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Property taxation of public utilities in Virginia

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Title:
Property taxation of public utilities in Virginia Assessment administration and practice
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Brown, James Earl, 1932-
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English
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xvii, 376 leaves. : illus. ; 28 cm.

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Assessed values ( jstor )
Copyrights ( jstor )
Corporations ( jstor )
Counties ( jstor )
Government human services ( jstor )
Personal property ( jstor )
Property taxes ( jstor )
Public property ( jstor )
Taxation ( jstor )
Taxes ( jstor )
Dissertations, Academic -- Economics -- UF
Economics thesis Ph. D
Public utilities -- Taxation ( lcsh )
Taxation -- Virginia ( lcsh )
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bibliography ( marcgt )
non-fiction ( marcgt )

Notes

Thesis:
Thesis -- University of Florida.
Bibliography:
Bibliography: leaves 333-344.
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Manuscript copy.
General Note:
Vita.

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This item is presumed in the public domain according to the terms of the Retrospective Dissertation Scanning (RDS) policy, which may be viewed at http://ufdc.ufl.edu/AA00007596/00001. The University of Florida George A. Smathers Libraries respect the intellectual property rights of others and do not claim any copyright interest in this item. Users of this work have responsibility for determining copyright status prior to reusing, publishing or reproducing this item for purposes other than what is allowed by fair use or other copyright exemptions. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder. The Smathers Libraries would like to learn more about this item and invite individuals or organizations to contact the RDS coordinator(ufdissertations@uflib.ufl.edu) with any additional information they can provide.
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PROPERTY TAXATION OF PUBLIC


UTILITIES


IN VIRGINIA:


ASSESSMENT


ADMINISTRATION AND PRACTICE










By
JAMES EARL BROWN


A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY








UNIVERSITY OF FLORIDA
August, 1962












ACKNOWLEDGMEINTS


The author wishes to express his sincere gratitude
to the Appalachian Power Company, and especially to Messrs. W. F. Keehne and C. L. Robison, for assistance in the collection of data and for making available research funds and facilities without which most primary data could not have been obtained.
Grateful acknowledgment is also due to Dr. Roland B.
Eutsler whose suggestions have proven most valuable and who devoted his time to this project far in excess of
any requirements as Committee Chairman. The writer is also indebted to Drs. R. L. Lassiter, R. H. Blodgett, W. E. Stone and E. R. Bartley for their advice and many worthy contributions.
Sincere appreciation is extended to Mrs. George B.
Page, who assisted immeasurably in the preparation of this manuscript, for her untiring diligence.

This work is dedicated to my wife, Maxine, without whose patience, encouragement and devotion this study would never have been completed.














TABLE OF CONTENTS


ACKNOWLEDGlNTS . . � LIST OF TABLE L-I.T OFFIGUR .�S

CHAPTR


1.


* * * * * * * * * * * 9 9

* * * * * * * * * * * * *9

***9 ******* *


INTRODUCTION . . . . The Problem . . . . . � * * Limitations of Study . . . Economic Considerations . . Preliminary Investigation .

The Need for Equalization in Virginia . . . . . .


* * * * *9


* * * 9 *9 .* * * * . 9 .



. . e
. . .o .


Scope or Study . . . 9 . * 9 � * *
2. HISTORiCAL DMELOPIM N1 AND BACKGROUND
OF PROPERTY TAXATION . . . . * 9 . �

Taxation of Interstate Commerce . .

Property Taxes . . . . . . . . .

Constitutional provisions-Virginia . . . . . . . . . .

Constitutional and statutory
development in Virginia . . . . .


Property tax revenues--general Property Tax Revenues in Virginia Summary . . . . . . . . . . . . *


* *


. .
* * . 9 . .


. . .

. 9 . . . .


iii


ii xi xvii


1 3 4 7 9 19

22









ABLE OF CONTENTS continuedd)

CHA PR Page

3. ASSSmN'as ADMINiSTRATION . . . . . . . 52
Making the Assessment . . . . . . . . . 5 Unequal Assessment . � l � . 60 Under-Assessment . . . . . . . . � * * * 62

Failure to comply with te law . . . 63
Effects of under-assessment on
local government . . . . . . * . . 65

Full-value assessment versus fractional valuation . . . . * . . .. 67

The Assessment Practice . . . . . . . . 68

Assessment of Income-Producilng
Properties, City of R.chmond,
Virginia . . . . . . . . . . * * * * * 70

Use of gross income rather than
new income . . . . . . . . * * * * * 71

Use of rental value rather bhan
actual rental ....... . . . . . 72

The problem of estimating rental
value . . . . . # . . . . . . . . . . 72

Selection of the proper capitalization rate . . . . . . . . . . . 73

Appropriate use of the capitalization process . . . . . . . * . . * 74 Illustrations . . . . . . . . . . . . 74

Summary . . * . . . . . . . . . . , . 79

4. T ASSsSSENT PHACTiCz .~ V.RGI~L . . 81

General Practice . . . . . . . . . . 81

Comparison of Assessment Ratios
in V~rginia . . . . . . . . . . . . . . 81








jABjL OF CONTENTS (continued)


Significance of Local Assessment RatiOs . . . , * * * �

Geographical Dispersion of
Assessment Ratios . . . . � * * � The Trend of Assessment Ratios . .

The Experience in Giles County,
Virginia . . . . . . . . . . . .

Other Effects of Under-Assessment
in Giles Countyj Virginia . . .

Trend of Assessment Ratios and
Rates of Levy, Service Area
Illustration . . . . . . . . .

Average Levies Per $4100 of
"Full Value" . . . . . .

Average Levies on Assessed
Valuations . . . . . . . . . . .

Summary . . . * . . . . . .

5. VALUAT. , ASSESSiNT AND TAXATION
OF PUBL SERVICE COPORATiON
PROPERTY, . . . . . . . . . . . . .

The Ad Valorem System of Taxing
Utility Property . . . . . . . .
Valuation of Utility Property . .
Original cost less depreciation
Advantages of original cost less depreciation . . . . .
Disadvantages of original
cost less depreciation . . .

Reproduction cost less
depreciation . . . . . . . . .

Capitalized income . . . . . .

Market prices of stock and debt


100


CHAPTER


Pag


*


* 101

, 102 . 108 . 112


. 115 . 117 . 121 . 125


. 129 . 131 . 133 . 134 . 136 . 138 . 140 . 148 . 151









iALE OF CONTENTS (continued)


C HiAPTR


Eage


Assessment of Properties of Public Utilities in Virginia . , . . .

Summary . . . * * * * * * 6, CLASSIFICATION AND TAXATION OF
TANG iBiLE PERSONAL PROPERTY . . The Relative Position of the Personal Property Tax . . . . . . . . . . .

Real and Personal Property Defined .

North Carolina . . . . . * . . .

New York . . . . . * * * * *

Effects in States Where Personalty is
not Subjec- to Taxation , . . . . .

Effects in States Where Persoralty is
Taxed . . . . . . . . . . . .
The Problem of Determining Value of
Tangible Personal Property . . . . *

States 4Where Realty and Personalty
are Taxed Alike . . . . . . . . . .

States Where Property is Classified .

Thie Classification of Public Service
Corporation Property in Virginia . .
Classification by the Virginia
State Corporation Commission , . .
Basis for classification . . ...

Tae problem of public service corporations in Virgin a . . .

Practice in Virginia , . . . . . .
The Personal Property Tax Solution
as Proposed by Utilities . . . . .

Practical Defects of the Personal
Property Tax . . . . . . . . . . . .


. 152

* 157

. 160

* 163 . 166 . 166

* 167

. 169 . 169 . 170 . 172 . 173 . 173 . 174 . 175 . 176 . 178 . 194 . 196









TABLX OF CONTAIN NS (continued)


CIAPTiER


Pa e


Lack of uniformity. . . # * o * * 196 Lack of universality. . . . . . � 198 incentive to dishonesty . . . . . 200 Regressivity . . . . . . * * * * * * 201 Double taxation . . . . . . . . . 202

Summary . . . . . . . . . * * * * * * 203

7. REPORMS IN THE TAXATION OF PUBLIC
SERVICE CORP01hATIONS, PART I . . . . . 208

Elimination of the Present Ad Valorem
Tax System on Public Utilities , . . . 210
Local taxation on the basis of
productivity . . . . . . . . � . . . 210

Taxation of public service corporations reserved for tie state . . , . 215
State responsibility for
instructional salaries . . . . . 216 State sales tax.. . . .. . . 220

Keeping the Ad Valorem System of
Taxation . . . . . . . . . . . . . . . 222


Greater equalization in the assessment practice . . . . . .
Reducing the assessment ratio on public service corporation property . . . . . . . . . .
Local ratios . . . . . . . .
Operating area ratios . . . .
Statewide assessment ratios .


Raising the assessment ratio on nonutility property . . . . . *
Deterioration of the average state assessment ratio . . .
Inadequacies of local effort The proposal to raise local assessment ratios . . . . .


Summary . . . . . . . . . . . . .


. . 224


. .
* . . .
. .


224
228
228 228


. 231 . 234 . 238 . 242


249


vii









TABLE OF COT2TS (continued)


CHAPTER
8. R.ORMS IN riU TAXAT ION OF PUBLIC SERVICE
CORPORATIONS, PART II . . . . * * ..... 251 The Central Tax Levy Rate . . . . . . . . 252
Need for uniformity . . . * * * * *g 252 The levy rate ... . * * * * * * * 253 Use of local rates of levy . . . . . . 253 Average operating system rates of levy. 254 Statewide average rate of levy . . * * 255

The Allocation of Central Levies . . . . . 256

Situs of investment basis . . . . . . . 259 Revenues generated basis . . . . . . 263 Population basis . . . . . 266 Watt-hour meters basis . . . . . . . 268 Pole-line miles basis . . . . . . . . 271 Combination of bases . . . . . . . . . 272
Plan A--no adjustment for local
effort . . . . . . . g * g . * 278 Plan B--adjusted for local effort . 286

Centralized Assessment and Allocation
for Local xation. ..... . . . . . 298
Summary . . . . . . . . . . . . . . . 300

9. SUMMARY ANID CONCLUSIONS . . . . . . . 303
Summary . . . . . . . . . . . . . . . . 304
Introduction . . . . . . . . . . . .. 304

Development of the property tax . . . . 304 Assessment administration . . . .. 305


viii








TABLE OF COiiNTUTS (continued)


C A Pra Page
The assessment practice in Virginia . . 306
Valuation, assessment and taxation
of public service corporation property. 310
Classification and taxation of tangible
personal property y . ... . . . . 313
Reforms in the taxation of public
service corporations . . . . . . . . . 314
Greater equalization in nthe
assessment practice . . . . . . . . 315 Allocation of central levies . . . . 316
Allocation of centrally assessed
values for local taxation . . . . . 320
Conclusions . . . . . . . . . . . . . . . 320
As to property taxation generally . . . 321 As to the assessment of real estate . . 323
As to the assessment of public service
corporation property . . . . . . . . . 324
As to the taxation of tangible personal property .. . .. . * . . . . 327 As to the rate of tax levy . . . . . . 328 As to recommendations . . . . . . . . . 329 BIBLIOGRAPHY . . . . . . , . . . . . . . . . . . . 333
APPENDICES
A. Counties in Virginia Served by
Appalachian Power Company, 192 * . * 346
B. Percentage of Assessed Valuation to
Market Value, Revenue from Local Sources and Revenue from Local Sources as a Per
Cent of Total Revenue, Commonwealth of
Virginia, Year Ended June 30, 1960 . . . . 347








AB OF CONTiNS (continued)
APPEnaGcES Pa&

C. The effect of Reassessment of All sieal
Estate and Tangible Personal Property
Other than Public Service Corporations,
Using a 40 Per Cent Minimum Assessment Ratio, 1959 . . . . . . . . . � * * 352

D. Town Levies . . . . . . . . . . . * * * 358
E. Assessed Value, Taxes Paid, Average Tax
Rate, in Towns Only, One Electric Power
Company, 1954-1958.. . . . . . . 362

F. Computation of Operating Revenues,
Appalachian Power Company, 1959 . . . . 369
BIOGRAPHICAL SKITCH . . . . . . . . . . . . . . . 376









LST OF ABLEE


TABLE R
1. Median Assessment Patios and Coefficients
of Dispersion, Selected Localities,
Commonwealth of Virginia . . . . . . . . . . 14
2. State and Local Tax Revenue, and Property
Taxes as a Percentage of Total Tax Revenue,
United States, Selected Years . . . . . . . 40

3. Sources of Revenue for Localities, United
States, 1946 and 1957 . . . . . . . . . . . 42
4. Property Tax Revenue as a Percentage of
Total State and Local Tax Revenue,
Classified by States, Other Data, 1957 . . . 44

5. Sources of 1eve~ue for Virginia Counties,
1943 and 1958 . . . . * * . . . . . . 49
6. Gross Capitalization iMate . . . . . . . . . 75
7. Income Approach to Value of Apartment
Building . . . . . . . . . . . . . . . . . 76
,8. Warehouse Value Indicated by Income Approach 78
9. Ratios of Assessed Value to Sales Value of
Real Estate, Commonwealth of Virginia, 1956. 82
10. Comparison of Actual Taxes Paid and Taxes Payable Using Average Statewide Assessment
Ratios, Tax Year 1959 . . . . . . .. . . 88
11. Comparison of Actual Taxes Paid and Taxes Payable Using Average Systemwide Assessment
Ratio, Tax Year 1959 . . . . . ...
12. Comparison of Actual Taxes Paid and Taxes Payable Using Separate Average Assessment
Ratios for Cities and Counties, Tax Year
1959 * * * * * * * * * * * * . * * * * * * * 93
13. Ratios of Assessed Value to Sales Price,
Real ;state, Selected Localities, 1956 . . . 98








LIST OF TAB]Ld (continued)


14. Trend of Ration of Acessed Value to Sales
Value of Real Estate and Trend of Applicable
Rates of Levy Thereon, Cities and Counties
in Area Served by a Southwestern Virginia
Power Company . . . � � * * * * * * �** 104

15. Computation of Tax Revenue, Area Served by
Hypothetical Utility, 1936 . . . . . * * * * 104

16. Computation of Tax Revenue, Area Served by
Hypothetical Utility, 1956 . . . . . . . .. 106
17. Investment and Assessment Data, Selected
Counties, 1959 . . . � * . * *. . * * . * . *114

18. Average Rate of Levy Per $100 of "Full"
Value, For the Years 1954 and 1958 . . . . . 118
19. Average Rate of Levy Per $100 of "Full"
Value, For the Years 1954 and 1958 . . . . . 119
20. Assessed Values, Taxes Levied and the
Average Rate of Taxation, Commonwealth of
Virginia . . . . . . . . . . . * * * * * * 122
21. Assessed Values, Taxes Levied and the
Average Aate of Taxation . . . . . . . . . 126
22. Comparison of Rates of Return to Bond and
Stockholders . . . . . . . . . . . . . . . . 143
23. Assessed Value of Property Subject to Local
General Property Taxation, 195b . . . . . . 164
24. Comparison of Actual Tax Levy with Levy
Based on Reclassification, Electric Light
and Power Companies in Virginia, 1949 . . . 181
25. Comparison of Actual Tax Levy with Levy
Based on Reclassification, Electric Light
and Power Companies in Virginia, 1959 . . . 182
26. Actual Classification of Assessed Va.Le
of Electric Light and Power Companies in
Virginia, Localities Employing Variable
Rates on Realty and Personalty, 1949 . . . . 185


xit








0F A~sk~S(contin1 d


27. Suggested Classification of Assessed
Values of Electric Light and Power
Companies in Virginia, Localities
Employing, Variable Rates on Realty and
Personalty, 1949
28. Actual Classification of Assessed Value of
Electric Light and Power Companies in
Virginia and Rates of Taxation Per $100 of Assessed Value, Localities Lmploying Variable Rates on Realty and Personalty,
1959 . . . . . . . . . . . * * * * * � * * * 187
29. Suggested Classification of Assessed Value
of Electric Light and Power Companies in
Virginia, Localities EmployinG Variable
Rates on Realty and Personalty, 1959 . . . 188

30. "Rate of Class Discrimination" Trend,
Selected Years, 1949-1959 . . . . . . . . 193

31. Local Taxation Based on Revenue Generated,
One Electric Power Company, State of
Virginia, 1959 . . . . . . . . . . . . . . 212
32. Ratio of Assessment on Real Estate, Tax
Hate, and Tax Levy Under Assumed Condition
of $50 Nillion Investment, Castlewjood
District, Russell County, Virginia,
1936-1956 . . . . . . . . . . . . . . . . . 219
33. Comparative Sales Taxes for States
Surrounding Virginia, 1960 . . . . . . . . 221

34, Taxes Computed Using atio in iach Locality
Served, 1959 . . . . . . . . . . . . . . � . 226
35. Taxes Computed Using eighted Average Ratio
in Service Area, 1959 . . . . . . * . . . . 229

36. Taxes Computed Using Statewjide Average
Assessment Ratio, 1959. . . .. * . . . * 232

37. Average Ratios of Assessed Actual Sale
Value of Real Estate, Counties and Cities, Selected Years, Commonwealth of Virginia,
1936 to 19560 . . . . . . . . . . . . . * 235


xiii








LIC~~ OF ~A~3ILJ~ (cor~tinueci)


38. Grouping of Localities by Ratios of
Assessed Value to sales Value, Commonwealth
of Virginia, 1942, 1950 and 1956 . . . . . . . 236

39. Relationship of County Assessment Ratios to
Percentage of Total Revenues Derived from
Local Sources, Commonwealth of Virginia,
Year Ended June 30, 1960 . . . . . . . . . . 239
40. Proposed Statewide minimum Assessment Ratio . 246
41. Limitations on Penalty Provisions . . . . . . 247
42. Levy Rates on Electric Utility Substation,
Selected Taxing Districts in Virginia, 1959. , 254
43. Average Rate of .evy on Real Estate, Counties
and Cities, Virginia, 1958 . . . * * * * * * * 256
44. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Computed on
the Statewide Average iate to Localities on
the Basis of Investment . . . . . . . . . . 260
45. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Computed on the Statewide Average iateto Localities on
the Basis of Revenues Generated . . . . . . . 264
46. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Computed on
the Statewide Average !ate to Localities
on the Basis of Watt-Hour Meters . . . . . . . 269
47. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Computed on
the Statewide Average Rate to Localities on
the Basis of Pole-Line Miles . . . . . . . . . 273
48. Allocation Factors--Compositez for Interstate Allocation of Railroad Values . . . . * 277
49. Computation of Composite Allocation Factor,
Not Adjusted for Local Effort . . , . . . , 279


xiv









L12I OF ~Ai~K~S (cont~uucd)


50. Allocation of a outhoestern Virginia Power
Company's 1959 Property Taxes, Computed on
the Statewide Average Rate to Localities
Using Composite Allocation Factor, Not
Adjusted for Local Effort . . . . . . . 282

51. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Actual Taxes Paid Using Composite Allocation
Factor, Not Adjusted for Local Effort . . . 284

52. Computation of Comiposite Allocation Faotor,
Adjusted for Local Effort . . . . . . . . 288

53, Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Computed
on the Statewide Average Rate to Localities
Using Composite Allocation Factors,
Adjusted for Local Effort . . . . . . . . . 290

54. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Actual Taxes
Paid Using Composite Allocation Factor,
Adjusted for Local Effort . . . . . . . . . 292

55. Allocation of a Southwestern Virginia Power
Company's 1959 Property Taxes, Actual Taxes
Paid Using Composite Allocation Factor,
Adjusted for Local Effort and Not Adjusted
for Local Effort Compared . , . . . . . . , 296

56. Percentage of Assessed Valuation to Market
Value, Revenue from Local Sources and
Revenue from Local Sources as Per Cent
of Total Revenue, Commonwealth of Virginia,
Year Ended June 30, 1960..... , .. . 347

57. The Effect of Reassessment of all Real
Estate and Tangible Personal Property
Other Than Public Service CorporatiLons, Using a 40 Per Cent Minimum Assessment
Ratio, 1959 . . . . . . * * * * * * * * * * 352

58. Average 'ax Levy of Towns in One utility's
Operating Area, Relation to Statewide
Average Tax Rate on Real Estate . . . . . . 359









W OF TAB l (ontinued)


59. Assessed Value, axeas Paid, Average Tax
Rate, in Towns Only, One Electric Power
Company, 1954-1905. . * * * * * 362
60. Computation of Revenues to be n1loca.ed on
Basis of Watt-Hour Meters, Appalachian
Po"er Company, ioanoke Division, 1959 * * 370
61. Computation of revenues to be Allocated on
Basis of Watt-Hour Meters, Appalachian
Power Company, 3luofeld Division, 1959 . . 371
62. Computation of City and County Revenues,
Appalachian our Company, Roanoke
Division, 1959. . . * * * * * * * * * * 372
63. Computation of City and County revenues,
Appalachian Power Company, Blueflield
Division, 1959 . . . . . . . . . * . . 374


xvi











LIST OF FIGURES


FIGURE �555
1. Assessment Ratios by Counties, Commonwealth of Virginia, 1956. . . . � * . . * 86
2. Assessment iatios by Sales Nalues of
Real Estate, Selected Areas, Commonwealth of Virgina, 1956. . . . . . . 99

3. Real satame AssesLment Ratios and Rates
of Levy, Service Area of a Southwestern
Virginia Power Company, Years of Assessment Studies, 1936-1956. . . . . . . . . 105
4. Real Estate Assesment Ratios and Rates
of Levy, Giles County, Virginia Years
of Assessment Studies, 1936-1956 . . . . 109

5. Comparison of Assessment Ratios and
Rates of Levy o Utiit and NonutilityT, Property, service Area of a Southwestern Virginia Pow2er Company, Years of Assessment Studies, 1936-1956 . . . . . . . . . 116

6. Counties in Virginia erved by
Appalachian Pouer Company, 62 . . . . . 346


xvii












CHAPTER 1

INTRODUCTION

The publication in 1776 of Adam Smith's Wealth of

Nations marked the initial enumeration of "canons of taxation," criteria for the evaluation of the merits and weaknesses of indiv dual taxes and their effect upon whole systems of taxation. These criteria held that a good tax system must be characterized by equity, certainty, convenience to the taxpayer, and economy in collection, and they have provided the source for most of the modern principles for evaluation.1

The growth in population, expansion in territory,
industrialization, urbanization and the changing concept of government's role and function have resulted in an assumption of increased fiscal responsibility by governments and a consequent search by federal, state and local governments for more and more tax revenue. In this search for


1
An examination of general taxation as it exists in the United States today leads one to the observation that the question of a tax or a tax system being "good" in keeping with these criteria is largely academic. See R. M. Haig, "Taxation," Encyclopedia of the Social Sciences, Vol. XIV, pp. 538-540; A. H. Hanson ana H. S. Perlo f, State and Local Finance in the National Economy (New York: W. W. Norton and Company, Inc., 194L4), pp. 250-456.








additional revenue the federal government has led the way. The ratification of the Sixteenth Amendment to the United States Constitution, popularly known as tne "Income Tax Amendment," bestowed upon the federal government the power to so lead the way.
The text of this sweeping amendment is both brief and to the point, leaving the intent clearly understood: "The Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." The increase in federal taxes which has stemmed from the exercise of this power of access has served to make the financing of state and local government more and more difficult.
Though the purpose of this study is not to explore the multiplication and growth in federal taxation, the above comments do lead to three observations. First, federal taxation, in its efforts to extract from the taxpayers more and more dollars of revenue for federal purposes, has all but exhausted the readily available sources. Second, state and local governments, to match federal funds on the one hand and to compete with federal authority over their citizens on the other, have been forced to renew their demands on those sources of taxation not pre-empted by the federal government. Finally, the taxpayer, subjected to such crossfire, has developed a keener sense of awareness in the area of taxation, forcing all levels of government








to strive for greater equity and fairness in taxation or, as an alternative, to engage in subterfuge.

The Problem
Illustrative of one problem of taxation is the ad
valorem tax as imposed on the public utility industry. This study is specifically directed toward the electric light and power industry in Virginia with the assumption that the observations and conclusions presented herein are possessed of reasonable applicability to the public utility industry generally. 2
This study will encompass three broad areas, First, an examination of the assessment practice in Virginia will reveal whether the assessment of public service corporation property differs from the assessment of nonutility property. Second, since the question of equity in taxation can be considered only by reference to the total tax burden, the method of classification of property as well as of rates of taxation will be considered. If inequities are found it is insufficient merely to point them out; therefore, the third area of coverage in this work consists of proposals to rectify those inequities uncovered during the course of this investigation.


2Data and research facilities have been provided by
the Appalachian Power Company, a subsidiary of the American Electric Power Company. See Appendix A for ma showing the section of Virginia served by the Appalachian Power Company.








Specifically, this study is concerned with the possibility of inequitable ad valorem taxation of public utility property in Virginia which might arise from the allocation of centrally assessed values to the taxing localities or from the imposition of local rates of taxation. Where inequities are found to exist in these two specific areas some attempt will be made to develop corrective procedures.

Limitations of Study

This study of public utility ad valorem taxation is first limited geographically to a consideration of one state only, Virginia. Further, attention has been focused on the electric light and power industry in Virginia. Both of these limitations were necessitated by the physical difficulties of conducting a personal investigation in more than one industry or in more than one general geographical area; however, it is believed that neither the data nor the problems considered are peculiar to Virginia or to the electric light and power industry. On the other hand, the data and observations presented herein concerning the electric light and power industry in Virginia should not be considered as necessarily representative of all public utility industries in all states. However, a review of the literature indicates that these and related problems exist generally throughout the country and that the major









difference between the problems of the various utility industries and between the various states is mainly one of
3
degree.
As stated earlier, one of the purposes of this study is to investigate the possible inequities which might arise from the allocation of centrally assessed values to the localities for imposition of local tax rates. it should be noted that the allocation process is not the only way in which discriminatory or inequitable ad valorem taxation can be effected on public service corporation property. This study is mainly concerned with the allocation of centrally assessed values after such values have been determined. The determination of assessed values, although given some consideration, is not given detailed consideration for the following reasons. First, Just what constitutes value for public utility property where no active market for such property actually exists has been a problem plaguing economists and tax assessors for years. Much has been written and many theories have been advanced; however,


3An indication of the widespread interest in this and related problems can be found in the annual Proceedinges of the National Tax Association.








there appears to be no generally accepted evidence of value
4
although certain "guides" are available to the interested.
Second, the determination of value for ad valorem purposes is not, at the present time, of any real significance
in Virginia.5 The Virginia practice of assessing public utility property at original cost, less an approximate depreciation allowance of 20 per cent, based on depreciation studies conducted by the Virginia Department of Taxation,
apparently has been accepted by both the utilities and the State Corporation Commission. There is, of course, no excuse for continuing an assessment procedure which has obvious defects; however, there is little disagreement over this method in Virginia and it has been deemed beyond the scope of this study to consider as a problem an area in which no problem apparently exists.


In its Appraisal of Railroad and Other Public Utility Property for Ad Valorem Tax Purposes, the Committee on Unit Valuation of the National Association of Tax Administrators reports that: "There are several tyges of evidence that are commonly used in making appraisals. This report suggests that among those to be considered are: "(1) capitalized earnings, (2) market prices of stock and debt, (3) original cost less depreciation, and (4) replacement cost less depreciation." The report goes on to advocate some combination of capitalized earnings and stock and debt evidences. (Page 3. See also "Guide for Assessment--Sales Ratio Studies, a report of the Committee on Sales Ratio Data of the National Association of Tax Administrators, dated June, 1954; "Guide for West Virginia Assessors," dated January 1, 1958.
58ee Chapter 5.








Economic Considerations

In the examination of the property tax structure in Virginia it is probable that certain inequities shall be discovered, as they must be in an examination of any tax system created by man; however, it it difficult to grasp the concept of inequity without personification. It is impossible for a corporation to be inequitably treated since equitable treatment is solely a human attribute. It is necessary, then, when investigating the state and local property tax structure as to its equity, to inquire Just who is it that is treated inequitably? Is it the stockholder of the public service corporation? Is it the consumer of utility services? Is it the owner of other property?
For purposes of economic analysis the sole criterion for measuring equitable treatment of stockholders rests in the compensation necessary to call forth their capital in
sufficient quantities to insure uninterrupted service by a growing industry. There is no evidence that such capital has not been forthcoming in the past, as confirmed by the fantastic growth in the electric power industry to meet the
needs of the consuming public. Though it may be argued that "inequitable" tax treatment of utility property has so impaired the rate of return to investors as to make the raising of capital more difficult, actual facts indicate that this problem is not significant. In the first place, present rates of return apparently are adequate to call








forth sufficient capital to meet current needs, indicating that if inequitable property taxation exists it is not presently inequitable to stockholders. Second, most regulatory commissions, following the "end result" doctrine, would probably allow, if demand were sufficient, a return to the investors of capital which would be adequate to call
forth such capital, inequities in taxation notwithstanding. To the extent that regulatory commissions in the future fail to allow upward rate adjustments, necessitated for example by discriminatory taxation, then the stockholders might well have room for protest on the grounds of unwarranted confiscation of property. This has not yet taken place and the future is still speculative.
For purposes of the present analysis, it is believed that any inequities which might exist in the taxation of public service corporations have not necessarily been imposed upon the investor. If they had, capital would not have been forthcoming to the utility industry due to an insufficiency in the rate of return, and this has not, fortunately, been the case. It follows, then, that the consumer of utility services is ultimately the one on whom the burden of taxation must fall, and where there are inequities in the taxing system it must be the consumer who is inequitably treated as long as the demand for utility


Federal Power Commission v. Hope Natural Gas Co.
(320 U.X. 591), 1944.





9


services remains relatively inelas,1c. Property taxes levied by one county, for example, must be paid by someone.
When the burden of these taxes can be shifted to the citizens of another county, or a city, it is not the company which is being inequitably treated but rather the consumers of that company who must pay someone else's bill. Where there are defects in the assessment practice or in the administration of the tax system, it is again not the company which is being discriminated against but rather people, and these people are most likely the consumers. Thus, it should be kept in mind that "inequities" as discussed in this study refer to people, although for purposes of presentation this point is not often emphasized.

Preliminary Investigatlon

Before making the more detailed investigation of the property tax system in Virginia as it affects public service corporations, the results of which comprise the basis of this thesis, it was necessary to make a few preliminary inquiries in order to ascertain whether Virginia was indeed faced with any problems in this respect and, if so, to what extent ere they serious enough to warrant the more detailed investigation. It was observed that the Virginia Constitution, as is the case in most state constitutions, calls for uniformity in taxation. One aspect of uniformity in taxation is the assessment of property; therefore, it was undertaken in these preliminary









investigations to measure the extent to which assessing in Virginia achieved a reasonable degree of uniformity.
The measuring standard favored by assessing experts is the "coefficient of dispersion," or "coefficient of deviation," which is the percentage which the average of the deviations of the assessment ratios of properties from their median ratio bears to their median ratio. Dr. John H. Russell, the former director of research for the Virginia Department of Taxation, referred to this measure as an "index of assessment inequality."7 The method of computation for this measure is as follows. First, the median assessment ratio of the individual assessment ratios in the sample is determined. Second, the deviation in percentage points of each individual ratio from the median ratio is determined, and the sum of these deviations is divided by the number of ratios to ascertain the average deviation. The coefficient of dispersion is then derived by dividing the average deviation by the median ratio. Assume, for example, that eleven pieces of


7Cited by J. Edward Rountry, "Equalization at Market Value," Appraisal Journal, Vol. XXIV, No. 2, April, 1956, p. 222.








property each have a market value of $30,000. The computation of the "index of assessment inequality" can be
illustrated as follows:
Deviations
Property Assessed Value Assessment Ratio from Median
1 $ 1,800 6.0 -19.0 23,000 10o.o -15.o
1,6o 12.o -13.0
s500 15.0 -10.0
5 6,000 20.0 - 5.0 6 7,500 25.0 0.0 7 10,500 35.0 10.0 8 14,4o00 48.0 23.0 9 17,700 59.0 3 .0 10 18,600 62.0 37.0 11 21,300 71.0 46.0
Total deviations . . . . . . . . . . . . . . . 212.0
Average deviation . . . . . . . . . . . . . . 19.3
Index of assessment inequality (coefficient of dispersion) equals 77.2 per cent
(Average deviation, 19.3, divided by the median ratio, 25.)

It is seen in the above illustration that the coefficient of dispersion is 77.2 per cent. This relatively high
coefficient stems from the lack of uniformity in the assessment ratios. Assume, however, that the same properties








are assessed at a more uniform rate. The following is observed:
Deviations
Property Assessed Value Assessment Ratio from Median
1 $ 9,000 30.% -10.0 2 9,900 33.0 - 7.0
10,500 35.0 - .0
S0,80 36.0- .0
5 11,4o0 318.0 - 2.0 6 12,000 40.0 0.0 7 12,600 42.0 2.0 8 13,200 44.0 .0 9 14,100 47.0 .0 10 14,400 48.o .0 11 15,000 50.0 10.0 Total deviations . . . . . . . . . . . . . . 59.0
Average deviation . . . . . . . . . . . . . 5.4
Index of assessment inequality (coefficient of dispersion) equals 13.5 per cent
(Average deviation, 5.4, divided by median ratio, 40.0.)

With a higher degree of uniformity, then, the coefficient of dispersion is seen to be relatively low. There is some question as to just how low the coefficient of dispersion must be in order for a locality to qualify as a "good" locality, with respect to making reasonably uniform assessments; however, Dr. Russell is reported to have established, over twenty-five years ago, that " ' an index as low as 20 should be considered a goal desirable of achievement and reasonably attainable,' that anything below this is to be considered as an excellent degree of








equalization for uniformity," and that " 'an index as high as 45 should be judged cause for the gravest concern.' .8
It should be noted that, in the preceding illustration, where there was illustrated a low "index of assessment inequality," even lower than the 20 per cent suggested by Dr. Russell as desirable, the assessed values varied 25 per cent, plus and minus, from the median. Therefore, there is some room for argument that the coefficient of dispersion, to reflect really acceptable assessments, should be considerably less than 20 per cent. A Minnesota tax study committee, for example, asserts that "a coefficient of dispersion of 10 per cent or less suggests that the assessor is performing his Job well."9
With these rough standards in mind, the preliminary investigation of the situation in Virginia was conducted. An examination of the assessment ratios prevailing in two counties and one city revealed that there was "cause for grave concern" of the assessment practice in certain sec10
tions of Virginia. 0 The results of this preliminary investigation of the assessment ratios in those localities, and the coefficients of dispersion for each, are shown in Table 1.


81bid.

9Report of the Governor's Minnesota Tax Study Committee, State of Minnesota (St. Paul, 1956), p. 177.
10Assessment ratios are based on a 1956 study conducted by the Virginia Department of Taxation, the latest such study conducted.







TABLE 1

MEDIAN ASSESSMENT RATIOS AND COEFFICIENTS
OF DISPERSION, SELECTED LOCALITIES,
COMNWBEALTH OF VIRGINIA


Average
Median Deviation Coefficient Assessment from of
Ratio Median Dispersiona Dickengon
County 12.% 6.8 54.5 Giles Countyc 14.6 15.2 104.1 Roanoke City d 33.6 8.0 23.8


Source: Working papers of the Virginia Department of Taxatio for the 1956 real estate assessment ratio study.
aThe average deviation from the median assessment ratios divided by the median assessment ratio.
bBased on an examination of all real estate sales made in 1956.
CBased on an examination of 102 out of 333 real
estate sales made in 1956, using random sample technique.
dBased on an examination of 224 out of 772 real
estate sales made in 1956, using random sample technique.

In Roanoke City the "index of assessment inequality"
shows that property is being assessed relatively uniformly; however, in the two counties observed, the coefficients of dispersion are shown to be in excess of the 45 per cent which Dr. Russell considered cause for grave concern. In Giles County particularly the coefficient of dispersion shows an extremely wide variation in assessment ratios. Where such a situation exists, as expressed in one study,








" . . the consequences of such wide variations in assessed valuations for the amount of the property tax burden of the individual taxpayer are staggering. . ..
Further, in the initial examination of Virginia's
property tax system, it was noticed that, in addition to the wide variations in the assessment ratios, there was general assessment at less than the 40 per cent ratio which is applied to public service corporation property. The question then presented itself as to whether there is any correlation between low assessments and high coefficients of dispersion. That there is this relationship is shown by the following:12
Median Assessment Ratio Coefficient of
for Nonfarm Houses Dispersion
as of 1956 Median Area
Less than 20.0 37.3 20.0 to 29.9% 32.0 30.0 to 39.95 25.1 4o0.Q or more 22.2
As an illustration of Just how this relationship might affect individual taxpayers, consider the following. Assume there are three pieces of property in a certain locality, each


11
lEarnest E. Means and d. W. Martin, County Property Tax Assessment in Florida (Tallahassee: Florida State University, Bureau of Governmental Research and Service, 1957), p. 51.
12Taxable Property Values in the United States
(Washington: U.S. Department of Commerce, 1959), Table 17, p. 86.








with a fair market value of $1 million. If the coefficient of dispersion is low, say, 10 per cent, and the total tax desired is $48,000, and an attempt is made to keep the
assessment ratios relatively high, then the distribution of the tax burden is as follows:

Fair Market Assessment Assessed Share of Property Value Ratio Valuation Taxa
A $1,000,000 78.0 $ 780,000 $14,976 B 1,000,000 80.0 800,000 15,360 C 1,000,000 92.0 2,000 17,66 24500,ooo $48,ooo
aAssessed valuation divided by total assessed valuation times total tax of $48,000.

On the other hand, if the coefficient of dispersion is high, say, 50 per cent, and an attempt is made to keep the assessment ratios relatively low, then the distribution of a total tax burden of $48,000 is as follows:


Fair Market Assessment Property Value Ratio
A $1,000,000 28.0
B 1,000,000 40.0 C 1,000,000 52.0


aIndividual assessed valuati( valuation times total tax of $48,(


Assessed
Valuation
$ 280,000

pa oooo
1l,200,000

on divided by 00.


Share of
Tax

$11,200
16,000 20,800
$48,000

total assessed


In the first illustration, where assessment ratios are high and the coefficient of dispersion is 10 per cent, the owner of Property C will pay $2,688 more in taxes than the








owner of Property A, due entirely to a difference in the assessment ratios of 24 percentage points. However, in the second illustration, where assessment ratios are lower and the coefficient of dispersion is 50 per cent, the owner of Property C will pay $9,600 more in taxes than the owner of Property A, again due entirely to a difference in the assessment ratios of 24 percentage points. With high assessment ratios the owner of Property C is mildly discriminated against; however, with low assessment ratios the owner of Property C pays 85.7 per cent more taxes than the owner of Property A. It appears, then, that equality of assessment within a locality, though difficult to obtain under favorable conditions, is much more difficult to achieve when assessments are made at some fraction of a constitutional mandate of full value.

Finally, in order to see to what extent Virginia had a problem worthy of further investigation, a comparison was made of this state with other states in the preliminary investigation. An examination of the U.S. Bureau of Census data revealed that of all the states (48 at the time of that

particular study) only three had coefficients of dispersion









in excess of 40 per cent, Virginia being one of these states. The grouping for the states was as follows:13
Coefficient of Number of
Dispersion States
Under lO. hone 10.0 to 19.9 21 20.0 to 29.9 19 30.0 to 39.9 5 Over 40.0% 3

The causes of relatively high coefficients of dispersion, with the inequalities resulting therefrom, are many; however, centralized control of the assessment function appears to have some direct relation to the problem. In Minnesota, for example, it was held that " . . . the principal handicap to more effective equalization and review at the state level appears to be issufficlent staff. Technical positions remain unfilled because the salary authorized does not attract men with the necessary qualifications."14 Another state's problem in this respect is illustrated by the following comment:

Over the years property assessments in
the great majority of Tennessee counties
have got sadly out of line, one with
another. There are many reasons for this, of which we need mention only a few. One of the main reasons, probably, is that we
are still operating under an Assessment
Act passed iu 1907. This act was an


1~3axable Property Values in the United States, a_. Cit., Table Id, P. by.
14Report of the Governor's Minnesota Tax Study
Committee, State of Minnesota (St. paul, 1955), p. 163.








excellent one--for 1907--but it was
designed for a horse-and-buggy age and
not for the conditions found in
Tennessee today. Other contributing
factors have been the low salaries
paid to assessors and the inadequate help allowed them. In many counties
the assessors' salaries are still thosel5
which were established by the 1907 act.

Although the causes are not clear in Virgin.a, it

might be that the segregation of the property tax function to the localities within the state has been a contributing factor. Further, although the causes may well merit attention, the effects of a "high index of assessment inequality" were deemed to be of ever., greater importance i. this study, particularly as tney affect the public service industry which has foui:d its assessment ratio frozen.


The Need for Lqualization in Virginia
At one time the major source of revenue to the state government in Virg.nia was tne general property tax, such levy being made upon the assessed values of property located and assessed in the various taxing districts. It was only natural for local assessors to seek to minimize 'their constituens' contributions so the centralized state governmeet in order to prevent an "undue burden" being placed upon them. Accordingly, assessment ratios were generally


15Cecil Morgan, "Eleven Counties Start Assessment Reform," Tennessee Planner, Vol. XVIII, No. 2, OctoberDecember, 1958, p 43.









very low. Virginia then embarked upoi. a plaa of restricting taxalion on real estate and tangible personal property to the local authorities. This was supposed to alleviate inequities arisi..n from divergent assessment ratios and the discrim.nat-on resulting from having one taxiing district conr_bute a disproport-onate share to the state government.

Although a particular injustice may have been corrected by segregation of tax sources between levels of government, such a procedure may have done little toward relieving individual taxpayers of any inequities which may nave faced them, for it is quite possible for discrimination of ths type merely to be transferred from a statewide level to a local level.

In segregatin the taxation of real estate and tangible personal property to the localities, t should be noted that the state reserved the more dynamic and potentially

greater sources of revenue for itself while giv ng to the localt es the more stable, if less yielding, sources of revenue, it is true, of course, that total property tax collections have increased; however, the proportion of total revenues derived by localit es from tne taxation of real estate has declined from 69.2 per cent in 1926, to 58.9 per cent in 1959.16 The cities and counties in


16Virginia Department of Taxat on, staff reports.









Virginia have this bee- forced to expand the r revenues by ceans of add-tional tax-on devices to aucment the property tax.

The reservatIOn of the propert, ax for tue sole use by the localities, except for the rolling stock of railroads, made necessary some method of equalization of the tax burden between taxpayers located in Virginia but within divergent taxing districts. Although segregation was intended to relieve inequities in the assessing procedure, the transfer of the responsib-lity to local assessors with no provisions to correct inequities would quite possibly have resulted in a sit-a-tion worse than tae one which was being corrected.

Therefore, equalization boards were established by statute in the counties and cLties to act primarily upon the com plaint of an aggrieved taxpayer. Public service corporation property was also "equalized"; however, the device employed nere was State Corporation Commission assessment of utility property at a statewide average assessment ratio, computed at the t~me to be 40 per ce-t of "market value."

Local equalization boards, as established n Virginia, act upon the instigation of aggrieved property owners; therefore, taxpayers must first know and be able to prove an injustice in tihe assessment of their property and then be wiling to take tneir case to the equalization board if they are to obtain relief. Tat the average taxpayer and property owner is possessed of sufficient knowledge









to adequately present his case s subject to sone do'bt. it is for this mala reason trhat local equalizatio- boards have probably been somewhat ineffectual in aceieviug their proper goal.

One of the .asks of this thess . to examine the

effectiveness of the other equalization procedure, namely, the equalization of public service corporation property by assessing such property at 40 per cent uf its i.arket value. A few of the more important questions to be considered are: Has the average statewide assess ent ratio remained at 40 per cent since t.is ratio was originally determined? is it equitable to assess all publ-c service corporation property, both realty and persoialty, at an average statewide assessment ratLo determined largely by a study of real estate assessment ratios?

Scope of Study

T..e study of assessment ratios Ln Virginia is intended to yield some light as to tue equity of Virginia's property tax system, particularly ii relation to the utility industry generally. However, as has been noted, t..e assessment ratio is but half of the taxing process, the otlier equally important half being the rates of levy applied to assessed values to determine the final tax bill. Further, in this respect, the rates of levy frequently vary between those imposed on real estate and those imposed on personal property. Thus, the classificatio-n of utility property into









categories of realty and personalty becomes an important prooleu to whici some attention will be directed. Ii addition, there will be a general review of the assessment practice as it applies to public service corporations.
Finally comes the question of alternative courses of action to be taken ii case deficiencies are found to exist in the present system. It should not be expected that this study will disclose all of the weaknesses of property taxation and proceed to correct them therewitn; however, it is hoped tuat any deficiencies which tuis study does reveal will be noted for further investigation. Further, any alternatives proposed should not be taken as final answers, but as points of departure toward ultiate solut io-s.













CHAPTER 2

HISTORICAL DEVELOPMENT AND BACKGROUND OF PhOPEhTY TAXATION

The development of property tax schemes can be traced to tue Middle Ages and to the influences exerted on its development by the economic composition of the early feudal estates. The more significant refinements and characteristics of today's modern property tax systems have been, however, largely associated with the development of the American economy and especially with the clarifications of state limitations under the federal Constitution. The rapid rise in this country's population and tue increased demand for trade between the states precipitated many problems. States and local communities were in need of more and more funds to carry out their public functions. Further, it was only natural that the localities should attempt to protect their "home grown" businesses. As a result, interstate commerce was subjected to heavy taxation by localities.

Taxation of Interstate Commerce

This taxation of interstate commerce did not proceed without protest by t.iose so engaged in such commerce. Numerous cases arose in which it became evident that state taxation of interstate commerce involved considerations which were not present when the issue related merely to the









police power. In view of these considerations tihe Cooley rule1 was not used to any great extent in the state tax cases. Uniformity, therefore, was considered to be of the utmost importance in this area.2 However, if granting protection to those engaged in interstate commerce solved the problem of local interference with national matters

it created another equally difficult problem. To give interstate commerce full immunity meant that competing, local business would have to pay an undue share of the cost of local government whose benefits interstate commerce enjoyed.

Out of many cases brought into the courts, the general rule evolved that states and localities, under their taxing power, may adopt any method of taxation which they desire as long as it is not in conflict with the federal Constitution. In order to steer the tax vessel to the harbor of constitutionality, safely past the "Scylla of the commerce clause and the Charybdis of due process," the states were forced to rely upon taxation of property, and not taxation of business income obtained through interstate commerce.


1Cooley v. Board of Port Wardens, 53 U.S. 298,299
(1851). In this case was developed the "doctrine of concurrent power" in which the states were permitted regulation of commerce concurrently with the federal government except when in conflict with federal regulation.

2The Passenger Cases, 7 Howard 286 (1849); State Freight Tax Case, 15 wallace 232 (1873 .









Unfortunately, the United States Supreme Court has shown a remarkable lack of consistency in interpreting just what was a tax on property and what was a tax on income. It has been held, for example, that the property of companies engaged in interstate commerce may be taxed
and, further, may be taxed at its value as it is, in its organic relations, and not merely as a series of unrelated items. It is therefore important to note that taxes on
such property have been sustained tnat took account of the augmentation of value from the commerce in which it was engaged. On the other hand, the United States Supreme Court held a Texas tax, ostensibly one levied on property, to be a tax on income and, therefore, invalid.5 The difficulty in distinguishing between the two, of course,
is apparent. Since the commercial value of property consists in the expectation of income from it, and since taxes ultimately come out of income, obviously taxes called taxes on property, and those called taxes on income, tend to run into each other in the long run.
A brief examination of certain other important cases

provides an insight into the rationale of the United States


3McAhren v. Bradshaw, 113 P. 2d 932, 57 Ariz. 342;
Pullman alace Car Co. v. Pennsylvania, 141 U.S. 18 (1891).
4Adams Express Co. v. Ohio State Auditor, 165 U.S. 194 (1897); Adams Express Co. v. Kentucky, 6bb U.S. 171 (1896); Fargo v. Hart, 193 U.S. 490 (1904).
5Wisconsin & M. R. Co. v. Powers, 191 U.S. 379 (1903)..








Supreme Court, although the theory evolved is dichotomous. In one such case, Justice Frankfurter, in the majority opinion, held that the commerce clause, even without implementing legislation by Congress, is a limitation upon the taxing power of the states.6 This "direct burden" rule would invalidate a tax not because it was discriminatory, or that other states might retaliate with a similar tax, or that it might increase the cost of production, but because there is interference by a state with the freedom of interstate commerce. On the other hand, when a regulatory measure has been called into judgment, the United States Supreme Court has generally followed the Cooley doctrine of "concurrent power." The "concurrent power" doctrine, however, has been limited by a decision which held that states can retard the flow of commerce under their police power to protect the health and safety of their people, but cannot make a similar retardation for economic purposes. Two more recent cases affirm the more modern view of the United States Supreme Court that "a tax on net income from interstate commerce, as distinguished from a tax on the privilege of engaging in interstate commerce, does not conflict with the commerce clause." Although taxes on net income


Freeman v. Hewitt, 329 U.S. 249 (1947).

7H. P. Hood and Sons, Inc. v. DuMond, 336 U.S. 525, 69 S. Ct. 557 (1949).
8Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S. Ct. 357 (1959); Williams v. Stockham Valves and Fittings, Inc., 358 U.S. 450, 79 3. Ct. 357 (1959).









of local businesses have become increasingly popular, and although recent decisions of the United States Supreme Court have permitted an expansion of the states' power to tax interstate commerce, emphasis has continued to remain upon the property tax as a major source of local revenue.

Property Taxes

The earliest rule applicable to the taxation of property is said to have been expressed in the maxim mobilia seguuntur personam. This rule holds that property be taxed in the owner's domicile, regardless of the location of the property itself. It has been suggested that this rule found its applicability during those times when property consisted mainly of wealth in the form of gold, silver and Jewels, and could easily be carried around by the owner or hidden by the owner in locations known only to him.9

More recently, however, the rule of lex situs has, in many cases, replaced the old rule. The large increase in the amount and kinds of personal property divorced from direct control of the owners has given rise to this law of the place where the property is kept and used. Generally speaking, the rules which have evolved to the present hold that real property is taxable only where located under the


9p. J. Hartman, Taxation of Interstate Commerce (Buffalo, N.Y.: Dennis Co., Inc., 1953), pp. 79-o.








lex situs rule. On the other hand, tangible personal property generally follows the owner under the mobilia sequuntur personam rule, with certain qualifications.
First, where the tangible personal property tax is located permanently outside the domicile of the owner, such property may be taxed in the state of situs because the property obtains the benefits and protection of its laws.10 Second, the problem arises as to when tangible personal property, used in interstate commerce, acquires a situs in a nondomiciliary state in order to allow that state the power to impose a tax on it. It is generally agreed that a nondomiciliary state can tax the tangible personal property engaged in interstate commerce within
it, disregarding the rule of mobilia sequuntur personam; however, such taxation must be based on a fair formula and possess some reasonable relation to the benefits conferred by the taxing state.11 A final consideration is the possibility of double taxation; that is, if the nondomiciliary state can tax tangible personal property, can the owner's state also impose a tax? The general conclusion apparently is that the domiciliary state cannot tax such property if


10Union Refrigerator Transit Co. v. Kentucky, 199 U.S.
194; 26, Ct. 3b6, 50 (1905).
11Pullman Palace Car Co. v. Pennsylvania, 141 U.S. 18 (1891); Ott v. Mississippi Valley Barge Line co., 336 u.s. 169; 69 S. Ct. 432 (1949); Braniff Airways V-. Nebraska State Board of Equalization and Assessment, 34d U.S. b52 ( 1954 ).








there exists a permanent situs elsewhere; otherwise, the owner's state can tax under the rule of mobilia sequuntur personam.12

Constitutional provisions--Virginia
Section 169 of the Virginia Constitution provides for assessment of real estate and tangible personal property at fair market value. Section 168 of this same Constitution provides that all taxes, regardless of who administers or levies them, "shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax. . . ." From these constitutional provisions there arise two important questions. First, can the property of public service corporations be classified separately from other types of property? Second, if property of public service corporations can be segregated, must the state assessing agency adhere strictly to the provisions of Section 169 or must it assess public service corporation property in the same manner as other property is assessed, whether or not the constitutional provisions are being followed?

In considering these questions, some general and historical analysis is necessary, the uniformity provisions being afforded attention first. It is generally agreed


12Northwest Airlines v. Minnesota, 323 U.S. 809 (1944).








that classification by legislative action of property into reasonable and natural classifications violates neither the Fourteenth Amendment to the federal Constitution nor the equality and uniformity clauses of many state constitutions. This power of a state apparently is without dispute, and allows such classifications to be made ". . . with respect to the subjects of taxation generally, the kinds of property to be taxed, the rates to be levied or the amounts to be raised, or the methods of assessment, valuation, and collection. Granting the power of a state to make classifications in tax matters, it has been said, we must then grant the right to select the differences upon which the classification shall be based."13
In addition to this power, it seems further that
reasonable discriminations are permissible and, in fact,
probably intended as a direct result of segregation. At least it is argued that classification does not prevent or bar unequal tax treatment between the various types of property so classified. Not only have state courts consistently held this position, but also the United States Supreme Court has maintained a position which affords little protection to property owners so discriminated


1351 Am. Jur., Section 173, pp. 230-231.

14City of Richmond v. Commonwealth of Virginia, Ex Rel., Record Number 339, Opinion of Justice Abram P. Staples, from the State Corporation Commission of
Virginia.








against. In one case before the United States Supreme Court, involving a tax which, through exemptions, discriminated against out-of-state competitors, it was held that
. . . the equal protection clause of the
Fourteenth Amendment does not prevent a
state from classifying businesses for
taxation or impose any iron rule of
equality. Some occupations may be taxed
though others are not. Some may be taxed
at one rate, others at a different rate.
Classification is not discrimination. It
is enough that those in the same class arel
treated with equality. That is true here. 5

The equal protection clause, in relation to taxation, requires that states treat parties among whom there is no substantial distinction in a reasonably uniform manner.l6 By the same token, inequalities that result incidentally in the application of a tax law which is not systematically arbitrary are not sufficient, it has been held, to make the tax unconstitutional.17 The United States Supreme Court has gone even further when it expressed the opinion that neither does the fact that a statute favors a certain class render it arbitrary if the differentiation is based upon a


15Caskey Baking Co. v. Commonwealth of Virginia, 313 U.S. 117 121 k1941).
16U.S. v. Burnison, 339 U.S. 87 (1950); Stewart Dry Goods Co. v. Lewis, 294 U.S. 550 (1935); Hopkins v. Southern California Telephone Co., 275 U.S. 393, 403 '(1925) .
17Maxwell v. Bugbee, 250 U.S. 525 (1919) (inheritance tax); Keeney v. New York, 222 U.S. 525 (1912), (transfer tax on property); Beers v. Glynn, 211 U.S. 477 (1909) (inheritance tax).





33


reasonable distinction or difference in state policy.18 Thus, in effect, the United States Supreme Court has held that a statute which has tne effect of encouraging needed and useful industries to locate within a state by exempting them, but not others, from its taxes is not arbitrary and does not violate the equal protection clause.19
On the other iand, arbitrary and unequal taxation is proscribed by both the federal and state constitutions.20
Where the state constitution contains a requirement that the general rule of taxation on property snall be uniformity, tile courts have so interpreted it as requiring all property to be taxed as one class.21 however, where


18Asbury Hospital v. Cass County, 326 U.S. 207 (1945)
(discrimination between classes of farm owners presumed relevant to legislative purpose); Stebbins v. Hiley, 268 U.S. 137 (1925) (tax differentiation between testamentary disposition and inheritance permitted); American Sugar Refining Co. v. Louislanna, 179 U.S. 89 (1900) (discrimination between refining company and farmers who refined their own sugar allowed .
19Williams v. Mayor of Baltimore 289 U.S. 36 (1933);
Ohio Oil Co. v. Conway, 261 U.S. 14b (1930); Bel's Gap R.R. v. Fennsylvania, 24 U.S. 232 (1890); Colgate v. Harvey, 29b U.S. 404, 439 (1935).
20Cumberland Coal Co. v. Board of Revision, 284 U.S. 236 (1931); Sioux Cty Bridge cdo. V. Dakota County, 260 U.S. 441 (1923).
210hicago & N.W. Ry. v. State, 128 W.s. 553, 108 N.W. 557 (1906); First National Bankc v. Holmes, 246 Ill. 362, 92 N.E. 893 (1910); Opinion of t~e Justices, 208 Mass. 616, 94 N.E. 1043 (1911); 1 Cooley, Taxation (4th Ed., 1924), pp. 292, 298. -









constitutional provisions merely impose a requirement of uniformity upon the same class of subjects, as in the case in Virgin a under Section 168 of the Constitution, statutory classification of property is impliedly authorized and, apparently, reasonable differences in assessments

between classes are allowable. A typical decision was handed down by a Minnesota court in 1938 when it stated that " . . , unless a discrimination is manifestly arbitrary and unreasonable it will be sustained. . . . Any classification is permissible which has a reasonable relation to some permitted end of government."22

in a decision of the United States Supreme Court, involving the classification of railroad property for taxation, cited and quoted at length by Justice Abram P. Staples in City of Richmond V. Commonwealtai of Virginia Ex Rel., supra, it was held that
. . the states may classify property
for taxation; may set up different modes of assessment, valuation, and collection; may tax some kinds of property at higher
rates than others; and in making all these
differentiations may treat railroads and
other utilities with that separateness which their distinctive characteristics
and functions in society make appropriate-these are among the common aces of taxation
and of constitutional law.


22State ex rel. Equity Farms, Inc. v. Hubbard, 203 Minn. 111 (1933).
23Nashville C. & St. L. RIy. v. Browning, 310 U.S. 362, 60 S. Ct. 9b (1940).








Constitutional and statutory development in Virginia
An examination of the development of the constitutional and statutory provisions relating to the taxation of public service corporations should provide an insight to the development of property taxation in Virginia. The statutes relating to the assessment of all public service corporation properties follow the same general pattern as do those governing railroad property assessment, and since public service corporation assessment practice today was developed from the system used for railroad property assessment, attention is first turned to the development of railroad assessment practice.24
Originally, railroads assessed tneir own property for purposes of state taxation, applied the existing levy rate,
and rendered payment directly to the state treasury. This procedure was provided for under Virginia law25 and was upheld by the courts, denying the localities any power to make assessments and, consequently, to levy taxes against 26
railroad property.26


24Based upon data in City of Richmond v. Commonwealth of Virginia, supra.
25Acts of 1870-71, Commonwealth of Virginia, p. 93.
26Virginia Tennessee R.R. Co. v, Washington County, 30 Gratt471 (i 7i).








It was not long, however, until the legislature, under pressure from the taxing districts, enacted legislation
which permitted a local levy on railroad property located therein.27 Local tax collectors were barred, however, from making tae assessment themselves, being required to use the same assessment as that made by the state and, further, being limited to the imposition of a rate of levy uniform with that imposed on other property. Even at this early date, classification was generally accepted; however, it appears that such separate classification of railroad property was made not for the purpose of discrimination, but to achieve equity between the taxation of railroad property and all other property. To attempt to place a value on railroad property located in one taxing district, without consideration of its operating whole, would be next to impossible. As a result, the General Assembly of Virginia specifically charged a central agency, the Board of Public Works, with the assessment responsibility, such assessments to be certified to the taxing districts for application of uniform local rates of levy.28
With the adoption of the Virginia Constitution of 1902, the system of taxation of both railroad and other public


27Acts of 1879-80, Chapter 106, Commonwealth of Virginia, p. 82.
28Acts of 1897-98, Chapter 76, Commonwealth of Virginia, p. 78.








service corporation property was furt ier developed as a
separate procedure, both as to ascertaining taxable values
and as to taxation. The effect of this system has been to
standardize the assessments of all public service corporation property; however, with each taxing district assessing all other property, it must have been obvious, even to
the engineers of this device, that local assessment ratios
would equate with utility assessments chiefly by accident.
Justice Staples, on this subject, had the following to say
in the opinion rendered in City of Richmond v. Commonwealth
of Virginia, supra:
In view of this necessary result with
respect to the inequality of the tax burden on their respective properties
which would fall upon railroads and other property owners, it cannot be
doubted that the framers of the Constitution of 1902 intended to and did place
the real and tangible personal property of railroads in an entirely separate tax classification. For many years prior to
the adoption of the 1902 Constitution, it
had been settled by the decisions of the
Supreme Court of the United States that
the equal protection clause of the Fourteenth Amendment required uniformity of
the tax burden only upon persons and
properties of the same class, and that it
lay within the province of the state to
classify its subjects of taxation, imposing
on one kind of property one burden of taxation, and on another kind a lesser or greater
burden.29


29City of Richmond v. Commonwealth of Virginia, supra. (Italics added.)









Further on, this same opinion asserts that "since the uniformity provisions of Section 168 (of the Virginia Constitution) could not possibly be applied to such conditions, it follows that the framers of the Constitution considered railroad property as constituting a separate and distinct class and not within the uniformity provisions."30
There has been in the past, without resolution to date, considerable confusion as to the exact meaning of the uniformity provisions. Justice Staples, for example, from the passage quoted above, is of the opinion that separate classification is permissible and was intended by the framers of the Constitution, an opinion to which there is little disagreement; however, it is to be questioned whether classification for purposes of making assessments of property values is sufficient, per se, to assure uniformity in the burden of taxation. Since the burden of taxation is measured by application of rates of taxation to assessed valuations, uniformity of the tax burden upon persons and properties of the same class would seem to mean uniformity in both assessments and levy rates.
As shall be observed, this complete "constitutional uniformity" does not exist in Virginia. On the one hand, the property of public service corporations and nonutility
property owners, when located within the same taxing


30Ibid.








district, is subject to uniform rates of taxation applied to divergent assessed valuations. On the other hand, two utilities serving a wide area, although assessed uniformly, are subject to divergent levy rates between counties and cities. This is similarly the case for one utility serving a number of taxing districts. Property tax revenues--general
As a per cent of combined tax revenues of state and local governments, the property tax has been declining in importance over the years. This fact is illustrated in Table 2.
The combined state and local property taxes rose from $4,730 million to $12,864 million in the thirty years between 1927 and 1957; however, expressed as a percentage of total tax revenue, the property tax declined from 78 per cent, in 1927, to 45 per cent, in 1957. This decline in the relative importance of the property tax is more significant in respect to state tax revenues, however, and reflects the gradual withdrawal by many states from the general property tax field in favor of other taxing devices such as the sales tax and the income tax. The property tax is still the major source of local tax revenue, however, 86.7 per cent of all local government tax revenue having been derived from this source, in 1957. Although Table 2 shows a decline from 97.3 per cent, in 1927, to 86.7 per cent, in 1957, in the percentage reliance of localities





TABLE 2


STATE AND LOCAL TAX REVENUE, AND PROPERTY TAXES AS A PERCENTAGE
OF TOTAL TAX REVENUE, UNITED STATES, SELECTED YEARS (In millions of dollars)


Year 1927 1934 1940 1946 1950 1957
Combined state and
local tax revenue
a. Total $6,087 $5,912 $7,810 $10,094 $15,914 $28,817 b. Property taxes 4s730 4,076 4,430 4,986 7,349 12,864
State tax revenue
a. Total 1,608 1,979 3,313 4.937 7,930 14,531 b. Property taxes 370 273 260 249 307 479
Local tax revenue
a. Total 4,479 3,933 4,497 5,157 7,984 14,286 b. Property taxes 4,360 3,803 4,170 4,737 7,042 12,385
Property taxes as a
percentage of total
tax revenue
a. State and local 77.7% 68.d 56.- 49.4% 46.2% 44.6%
b. state 23.0 13.8 7.8 5.0 .9 3
c. Local 97.3 96.7 92.7 91.9 .2 .7

Source: U.S. Bureau of the Census, Historical Summary of Governmental Finances in the United States, 1959. (1957 Census of Governments, Vol. IV, No. 3), tables 4, 5 and b.








nationally on the property tax for local revenues, the decline appears to be of minor significance. However, if one considers the tremendous increase in revenues from other sources, notably the individual income tax, the sales and use taxes, and federal supplements, it is seen that local governments are depending even less on the property tax than the foregoing figures would appear to indicate. As shown in Table 3, this fact has proved valid during the period of rapidly expanding revenue needs since World War II.
While total local revenues were increasing 209 per
cent, property taxes increased only 161 per cent. This lag in the increase in property tax revenues resulted in that source declining from 57.6 per cent of total revenues in 1946 to 48.7 per cent in 1957. Thus, although property taxes have declined in importance only moderately in relation to total local taxes, the decline is more pronounced when viewed in relation to total local revenues. As
indicated in Table 3 property taxes are being supplemented by an increased reliance by local governments upon the
other sources of revenue, in particular state and federal supplements.
Although the preceding analyses are enlightening as to the role of the property tax nationally, they do not reveal either basic differences between states or, more important and relevant to this study, the actual situation which is confronted in Virginia by the taxpayers of that state, including in particular the public service corporations





TABLS 3


SOURCES OF REVENUE FOR LOCALITIES, UNITED STATES, 1946 AND 1957 (In millions of dollars)
194t 107 Percent7age Per Gent Per ent Increase Amount of total Amount of total 1946 to 1957
Total local revenues $8,227 100.0% $25,406 100.0 209
Intergovernmental revenue:
From federal government 53 0.6 34 1.4 547 From state governments 2,092 25.4 7,196 28.3 244
Local sources:
Property taxes 4,737 57.6 12,385 48.7 161 Income taxes 33 0.4 191 0.8 479
Sales and gross
receipts taxes 183 2.2 1,031 4.1 463
Other, including
licenses 204 2.5 679 2.7 233
Charges and miscellaneous 925 11.2 3,580 14.1 287


Source: U.S. Bureau of the Census, Historical Summary of Governmental Finances in the United States, 1959. (1957 Census of Governments, Vol. IV, No. 3), Table 6.








operating in and serving that state. Table 4 is more revealing in this respect. The various states, including the District of Columbia, have been broken down into three groups. Group 1 consists of those states which place heavy reliance (over 60 per cent) on the property tax as a source of local revenue. Group 2 includes those states which fall into the middle range of reliance, 40 to 60 per cent, and Group 3 includes the remaining states whose emphasis upon the property tax is less and whose revenue from this source is less than 40 per cent. It should be noted that only three states, Nebraska, New Hampshire and New Jersey, placed sufficient importance upon the property tax as a source of local revenue to obtain greater than 60 per cent of their local tax revenues from this source.
As shown in Group 3 in Table 4 , there were eighteen
states and the District of Columbia which had relegated the property tax to a role of only minor significance. It is noteworthy that this group includes most of the southern and southwestern states, a fact which reflects the predominant agrarian economy of these states. Explanations of this relatively unimportant position of the property tax in these states can only be conjectural; however, in each case
there is at least one apparent explanation. In Florida, for example, the subsidizing of home owners by property tax exemptions has brought a material narrowing of the property tax base. West Virginia, among others, has set a legal limitation on property tax rates. Many counties in Virginia




TAuE 4


PROPERTY TAX REVENUE AS A PERENTAGE OF TOTAL STATE AND LOCAL
TAX HEVENUE, CLASSIFIED BY STATES, OTHER DATA, 1957

Property Tax Revenue - State an Percentage Per Per of all state $1,000 of $1.,000 of and local Per personal Per personal taxes capita income capital income
Group 1 (over 6c)
1. Nebraska 70o $ 97.95 $53.31 9 5 2. New Jersey 64.0 112.92 5.02 2 15 3. New Hampshire 62.8 95.42 51.34 11 7
Group 2 (4C! to 6~)
4. Montana 58.3 109.49 58.17 5 3 5. South Dakota 58.2 94.66 61.02 13 2 6. Kansas 58.0 101.81 56.01 7 4 7. Massachusetts 58.0 122.28 51.95 1 6 . Indiana 54.9 77.82 38.50 24 23 9. North Dakota 52.8 88.25 61.60 16 1 10. Wisconsin 51.8 95.05 49.49 12 9 11. Minnesota 51.8 93.62 50.55 14 8 12. Illinois 51.7 92.35 37.99 15 25 13. Wyoming 51.4 98.33 48.40 8 10 14. Colorado 50.8 95.97 47.80 10 12 15. Rhode Island 50.4 76.50 38.23 25 24 16. Idaho 50.2 78.07 48.28 23 11 17. Connecticut 50.0 101.85 36.:18 6 26 18. Maine 50.0 74.91 44.86 26 16 19. Iowa 48.8 85.94 47.30 17 13 20. Ohio 48.0 73.20 32.48 27 29




TAIJ"B 4 (continued)


Property Tax Revenue State Rank Percentage Per er of all state $1,000 of $L,000 of and local Per personal Per personal
taxes capita income capita income


New York California Arizona T sexa Michigan Vermont Missouri Utah Maryland Oregon


Group 3 (under 40%)


District of Coluab.a Kentucky Nevada
Florida Penn sylvania ViRasadA Oklahoma Washington Georgia
Tenesseeo Misa ssippi North Carolina


21. 22.

25. 26. 27. 28.
29. 30.


$109.94 112.6
78.74
63. 3
78.85 57.98 71.33 67.73
85.08


47.7% 47.2
46.4 46.2 46.1
4u.0 4 .4 43.8 42. 42.4


36.8 36.3
36.1 35.4
334 31.1i
30.4
29.6 2940 28.9
2 .8


$4 .35 4 .51 42.70 35.51 38,56
46.60 29.76
415 31. 1 43. 81


25.26
28.28
33.61
31.40
25*42 24.23 28.54 26.27
25.20 24,38 30.78 22.76


64.35 38.77 83.oo
56.12
53.85
39.88
46.62 55.84 36.13 33.93 29.75 30.15


31. 32. 33.
34. 35.
36. 37. 38.
39.
0.
41. 42.






TABLE 4 (continued)


Property Tax Revenue Sate ank
Percentage Per Per of all state $1,000 of $1,000 of and local Per persona Per personal taxes capital income capita income
43. Arkansas 26.5% $26.5 $23.22 47 42 44. West Virginia 25.4 28.46 18.19 46 47 45. Delaware 23.9 32.44 11.73 43 49 46.. ew , 4exico 23.4 36.84 21.41 39 45 47. Soutn Carolina 23.0 23.89 20.23 48 L 6 48. Louisiarna 21.8 35.39 22.59 41 44 49. Alabama 20.2 20.45 15.50 49 48

Source: U.S. Bureau of the Census, Compendium of Government Finances
(Wasmgton: U.S. Government Printing Orrffice, 1959), 194 pp. (1957 census of Governments, Vol. ILL, No. 5.)








have generally placed a low ceiling on the availability of property taxes through the practice of assessing property at small fractions of full value. Nevada, where gambling is legal, has an alternative source of revenue not readily
available under existing laws to many other states. Washington State has taken over most of the responsibility for administering or financing the local administration of

certain commonly local functions, such as schools and wjelfare, using for this purpose revenue fro. sources other than property taxation.
It should also be noted that, on a per capita basis,

with only minor exceptions, the rank of the state is similar to that obtained when comparing local property taxes with total taxes. The exceptions, taking iassachusetts as an example, show that where the per capita tax is exceptionally high, so also is per capita income. Per capita figures are not, however, a very good measure of the comparative property tax burden. For example, though New Jersey, California and New York rank high in per capita taxes, they rank 15th, 17th and 19th respectively in property taxes per $1,000 of personal inco e. On the other hand, these data show how a combination of moderate per capita income and relatively great reliance on the property tax creates an extremely high burden of taxation per $1,000 of personal income. North and South Dakota are cases in point.

That the property tax accounted for 86.7 per cent of all local tax revenues in the United States in 1957 is an








indication that other taxes have not become a material fac tor in local tax systems nationally. Though locally administered nonproperty taxes are a substantial source of revenue in some cities and of lesser importance in many others, they are not a satisfactory substitute for local governments generally. The more productive nonproperty taxes are not well adapted for local administration; how ever, it might well be possible to permit the localities
to participate in state-administered tax schemes as a supplement to the property tax.

Proerty Tax Revenues in Virginia
Virginia is not distinctive in the relative decline of the importance of the property tax as the chief source of revenue to the localities. Table 5 illustrates this point. From it, it is observed that Virginia's counties continue
to rely chiefly upon property taxes as their largest source of revenue; however, it is noted that, as a percentage of total local revenues, property taxes have declined in importance, dropping from 47.00 per cent in 1943 to 42.72 per cent some fifteen years later. It is also noteworthy that all sources of revenue have increased more rapidly in Virginia than the national averages; however, even in
this case property taxes have increased to a lesser degree than have the remaining sources of revenue. This indicates that in Virginia as well as nationally property taxes are being supplemented by an increased reliance of local




TABLE 5


SOURCES OF REVENUE FOR VIRGINIA COUNTIES, 1943 AND 1958
(In millions of dollars)


1943 195b Per Cent Type of Revenue Amount Per Cent Amount Per Uent Increase
Property taxes $16,546 47.oo , 76,825 42.72 464. Service charges a 814 2.31 7,339 4.08 901.6 State supplements 14,196 40.36 69,75 38.79 491.4 Federal supplements 1,575 4.48 11,99 6.66 759.6 Other revenuesb 40 5.85 13,92 7.5 62.8
Total $35,171 1OO.0O% $179,816 iOO.0Q


Sources: Report of Auditor of Public Accounts on Comparative Cost of Local Government, Year Ended June 30, 1943, Commonwealth of Virglnia. Repot of Auditor of Public Accounts on Comparative Cost of Local Government, Year Ended June 30, 1958, Commonwealth of Virginia.
aState supplements include certain federal welfare payments.
bOther revenues include dog licenses and miscellaneous receipts.









governments upon the other sources of revenue, in particular state and federal supplements and increased service charges.

Summary
in this chapter some historical background of the
property tax was presented, including the taxation of interstate commerce and the development of rules applicable to the taxation of property. Also considered were the constitutional provisions for the taxation of property in Virginia. It was noted that the constitutional and statutory development of the ad valorem tax system in Virginia followed the same general pattern as the development of taxes on railroad property. These constitutional provisions, as they have developed, have never been precisely defined in all cases. In particular, the provision of the Virginia Constitution requiring uniformity in taxation does not spell out whether uniformity in assessment means uniformity between all property or between classes of property owners.
Background data relative to property tax revenues were also analyzed and it was found that nationally the property tax has declined in importance over the years, especially as a source of state revenues. Although it has declined somewhat as a source of local revenues, it was noted that the property tax continues to provide a substantial percentage of total local revenues. An analysis of property tax revenues in Virginia revealed that this tax scheme has similarly declined in relative importance as a source of








local revenues, being replaced in large part by state and federal supplements and non-tax revenues. However, Virginia's localities continue to rely on the property tax as their chief source of revenue.
Because the property tax does continue to play such an important role in local government revenues, the problems of equity in the administration of this tax system continue to have considerable significance. It is to one administrative aspect that this study now turns--the assessment function.













CHAPTER 3
ASSESSMENT ADMINISTRATION

The assessment of property on some equitable basis
has been the most difficult problem facing the tax assessor throughout the long history of this type of taxation. As long ago as 1692, a petition to the Governor of the Colonial Assembly of the Colony of New York urged
. . . that there may be a certain method
for the equal and proportionable assessing of subsidies, We doe pray his Excell. would
appoint Commissioners in each respective
County for the making of an Estimate of
their Estates, that for the fu ture there
may not be such uncertainties.

That the basis for such complaints exists even today is evidenced by recent findings and reports of state tax commissions throughout the country. For example, the final report of the State Tax Study Commission to the Governor of West Virginia states that "West Virginia's problem is not so much excessive taxes, as it is extreme unevenness of burdens."2 The 1956 Report of the Governor's


1Frederick D. Bidwell, Taxation in New York State Albany: J. B. Lyon Company, 1918), pp. 12-13.
2West Virginia State Tax Study Commission, West
Virginia Taxes, Charleston, West Virginia, Novem eE, 1960, p. 510









Minnesota Tax Study Committee states that in " . . . examining Minnesota's tax problems, the Research Staff and the Committee itself found the property tax to be the most deficient major element of the Minnesota tax system not only in terms of its inequity in structure and enforcement, but also in its discriminatory impact on industry and agriculture."
This same problem was also recognized in New Jersey, as indicated by the statement in a 1953 Report of the New Jersey Commission on State Tax Policy that the:
* . . study of the general property tax
touches upon the most sensitive issues of
state and local government. It was undertaken because of a long-held belief that property valuations and assessments were
marred by the grossest inequities. The
study demonst ates and confirms this
belief. . .
That uniformity in the assessment practice is essential to the health of the nation's economy is a fact which occasionally goes by unnoticed in the efforts of many tax assessors to obtain revenues. As stated by one authority, equity in the assessment practice
. . . is essential to the continued
success of our democratic system of government. Local government, the bulwark of
our democratic system, cannot be considered


3Report of the Governor's Minnesota Tax Study Committee, State ofr Minnesota (St. Paul, 195b), p. 568.
4New Jersey Commission on State Tax Policy, Sixth Report . * . The General Property Tax in New Jersey: A Century~ of Inequities (Trenton, 1953), p. ix.









on a sound financial basis unless the
cost is equitably distributed among its taxpayers. Uniformity and equality are also essential in an economic system of
free enterprise and fair competition.
The tax cost is a substantial item in
the overhead of commercial and industrial organizations. If the cost is not equitably distributed, it disturbs the economic
structure of our society. If a business
concern could count on its assessment and its competitors' assessments always being
on a sound and equal basis, It could better
plan a sound future program.

Making the Assessment

The first problem confronting the local assessor is one of locating taxable property and adding it to the tax rolls. Some pieces of property escape the tax rolls for some period of time due to questions of situs and jurisdiction, failure of the property owners to disclose the existence of the property, or the failure of the assessor to "find" such property through ignorance, incompetency or error.
Once property is located it is the assessors' Job to determine its value, according to a uniform standard, so that each taxpayer contributes to the cost of government in proportion to the value of his property, this being the essence of ad valorem taxation.


5Clifford Goes, "Appraisals," Proceedings of the Forty-First Annual Conference on Taxation (Sacramento, Calis National Tax Association, 1946), p. 149.









This is no easy task, however, since thele is little
agreement as to which standard of value should be applied by the assessor. The statutory and constitutional provisions of most states provide for the assessment of property at some percentage, most usually 100 per cent, of "full"
value, "fair" value, "fair market" value, "fair cash" value, "cash" value or some other varying term which is lacking in both uniformity and clarity between the states.
Section 169 of the Virginia Constitution provides for assessment of real estate and tangible personal property at its full fair market value. This leaves unsolved the problem of the determination of fair market value. For some types of property the determination of fair market value is relatively simple conceptually if one accepts the general definition that fair market value is
. . . the probable price at which it
would have been sold, had it been sold, on the taxing date at a sale between a
willing buyer able but not compelled to
buy, and a willing seller able but not
compelled to sell, if both buyer and
seller had been fully conversant with the
property and with current publ ic opinion
concerning prices in general,.
Even though sales prices of parcels of property can be objectively determined in many cases, there are limitations


6The determination of fair market value of public service corporation property is taken up in Chapter 5.
7philip H. Cornick, in A. E. Buck and Others,
Municipal Finance (New York: Macmillan Company, 1926), p. 313.








to its exclusive use in establishing taxable property values. First, it is necessary to eliminate from consideration sales of property which might not be "arms length" in nature, such as transfers between relations. Second, as is frequently the case, economic conditions might exist which affect the degree of willingness to sell or buy. A recessionary period such as the 1960-1961 downturn in economic activity, for example, may well encourage some owners of property, unable to meet mortgage payments, to sell on terms less favorable than they might normally sell. Further, not only is the number of sales of property in a given period of time a relatively small percentage of the total property available, but also it is questionable that the properties actually sold are truly representative of
all types, ages, and conditions of such other properties in the area. As a result, sales price data must be supplemented by other analyses in order to arrive at a "fair" market value which may or may not be the same as market price.
Though many assessors copy the preceding jear's assessme-t roll to satisfy ,heir respous-bility for the current year's assessment, maki . littlee real effort to acteve unifor'ity or equity, their excuses often are plausible. The assessment of property, whic exists In a multiplicity of k-,nds of land and i.-provemenas and for a leg-on of pur poses, is a form dable task even for the iiost exper enced and objective assessor. Although the job of assessor is









perhaps one of the most responsible i. government, most governmental units do not pay a salary sufficiently high to ,tract the more qualified .ndividuals to seek the office. In many cases, the local government's budget is such that sufficient funds are nt available because of the small size of the taxing district. In Virginia, the Department of Taxation has a team of expert assessors who will lend their

assistance to the assessors in. the localities; ho wever, there is .o evidence that the use of th-'s service is widespread.

In addition to the possible lack of competency on the part of the local assessor, other obstacles exist to impede assessment practice. O.e of the foremost of these obstacles is the scarcity of adequate funds to properly staff the assessment function. Closely related is the matter of time. Without adequate staff, regardless of the qualifications of the staff already on the Job, it is impossible to devote much time to the determination of a fair value on each and every parcel of property. The treasurer of oe city, for example, states that if the number of worki ig hours per year devoted to the assessing functio were divided by the

total number of parcels of property under the Jurisdiction of h.s office, the average time allowable for the assessmet of each piece of property would be approximately thirty
8
seconds.

8Personal interview with Johnny II. Johnson, treasurer, City of Roanoke, Virg.unia, July 14, 1960.









What, then, can tL.e assessor do? Whether the assessor meets his responsibility by guess.,, uy copy.g last year's assessment roll, or by applying objective appraisal methods depends largely oi4 his .raLn.g and the knd of organization and assessing aids he ..as at hs disposal. It is further depeodea on the part c lar problems with which he is faced. For example, . the case of certain , classes of real estate, such as dustr al property, sales may be both frequent and unreprese. tative of market value. Frequently, improvements have been made to proper y for which the market price depends on e..ther how well these improvements serve their tended purposes or how well they can be adapted to other uses for whtch there is some demand. illlustratons of tese problem s.tuatlo.s would be a moau aroud an eccentric's house, a bomb shelter of unknown adequacy, or a railroad station where service has been curtailed or abandoned, 1:. th s respect, o writer reveals tiiat older houses present a problem .n tat hey

. . . are frequently the materialzed
dreams of the.r wealthy owner-buJiders
(nightmares, however, for the assessor),
which ra..ge from mIniature repl cas of
Kng Arthur's castle at Camelot to
Brobd ingnaian mons bros -ties3 comb g features of Goth-ic, French Renaissa-ce, Tudor and Jyzantine architecture. . . .
Monumental residences are hardly more disposable tnam would be an elaborate tombstoae
.nscribed With the -ame and crowned wi-h
the family crest of tne ower-bucer.


9Albert E. Cnampney, "Obsolete Mans.o..s," Assessors' News Leter (National Assoclation of Assess-.g OffiCers, XX, Lo. 1, July, 1954), 50-51.








Few people question the mag&.tude of the assess_.g
function itself; however, few people seem to be aware of the complexity of the processes whereby property is assessed. in the assessing of personal property, for example, the assessment function ranges from being no problem at all in those states which have exempted personal property from ad valorem taxation, to being a problem of great futility in those states which stll attempt to tax kinds of personal property that do not readily lend themselves to assessment.

I1 the assess ng of real estate, which comprises the largest base in any ad valorem tax system, no few problems are encountered. Land itself is of different k.nds, improvements are of varying effectiveness and type, acd both land and improvements are devoted to a multitude of uses. it is the duty of the assessor to take cognizance of these elusive factors in determining market value.

Most assessing agencies are aware that "fair property 10
taxation is possible only with fair assessmets," and are making efforts to stay abreast of changing conditions. it is interesting to note that such efforts made by one state brought to light the following conditions:

1. Many property owners have continued to pay taxes on a vacant lot years after constructing a home or building on the lot.


1OGuide for West Virgin .a Assessors, Charleston, West Virgin a, January 1, 1950, p. 54.








2. Many properties, commercial and income,
are classified as residential anLd paying half tue tax rate that similar properties
are paying.

3. Many property owners paying taxes on a
value based on the property before the levy
limitations law was enacted. In other words, their property valuation has remained undisturbed for over twenty-five years.
4. Many properties built in the last ten
years carry high assessed values based on the inflated cost of labor and mater-al, therefore
have no relationship to t values placed on
properties prior to 1930.

The problem with which assessors are generally faced

center mainly in unequal assessments and under-assessments. Though complete equality of assessment is doubtful of achievement, even with the advanced scientific tools of the progressive assessor, reasonable approx .mations of equality are certainly feasible. Under-assessment, or assessing at some fraction of the legal requirement, presents certain difficulties of itself. Each of these problems of assessment administration will be given some consideration.

Unequal Assessment

All states require uniformity of assessment, irrespective of whether property is assessed at full value or

some fraction of full value. As long as all taxable property within a given taxing district is assessed at the


11lbid.









same ratio to market value, it may be stated, with certain qualifications, that there is equality of assessment. Within one taxing district, however, if one piece of property is assessed at 40 per cent of full value, as are public service corporations in Virginia, and another piece of property substantially the same is assessed at only

8.5 per cent, the bias in favor of the latter is immediately evident.

Though it is possible to correct the lack of equality of assessments within one taxing district -n a state there may remain inequality between taxing districts. This, too, creates certain problems, For example, and of paramount importance in th s thesis, many states assess the property of certain kinds of property, notably public service corporation property, and certify their assessments to the localities for application of local tax rates. Frequently, however, these state assessing bodies cannot or do not adjust these assessed values to the widely varying levels of local assessments. Often the local assessment ratios are used for purposes of allocation of state aid, as in the case in Virgini.a.12 Virginia, as many states do, limits the borrowing power of the localities to a fixed percentage of local assessed valuations. Thus, because of varying


12Virg3.la s still usig 1950 assessment ratios for this purpose.
130 ly the cities in Virginia are so limited.









assessment ratios, the various local governmets are limted unevenly ii the use of their fiscal resources. These considerat one help to explain w y "it is esseti al that the state law provide a uniform standard of assessment for all taxwug d stricts in the state, together with adequate administrative means for enforcing the use of the common standard.hl14

Under-Assessment

In some states fractional assessment is provided for

by law15 but the majority of the states seem to contemplate assessment at full value. However, investigation of the assessment practice of the various states reveals that no state actually meets the requirement of assessment at a full 100 per cent of full value. This situation of legal, or illegal, under-assessment raises three fundamental questions. First, why has assessment admin strat.on failed to comply witn the law? Second, n what ways is underassessment deleterious to local government? Third, what are the relative advantages of assessing at 100 per cent of full value, or of assessing at some fraction of full value?


14A. E. Buck, et al., Municipal Finance (New York: Macm..11an Co., 1926), p. 310.

15Alabama, 60 per cent; Arkansas, 18 to 20 per cent; Indiana, 33 1/3 per cent; Iowa, 60 per cent; ijebraska, 35 per cent; Oklahoma, 35 per cent; South Dakota, 60 per cent; Utah, 40 per cent; Washington, 50 per cent; Connecticut and Oregon, option of county assessor; Pennsylvana, county opt o. not to exceed 75 per cent.









Failure to comply with tiie law

Historically, one of the uajor reasons for te failure ,f certain counties and cit es to comply witu a law requiring assessment at 100 per cent of full value has been the policy of protec t g t.ae local c.t zeas from paying either an Anfair snare of state taxes or perhaps even a fair share of state taxes. With more and more states withdrawng from property taxat ou as a source of revenue, leaving this source to thie local tles, the impetus for lower assessments on local property for thLs reason no longer exists; however, the practice in mauy cases seems intre ced. Further, some states apport.ou school aid and other forms of ass stance to their poorer localities in greater proport~ous per capita tuan to t oe more well-to-do localit es, a d o e of the measures of "poorness" a frequently assessed valuati.on. This pract ce wold naturally encourage assessments at sometaingL less than the legal minimum. Also, maI.ay localities purposely retain low assessment rat -os in order to appear more attractive to potenttial industries who eight relocate or expand in that area. Unfortunately, manZ, localities fail to realize that firms generally tenJ to consider tIe fairuess and stability of the local tax structure as well as the suort-run aeuefits which might temporarily accrue to tem.

T.ere are a few other poss ble causes of assessment

at less than the legal min mum. First, it .s entirely possible that influenclal property owners, in some cases,









bring pressure to bear on local officials to concentrate their revenue-raising efforts in some direction other than the property tax. Just how this is accoiplisaed and to what extent it is successful is open to debate; however,

it s reasonable to expect that somne assessors can be so influe ced, particularly woen the assessing function is Cund acted by an elected official. Second, the assessment of property at less than tiie required ani a ma tend to make the property owner in general feel as tioU he were "getting a bargain" regardless of the rate of taxation applied to his assessed valuation. Tius, as lo..g as the taxpayer thinks he is "getting away witil soBo7etaing," th-s may tend to make the assessing and collection function considerably easier for the local officials. Finally, underassessment can either obscure unequal assessments or ..ake protests less likely. W..ere the state law requires assessment at 100 per cent of full value, and one taxpayer is assessed at only 50 per cent, he is not only less likely to know that he is unequally treated, even if otner taxpayers are assessed at only 10 per cent, because of his desire to keep ihis "bargain" a secret, but also ne is less likely to protest since he knows his assessment is less than tnat required by law. As expressed by one writer on the subject, "Historically, the full-value law has been









used by some escape-uinded assessors as a convenie~t met_..d of t rning aside complaints of inequiti.6 Effects of under-assessment on local government

One of the most serious effects of local assessment practice is tue exercise by the assessor of legislative powers not intended for ..im. in Florida, for example, the legislature has provided a homestead exemption of $5,000, presumably, according to the Florida Constitut on, an exemption of the first $5,000 of full value of real estate. if one local assessor decides to assess local property at 10 per cent of full value, ne is in effect, multiplying

the legislative intent by ten.

As mentioned earlier, state aid to localities is frequently measured by assessed valuations. Therefore, local manipulation of the assessment ratio res lts in erratic

deviations from the intent of state policy in the distribution of state funds. Further, local debt is often restricted to some percentage of assessed valuation, as is the case of the cities in Virginia, and local tax rates are often limited by state law, in consideration of what the state considers an acceptable assessment ratio, as is the


16Leslie E. Carbert, "Full-Value Assessment Versus Fractional-Value Assessment," Proceedings of the FortySixth Annual Conference on Taxation Zacramento, Calif: ihational Tax Association, 1953), p. 174.








case in West Virgini.a; therefore, low assessments may cause many local governments to suffer a material erosion of their general borrowing and property taxing powers. Curtailment of borrowing power has in many cases resulted in further complexities of local government plus added, unnecessary cost. In Washington State, for example, where the assessment ratio is "fixed" at 50 per cent, and where the tax rate is similarly restricted, the counties have established special districts as "separate governments"
although they are actually merely taxing arid borrowing districts set up to skirt the legislative restrictions.
The result has been, in many cases, the inJudic-ous and costly use of revenue bonds and the creation of "authorities" through which capital facilities are financed indirectly from property taxes.
Valuations of property at less than the legal minimum have not received consistent Judicial approval. In a fairly recent case tie Supreme Court of New Jersey upheld assessment at 100 per cent of full value, in spite of local practice to the contrary, and vowed to uphold this principle in any case brought by an "aggrieved" taxpayer.17


178witz V, Middletown Township, 23 N.J. 580 (1957).





67


The Connecticut Supreme Court, in a similar case, has held that the under-assessment practice is invalid and counterlegislative, saying:

Nor can we overlook a further matter in demonstrating the impropriety of pursuing a role of fractional valuation, Wnen assessors adopt suc rule, they indirectly
assume a role which rightfully is not
theirs to plan. For if such a rule is
applied, the assessment roll will obviously
be smaller in amount than it would be if the mandate was carried out. Under such circumstances the borrowing power of the
municipality is affected, since its indebtedness may not exceed specified percentages of the grand list. Assessors who use fractional valuations to determine their assessnents therefore interfere, perhaps unwittingly
but nevertheless effect'gely, with a power
that belongs to others.

Full-value assessment versus
fractional valuation

Fractional valuation is frequently supported on the

grounds that it makes little difference so long as there is equality of assessment. This point of view overlooks the fact that assessed value, in addition to providing a tax base, usually controls or influences certain basic fiscal powers and policies of local government. Objections to raising assessed value to full value are numerous, a popular one being that an abrupt departure from the various established conventions would result in disclosure


18ingraaim Co. v. City of Bristol, 144 Conn. 374 (1957).








of built-in inequalities between different classes of taxpayers, loss of local government revenues, a redistribution of the tax burden, and a loss of revenue from public service corporation properties whiich are frequently assessed at a percentage of full value soewat hither taa.. local property.
Arguments in favor of assessment at full value include the following: it gives taxpayers a better opportunity to spot inequities and obtain relief; it encourages a more professional and scientific approach to the assessment function itself; and to tie above ends, it makes iniequalities in the assessment practice more noticeable and, thus, more subject to protest. In the words of one proponent:

Does it really make any difference whether
assessments are at full or at a fraction of full value? From the point of view of
uniformity, it probably does not, although
it is often said that relative under- or over-assessment is more easily discerned
at full value. There is probably some truth in this, which would impel me to
believe that assessments would be better
made if their levels were up reasonably
near where they ought to be.

The Assessment Practice
The manner in which assessments are currently administered helps to account for the inequities which might


19Thomas A. Byrne, "Full Value Assessments in Practice: Reasons For Under-Assessment," Assessors' News Letter (International Assoc ation of Assessing officers), XXV, No. 1, January, 1959), 3-7.









exist, as well as to account for the general underassessments which are prevalent. Without coordination of the assessment practice within a state where there are a number of independent assessors, there may be a number of divergent opinions. With a separate assessor employed in each of the state's localities, large or small, the rate of compensation generally has been quite low. Revealing that, in 1956, nearly 60 per cent of the assessors in New York State earned less than $500 per year, the New York director of the equalization board commented: "Is it any wonder tLat the assessing Job in many towns and some cities is confined primarily to copying last year's roll?"20 An economist at the University of Washington similarly observed that
, . it should be said that the compensation paid these officials is grossly
malproportioned to the importance and technical character of the assessment
function. If technical qualifications
were required of those standing for election as county assessor, based on specialized training and accepted professional
standards, it is questionable whether there would be any candidates for this office.21
The conclusion to be drawn from these statements is that the assessment function has been divided into too


20Frederick L. Bird, "Equalization in New York,"
Proceedings of the Forty-Ninth Annual Conference on Taxation Sacramento, Calif: National Tax Association, 19577,

21james K. Hall, "Equalization of Property Assessments in Washington," in Ibid., p. 213.









many segments, few of which are capable of supporting a qualified assessing office. As early as 1941 the National Association of Assessing Officers reported that:

The political subdivision serving as an
assessment district should have sufficient resources to afford adequate assessment machinery, and should provide an
assessment task large enough to realize the economies of large-scale operations
and to warrant t.e employment of one
full-time asses r and at least one fulltime assistant.

Though it is true that the assessment function has not been given adequate consideration in many localities it is equally true that certain other localities have made considerable effort to improve their assessment practice and
to achieve a greater degree of uniformity and equity. A brief examination of the procedure developed in the City of Richmond, Virginia, for the assessment of incomeproducing properties illustrates some of the efforts made
in this direction.

Assessment of Income-Producing Properties, City of Richmond, Vir.Inia.
The City of Richmond has used capitalized income to determine assessed values for over twenty years;


22
Report of the Committee of Assessment OrManization and Personnel (Chicago Ill.: National Association of Assessing Officers, 1941), p. 51.
23The data following result from a personal interview
with Mr. Richard A. Chandler, Assessor of Real Estate, City of Richmond, Virginia. With Mr. Chandler's permission, considerable use of data provided by Mr. Chandler is made. Date of interview: July 21, 1960.









consequently, its method of using this technique, as

evolved over the years, is relatively well-developed.

The advocates of this procedure point to six key reasons

for its use:

1. To demonstrate that assessments are not
arbitrarily made and to inst-ll confidence
n assessments by conforming with the practices of the market. On income producing
properties particularly, lack of use of this
approach creates public skepticism in the
value estimate.

2. To provide an essential check on the
other approaches to value.

3. To provide a measure of all forms of
depreciation.

4. To avoid the elimination of basic concepts
of value. Each of the three approaches
attempts to measure a different motive and
each is based upon different theories, laws and principles of economics and value. To
ignore this approach is to ignore established
concepts of value.

5. To comply with tue rulings of the courts and thus avoid having an assessment declared
erroneous. Since 1861, Supreme Courts of various states and the United States have
insisted that the rental or income of a property must be considered and evaluated in determining
assessed values.

6. To produce equitable assessments based
upon fair market value, which is required by
law in most assessing Juriscictions.

Use of groes income rather than net income

In utilizing the capitalization method, one of the

first decisions confronting an assessor is whether to use

gross income or net income. The City of Richmond uses
gross income for three reasons. First, the use of gross









income in mass appraisals makes it unnecessary to study

large volumes of income and expense statements, some of which are distorted. Second, the use of gross income

assures the prudent manager of real estate that he will not be penalized in favor of the inefficient or imprudent manager. Last, the use of gross income leads to uniformity and equality and, thus, equitable assessments. Use of rental value rather than actual rental

In determining value based on income the question

arises whether to use the actual rent a property produces or whether to use its rental value. Once again, the City of Richmond prefers to use economic income, or rental value, following the recognized practice in the appraisal profession at large. The use of this value avoids

erroneous values created by using unusually high or low leases. Actual rental income would develop different values and would result in inequitable assessments. The problem of estimating
rental value

There are numerous sources of obtaining this data. An analysis of what the majority of similar space is renting for frequently helps ascertain the rental value of a particular piece of property. Also used in the City of Richmond is the device in which gross sales of the property are determined, and using a percentage lease









table, estimating the perce.a e of ross sales at ti.e part cuaar t pe of bus less can aff rd to pay for rent. Selecturo of toe proper
capital nation rate

In the City of Richaond three 'eo s or so rces are

utiliZed for select n .ross rates. First, whenever there is a transfer of .ncone producing property, the assessor's offLce obtains the gross .ncoe, tie sales price and the operating statement when ava la le. The rate is then deteruied by d hiding t.ie sales price into thie inco .e. The resultant rate is te catalog ed as to the type pr pert, and location, front which a pat oer is developed.

Second, infor.ced opI .on of realtors and appraisers 1as, over a period of time, helped to develop cross rates for

each t pe of reuta- property accord. n to condition, use and location.

Finally, the "built- p" nethiod is used to de ermine

the proper gross rate either for a teneral class of property or for an individual p ece of property. Tile gross rate is composed of the inrmerest rate, tie depreciat .on rate and normal expenses expressed as a rate. To develop the gross rate by the ouliit- p methoo, onlo the typical operating rat.o of the type propert u..der study, the tpica. .a~.d and uIlding ratio, and either the interest rate and est. mated remainmig economic life or the over-al rate need be known. The typ:cal operat:.ng ratio can be ascertained from national studies or from analyses of operating expense









staueueuts of similar properties. Tne use of typical or average operat ng ratios -n lieu of actual expenses or otner methods is preferred for the same reasons gross come ls used rather than neet income. Tie typical land and b ilding ratio on any general class of property Is normally generallyy known or can be readily obtained. Interest rates and depreciation rates or over all rates are obta..nable from tae market. The process na of these item s into a gross capitalization rate is illustrated in Table 6.

Appropriate use of the capitalization process

This process is most generali- used in nose cases

where the real estate market itself livess pr ie considerat.on to value factors such as anticipated eari-..gs or income prodccling potential. These cases would include cu.L.mercial stores, apartment houses, factories, theatres, shopping centers, motels and sim.-lar properties.


illustrations

In Table 6 the gross capitalization rate for apartment property, with gross .income of $19,500, is determined. It will be not ced that if ,he gross capitalization rate, determined therein to be 18 per cent, is divided into tne gross income of $19,500, tue capitalized value of 4108,333 is determined. To see how reliable this method is, Table 7 is presented, using the income approach to value;








TAB13E 6

GROSS CAPiTALIZATION RATE
Capitalized Value of An Apartment Building


Typical operating ratio Typical ratio of land to total Typical ratio of buildin_ to total interest rate
Remainikg economic life, 40 years Gross rental per year


55%
20 80
6


$19,500


Rates:
Land, 20 x 6 1.2% Building, 8W x (6% / 2) 6.8
Over-all rate 8.0

If expenses represent 55 of gross -ncoue then the over-all rate (8.0%) represents 45%.

Gross capitalization rate equals 100.o.
Therefore, 45% of X = 8.0%
X = 18.0% (gross capitalization rate) Capitalized value = $19,500 div ded '8.C =
$108,333









TABLE 7

INCOME APPROACH To10 VALUE OF AN APARiSiET BUILD:ILNG
Based on Actual Operating Statement


Gross income (100% occupancy) Less: vacancy and collection loss of 5%
Effective gross income
Less:
Operating expenses
Depreciation (excluding building)
0tner fixed charges
Total expenses
het income to land and buildings before depreciation on building
Return on land value $25,000 at 6%
Net income imputable to building before depreciation on building,

Coputation of value:
Estimated reua ining economic life of building 1a 40 years, interest and depreciation thIerefore is 8.5%. Net income before depreciation $7,479 capitalized at 8.5%
Add land value
Indicated value of tae property by capitalization


419,500
,975
418,525


$6,026
930
2490


$ 8,979
S1,500 LJ 7412


$87,988

22, 000

$112,9 88









that is, val ing the real estate cased on reconstruction of an actual operating statement aud using ouildin, residual straight line depreciation technique of capitalizat Union.

As can oe seen in an examination of the two preceding tables, the application of tue gross capitalization rate yields an estimated value whic varies less than 5 per cent from tie $112,988 developed from the full processing. Another example to be considered is a warehouse, one story, w th 7,000 square feet of rental space. The ware-ouse was built in 1948 and has an estimated remaining useful life of fifty years. From the trend tables of the City of Richmond it was ascertained tiat typical rental for similar properties is 60 per square foot and that the average gross rate of capitalization for such property is an estimated 12 per cent. Seven thousand square feet at 604 per square foot would yield $4,200 of gross income wiich, when capitalized at 12 per cent, gives a value of $35,000.
Table 8 shows a value indicated by the time-consuming income approach of $38,344. This compares with thie value, 435,000, obtained throuLi the use of a gross capitalization rate. Ti.us, it is seei tnat appraisal and assessment tools are available to the harrassed assessor and wLll provide within a tolerable range equitable and uniform
assessments with a winiuum staff. Though these tools exist and can facilitate tue informed assessor in his task,










WAREHOUSi VALUE I fCATED BY CC0 APP210ACH241


Gross income: 7,000 0qdare feet C 60
Less: vacancy and collection losa, 3
Effective gross income
Less:
Management fee,
Taxes
Insurances
Repairs and maintenance
Reserve for depreciation:
Roof
Heaters
Total
Net income before depreciation on building
Return of land value, 6 of $10,000
het income imputable to building

Interest rate 6; remaining economic life of building is 50 years, or 2,. Capitalization rate for interest and depreciation B%. $2,267.56 capitalized at B equal Add value of land
Value indicated by income approach


04,200.00
126.00
$4,074.00


$244.44 600.00
122.00 100,00
100. 00 40.00


1,206.44

42,867.56
600.00
Goo.oO

$2,267.56




$28,344 10,000

$38,344


there is still a wide range in which he must use his Judgment. For example, property substantially identical in every respect may vary in market value because of tImproving or deteriorating neighborhoods, location in respect to bus service, shopping or schools, scenic views, noise,


24Exoerpt from independent appraisal of this warehouse.








and a multitude of ouher factors. Where staff is inadequate or incompetent, it is impossible to stay abreast of all the changing factors. As a result, frequent unequal assessment or under-assessment becomes a naJor deficiency in the assessment practice.

Summary

This general review of assessment administration
commenced with a discussion of the basic problems facing the assessing officer. First, property subject to taxation must be located and placed on the tax rolls. Second, a reasonable valuation of such property must be made. It was noted that both of these problems are frequently complicated by the fact that not only are valuations difficult to make for all types of property but also the assessing office is frequently limited as to staff and operating funds.
As a result both of these internal limitations of the assessing function and of the fact that not all property within a given locality is assessed by the same office, unequal assessments within taxing districts and between taxing districts may give rise to discrimination in ad valorem taxation. If assessments which are not equal result in inequities, then the alternative of uniform assessments must be followed to insure a greater degree of equity. In making uniform assessments, however, it was noted that certain problems remain. Should all








assessments be made at "full value" or uniformIl at some fraction of full value? Ihe Leneral conclusion was reached that from the point of view of uiformity it probably makes no difference; however, from the point of view of the fiscal powers and policies of local government as well as of the best interests of property owners, assessments closer to full value seem more desirable.
Finally, the procedure as has developed in the City of Richmond, in respect to the asseising function, was examined in order to show what one city has done toward achieving reasonable uniformity in the assessment of its nonutility properties in spite of fiscal limitations. The significance of this general review of assessment administration for purposes of this study lies in the extreme importance attached by the utility industxtry to the assessment of nonutility properties. Utility property is currently assessed centrally and where assessment administration within the localities differs from the administration of central assessment, inequalities and possibly inequities, the object of inquiry in this study, are likely to exist.
Turning from a general review of assessment administration to the assessment practice in Virginia, it is felt that an analysis of the specific facts as they exist in Virginia will reveal whether there is in fact cause for concern at the variance between central and local assessment administration,












CiHAPTER 4


THE ASSESSIEN PRACTICE IN VIRGINIA

General Practice

Constitutional and statutory provisions to the contrary, the practice of assessing property at some percentaLe of full value has been approved by the courts. In Virginia, the courts have permitted the separate classification of utility property and its assessment at a percentage of market value, even where nonutility property is assessed at different ratios between and within taxing
1
districts. I Decisions in other states offer similar conclusions, a more recent court in Kentucky holding that assessments at some ratio of market value was acceptable in the interest of uniformity and equity, in spite of a constitutional requirement to assess at full value.2

Comparison of Assessment Ratios in Virginia
An examination of Table 9 of assessment ratios in
Virginia reveals some characteristics of the assessment


1City of Richmond v. Commission, 188 Va. 100, 59 S.E. 2d 6T4 T(194).
2Luckett v. Tennessee Gas Transmission Company, Ky. 331 S.W. 2d oy9 (190).





TABLE 9


RATIOS OF ASSESSED VALUE TO SALES VALUE OF REAL ESTATE,
COMMONWEALTH OF VliCINA, 1956


Cities


Richmond Danville South Norfolk Lynchburg Falls Church Winchester Fredericksburg Colonial Heights
Clifton Forge Norfolk i-Martinsville


81.(%
66.0 53.0 46.8 45.1 44.8
44.2 43.2 41.2 40.9 4o.7


12. 13. 14.
15. 16.
17. 18.
19. 20. 21.
22.


Hopewell Petersourg Newport News Portsmouth Virginia b3eachi Harrisonburg Alexandria Bristol Roanoke taimpton ladford


40.1%
40.0 4o.o 39.7 383.4
36.1 35.9
34.7 34.4 33.4 32.5 32.0


23.
24. 25.
26. 27.

28. 29. 30. 31. 32.


Suffolk Buena Vista 4aynesboro
Covington Ciiarlottesville .arutJick Staunton Norton Williamsburg Galax


Counties


henrico Arlington Norfolk Fairfax Lancaster Chesterfield Prince George Richmond


39.7 31.9 31.3 31.2
29.7
29.32 28.14 28.2


U
S.
10. 11. 12. 13.
14. 15. 16.


Buckingham Surrey Bath Roanoke Spottaylvania h ighla nd Westmore land Nelson


27.42 26.9 26,6
26.4 26.4 25.5
25.2 2 .6


17. 18. 19. 20.

21. 22. 23.


4 Madison Stafford Halifax Nor thu~miberland
Appomattox Culpepper
Charles City


1.
2.
3.
4.
5.
6.
7.
8.
9.
10. 11.


30. Q
27.4 27.3 27.2

27.0 23.3 22.9 21.6 19.7
14.2


24.7.
24.2 23.9

23.5 23.2 23.0
22.4




TABLE 9 (continued)


Counties


24. 25.
26. 27.
28. 29. 30. 31. 32.
33. 34.
35. 36.

38
39. 40. 41. 42. 46* 4 . 45* 46. 4 . 4*


Powhatan Floyd Niottouway Goochland
Brunsuick Ma theus Craig Auelia Gloucester
Rockingham Campbell Pittsylvania Alleghan Middlesex Clark Mecklenburg Rockbridge Accoack kLng George James City Lunenburg Greenville
Suex Northampton Charlotte


22.1 , 21.9
21.8 21. 21.8
21.4 21.3
21.2 21.1 20.9 20.6
20.5 20.5
20.1 20.0
19.9 19.8 19.5
19.4 19.3 19.2 19.1 19.1 19.0
18.4


49. 50. 51. 52.
55.

56.
57.
58. 59. 60. 61. 62. 63. 64. 65.
66. 67.
GD.
69. 70.
71. 72.
73.


iappahannock Dinwiddie Loudoun
Augusta Greene Fauquier Cumberiand Fluvaa a King William Prince Edward Ja nsemond Caroline
deu Kent King a. d Queen Frederick York Warren Essex
isle of dight Louloa Price .illiam Bedford Ora.,go Shenadoah Dythe


18.49 18.2 18.2
18.1 18.1 18.0 18.0 17.9 17.9 17.7
17.6 17.5 17.2 17 .* 17.2 17.2
17.0 16.9 16.9 16. u
16.8 16.3 16.1
16.0o 15.9


74. 75. 76. 77. 78. 79.
80. 81.
82.
8$. 84. 81.
86.


89.

90. 92. 93. 94. 95.
96. 97. 98.


Estate Assonsuont Ratio


Patrick Southlampton Wise Botetourt
Amherst Fulacki Giles
13laad Mouwgomery Frakli 1anover Page Albunarle Buchanau Tazaxcell

Priceos Amnoe D-ICIckeson Lee
Gra o Ruso 1
Scott Carroll Smytl ua sh into


15.$ 15.8 15.5 14.9
14.1 13.8 13.4 13.3
13.3
13.1 12.1 12.4 12.1 11.3
11.2 11.0
10.2 10.0 9.1
8.5 8.5 8.5
8.4 8.3 6.5


Source: Virginia Department of Taxation, 1956 eal Study.




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PROPERTY TAXATION OF PUBLIC UTILITIES IN VIRGINIA: ASSESSMENT ADMINISTRATION AND PRACTICE By JAMES EARL BROWN A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA August, 1962

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ACKNOWLEDGMENTS The author wishes to express his sincere i^ratitude to the Appalachian Power Company, and especially to Messrs, W. F. Keehne and C. L. Robison, for assistance in the collection of data and for making available research funds and facilities without which raost primary data could not have been obtained. Grateful acknowledgment is also due to Dr. Roland B. Eutsler whose suggestions have proven most valuable and who devoted his time to this project far in excess of any requirements as Committee Chairman. The writer is also Indebted to Drs, R, L. Lasslter, R. H. Blodgett, W. E, Stone and E, R. Bartley for their advice and many worthy contributions. Sincere appreciation is extended to Mrs. George B. Page, who assisted immeasurably in the preparation of this manuscript, for her untiring diligence. This work is dedicated to my wife, Maxlne, without whose patience, encouragement and devotion this study would never have been completed.

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TABLE OF CONTENTS ACKNOWLEDGMENTS LIST OF TABLES LIST OF FIQURcS ^cvii CHAPTER 1, INTRODUCTION i i The Problem S Limitations of Study ^ Economic Considerations •••••••• T Preliminary Investigation 9 The Need for Equalization in Virginia 19 Scope of Study 22 2. HISTORICAL DEVELOPMENT AND BACKGROUND OF PROPERTY TAXATION 24 Taxation of Interstate Commerce • . . . 24 Property Taxes 28 Constitutional provisions — Virginia 30 Constitutional and statutoi»y development in Virginia . , 35 Property tax revenues — general • • • 39 Property Tax Revenues in Virginia ... 48 Summary 50 ill

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TABLE OF CONTENTS (continued) CHAPTER 3. ASSESSMENT ADMINISTRATION 58 Making the Assessment 5^^ Unequal Assessment 60 Under -Assessment • * « • # • • 62 Failure to comply with the law • • • 63 • -» Effects of under-assessraent on local government 65 Full-value assessment versus fractional valuation t o7 The Assessment Practice ........ 68 Assessment of Income -Producing Properties, City of Richmond, • Virginia # . • 70 Use of gross income rather than net income • 7^ Use of rental value rather than actual rental . • ..... 72 The problem of estimating rental value • 72 Selection of the proper capital!^ • zation rate ............. 73 Appropriate use of the capitalization process ........... 7^ Illustrations 7^ Summary • 79 M. THE ASSESSMENT PRACTICE IN VIRGINIA . . 8I General Practice ............ 8I Comparison cf Assessment Ratios in Virginia 81 U

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TABLE OF CONTENTS (continued) CHAPTfiR iBS^ Signif icance of Local Assessment Ratios Oeographical Dispersion of AsBessment Ratios • * 101 The Trend of Assessment Ratios . • • 102 The Experience in Giles County, ». • . Virginia 108 Other Effects of Under-Assessroent in Giles County, Virginia . • • • • 112 Trend of Assessment Ra'cios and . Rates of Levy, Service Area Illustration • • 11^ Average Levies Per i^lOO of "Full value" 117 Average Levies on Assessed valuations 121 Suminary 123 5, VALUATICII, ASSESSMENT AND TAXATION OF PUBL...C SERVICE CORPORATION PROPERTY 129 The Ad Valorem System of Taxing Utility Property 131 Valuation of Utility Property . . . 133 Original cost less depreciation . 134 Advantages of original cost less depreciation 136 Disadvantages of original cost less depreciation .... I38 Beproduction cost less depreciation • . . • • 140 Capitalized income l48 llBrket prices of stock and debt . 151 v

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TABLE OF CONTENTS (continued) CHAPTER Assessment of Properties of Public Utilities in Virginia . , . 152 Sutntnary 157 6, CLASSIFICATION AND TAXATION OF • TANGIBLE PERSONAL PROPERTY *.'*t'#". . loO The Relative Position of the Personal Property Tax , • . . . ........ 163 Real and Personal Property Defined • « l66 North Carolina l66 New York I67 Effects in States Where Personalty is not Subject to Taxation 169 Effects in States Where Personalty Is Taxed • , • • • The Problem of Determining Value of Tangible Personal Property ...... 17O States Where Realty and Personalty are Taxed Alike ^'^^ States Where Property is Classified . . 173 The Classification of Public Service Corporation Property in Virginia » « • 173 t 9 Classification by the Virginia State Corporation Commission .... 17^ Basis for classification 175 The problem of public service corporations in Virginia • • 17o Practice in Virginia , . ...... . I78 The Personal Property Tax Solution as Proposed by Utilities 19^ Practical Defects of the Personal Property Tax I96 n

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TABLE OF CONTENTS (continued) CliAPTER Lack of uniformity ....•-«•«* •
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TABIE OF COIJTEUTS (continued) CHAPTER 8. REFORMS IN THE TAXATION OF PUBLIC SERVICE CORPORATIONS, PART II 251 The Central Tax Levy Rate 252 Need for uniformity 252 The levy rate .»...•••••••• 253 Use of local rates of levy 253 Average operating system rates of levy. 254 Statewide average rate of levy , . . • 255 The Allocation of Central Levies 256 Situs of investment basis 259 Revenues generated basis 263 Population basis ..... 266 Watt-hour meters basis * • 268 Pole-line miles basis .... 271 Combination of bases 272 Plan A --no adjustment for local effort 278 Plan B--adJusted for local effort . 286 Centralized Assessment and Allocation for Local Taxation 298 Summary ....... 300 9. SUMMAHy AND CONCLUSIONS 303 Summary 304 Introduction ..... 304 Development of the property tax .... 304 Assessment administration 305 vill

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V TABLE OF CONTENTS (continued) CHAPTER ^Sfi®. The assessment practice in Virginia . . 306 valuation, assessment and taxation of public service corporation property. 310 Classification and taxation of tangible personal property ••«••• 313 Reforms in the taxation of public service corporations • . 31^ Greater equalization in the assessment practice 315 Allocation of central levies .... 3l6 Allocation of centrally assessed values for local taxa\;ion ..... 320 Conclusions 320 As to property taxation generally . . , 321 As to the assessment of real estate . . 323 As to the assessment of public service I corporation property • . • • 32^ As to the taxation of tangible personal property 327 As to the rate of tax levy 328 As to recommendations 329 BIBLIOGRAPHY 333 } APPENDICES A, Counties in Virginia Served by • • • • ' Appalachian Power Company, 1962 346 B. Percentage of Assessed Valuation to Market Value, Revenue from Local Sources ; and Revenue from Local Sources as a Per Cent of Total Revenue, Commonwealth of Virginia, Year Ended June 30, i960 .... 3^17

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TABLE OP COMTEHTS (continued) APPEi©ICES C. The Effect of Reassessment of All Real Estate and Tangible Personal Property Other than Public Service Corporations, Using a MO Per Cent Minimum Assess. raent Ratio, 1959 . • • • • D, Town Levies E. Assessed Value, ^x'axes Paid, Average Tax Rate, in Towns Only, One Electric Power Company, 195^-1958 F, Computation of Operating Revenues, • ^ Appalachian Power Company, 1959 * • • BIOGRAPHICAL SKETCH

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LIST OF TABLbS TABLE Page 1. Median Assessment Ratios and Coefficients of Dispersion, Selected Localities, Commonwealth of Virginia . . ...» . . . • 1^ 2. State and Local Tax Revenue, and Property Taxes as a Percentage of Total Tax Revenue, United States, Selected Years 3, Sources of Revenue for Localities, United States, 19^6 and 1957 40 42 44 4. Property Tax Revenue as a Percentage of Total State and Local Tax Itevenue, Classified by States, Other Data, 1957 . • • 5. Sources of Revenue for Virsinia Coimties, " 1943 and 1958 ^9 6. Gross Capitalization Rate 75 7. Income Approach to Value of Apartment Building 70 '8, Warehouse Value Indicated by Income Approach 78 9, Ratios of Assessed Value to Sales Value of Real Estate, Commonwealth of Virginia, 195o. 82 10. Comparison of Actual Taxes Paid and Taxes Payable Using Average Statewide Assessment Ratios, Tax Year 1959 ^3 11. Comparison of Actual Taxes Paid and Taxes Payable Using Average Systerawide Assessment ^ Ratio, Tax Year 1959 • W 12. Comparison of Actual Taxes Paid and Taxes Payable Using Separate Average Assessment Ratios for Cities and Counties, Tax Year 1959 93 13. Ratios of Assessed Value to Sales Price, Real Estate, Selected Localities, 1956 ... 98 xl

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LIST OF TABLES (continued) TABLE 14. Trend of Ratios of Assessed Value to Sales value of Real Estate and Trenr: of Applicable Rates of Levy Thereon, Cities and Counties in Area Served by a Soutiwestern Virginia Power Company ......... 15. Computation of Tax Revenue, Area Served by liypothetical Utility, 1936 10^ . 16. Computation of lax Revenue, Area Served by Hypothetical Utility, 1956 100 17. Investment and Assessment Data, Selected Counties, 1959 • . . . » 11** 18. Average Rate of Levy Per $100 of "Full" Value, For the Years 195^ and 1958 118 19. Average Rate of Levy Per $100 of "Full" Value, For the Years 195^ a^d 1953 ..... 119 20. Assessed Values, Taxes Levied and the Average Rate of Taxation, Commonwealth of Virginia 122 21. Assessed Values, Taxes Levied and the Average Rate of Taxation ...•...*.. 126 22. Comparison of Rates of Return to Bond and Stockholders 1^3 ,23. Assessed Value of Property Subject to Local General Property Taxation, I956 l64 2i|. Comparison of Actual Tax Levy with Levy Based on Reclassification, Electric Light and Power Companies in Virginia, 1949 . . . I8I 25. Comparison of Actual Tax Levy with Levy Based on Reclassification, Electric Light and Power Companies in Virginia, I959 % % • 182 26, Actual Classification of Assessed Vaiue of Electric Light and Power Companies In • Virginia, Localities Employing Variable Hates on Realty and Personalty, I949 .... 185 xii

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LIST CXP TAB1£S (continued) TABLE 27. Suggested Classification of Assessed Values of Electric Light and Povjer Companies in Virsinla, Localities Employing Variable Rates on Realty and Personalty, 19^9 • . • ^. • • • * *.f • • 28. Actual Classification of Assessed Value of Electric Light and Power Corapanies in Virginia and Rates of Taxation Per $100 of Assessed Value, Localities Employing Variable Rates on Realty and Personalty, 1959 187 29. Suggested Classification of Assessed Value ' of Electric Light and Power Companies in Virginia, Localities Employing Variable Rates on Realty and Personalty, 1959 . . . IS8 30. "Rate of Class Discrimination" Trend, Selected Years, 1949-1959 193 31. Local Taxation Based on Revenue Generated, One Electric Power Company, State of Virginia, 1959 212 32. Ratio of Assessment on Real Estate, Tax Rate, and Tax Levy Under Assumed Condition of $50 Million Investment, Castlewood District, Russell Coiuity, Virginia, 1936-1956 ....... 219 33. Comparative Sales Taxes for States Surrounding Virginia, I96O ......... 221 3^*. Taxes Computed Using i^tio In Each Locality Served, 1959 226 35 • Taxes Computed Using WelgTited Average Ratio in Service Area, 1959 229 36, Taxes Computed Using Statewide Average • Assessment Ratio, I959 232 37« Average Ratios of Assessed Actual Sale Value of Real Estate, Counties and Cities, Selected Years, Commonwealth of Virginia, 1936 to 1956 . . . . • 235 xlil

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LIST OP TABLES (continued) TABLE 38. Grouping of Localities by jRatios of Assessed Value to Sales Value, Connnonwealth of Virginia, 19^2, 1950 and 1956 236 39. Relationship of County Assessment Ratios to Percentage of Total Revenues Derived from Local Sources, Cotmnonvjealth of Virginia, Year Ended June 30, 196O 239 ^0. Proposed Statewide Mininaum Assessment Ratio • 246 41, Limitations on Penalty Provisions 247 42, Le\'y Rates on Electric Utility Substation, Selected Taxing Districts in Virginia, 1959» • 254 43, Average Rate of Levy on Real Estate, Counties and Cities, Virginia, 1953 256 44, Allocation of a Southwestern Virginia Powor Company's 1959 Property Taxes, Computed on the Statewide Average Rate to Localities on the Basis of Investment 260 45, Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average riateto Localities on the Basis of Revenues Generated 264 46, Allocation of a Southwestern Virginia Power Company's I959 Property Taxes, Computed on the Statewide Average Rate to Localities on the Basis of Watt-Hour Meters 269 47, Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average Rate to Localities on the Basis of Pole-Line Miles 273 48, Allocation Factors — Composites for Interstate Allocation of Railroad Values 277 49, Computation of Composite Allocation Factor, Not Adjusted for Local Effort 279 xiv

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LIST OP TABLES (continued) TABLE Page 50, Allocation of a Southvjestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average Rate to Localities ' . Using CoEjposite Allocation Factor, Not Adjusted for Ix>cal Effort 28i 51, Allocation of a Southwestern Virginia Fewer Company's 1959 Property Taxes, Actual Taxes Paid Using Composite Allocation Factor, Not Adjusted for Local Effort , . . 284 52, Computation of Composite Allocation Factor, Adjusted for Local Effort 288 53, Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes. Computed ^ on the Statewide Average Rate to Localities Using Composite Allocation Factors, . Adjusted for Local Effort ....•«••• 29O 54, Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Actual Taxes Paid Using Composite Allocation Factor, Adjusted for Local Effort 292 55 • Allocation of a Southwestern Virginia Power Company's I959 Property Taxes, Actual Taxes Paid Using Composioe Allocation Factor, . Adjusted for Local Effort and Not Adjusted • for Local Effort Compared . . , # . , 296 56, Percentage of Assessed Valuation to Market value. Revenue from Local Sources and Revenue from Local Sources as Per Cent of Total Revenue, Cororaonweal-ch of Virginia, Year Ended June 30, i960 , , 347 57. The Effect of Reassessment of all Real . Estate and Tangible Personal Property Other Than Public Service Corporations, ' Using a Mo Per Cent Minimum Assessment Ratio, 1959 352 58, Average Tax Levy of Towns in One Utility's Operating Area, Relation to Statewide Average Tax Rate on Real Estate 359 XV

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OF DABLbS (continued) TABLE ' ^age 59 « Assessed Value, Taxes Paid, Average Tax Rate, in Towns Only, One Electric Power Company, 195^-1953 60, Computation of Revenues to be Allocated on Basis of Watt-Hour Meters, Appalachian Povjer Company, Roanoke Division, 1959 . . • 370 61. Computation of Revenues to be Allocated on Basis of Viatt-Hour Meters, Appalachian Power Company, Bluef ield Division, I959 . . 371 62# Computation of City and County Revenues, Appalachian Power Company, Roanoke . Division, 1959 . . 372 63. Computation of City and County Revenues, Appalachian Power Company, Bluef ield Division, 1959 ..... 37^ xvl

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LIST OF FIGURES FIGURE . : 1, Assessment Ratios by Counties, Comraonwealth of Virginia, 1956 8b 2, Assessment Ratios by Sales. "Values of • • Real Estate, Selected Areas, Cointnonwealth of Virginia, 195^ 99 3, Real Estaiie Assessment Ratios and Rates of Levy, Service Area of a Southwestern Virginia Pouer Company, Years of Assessment Studies, 1936-1956. . . . •.,*»• 4, Real Estate Assessment Ratios ano Rates of Levy, Giles County, Virginia, Years of Assessment Studies, 193o-1956 .... I09 5, Comparison of Assessment Ratios and Rates of Levy on Utllltsf and Nonutillty Property, Service Area of a Southwestern Virginia Povjer Company, Years of Assessment Studies, 1936-1956 116 6, Counties in Virginia Served by Appalachian Povjer Company, 1962 3^6 xvil

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CHAPIER 1 INTRODUCTION The publication in 1776 of Adam Smith's Wealth of Nations marked the initial enumeration of "canons of taxation," criteria for the evaluation of the merits and Meaknesses of individual taxes and their effect upon whole systems of taxation. These criteria held that a good tax system must be characterized by equity, certainty, convenience to the taxpayer, and economy in collection, and they have provided the source for moat of the modern principles for evaluation,^ The growth in population, expansion in territory. Industrialization, urbanization and the changing concept of government's role and function iiave resulted in an assumption of increased fiscal responsibility by governments and a consequent search by federal, state and local governments for more and more tax revenue. In this search for An examination of general taxation as it exists in the United States today leads one to the observation that the question of a tax or a tax system being "good" in keeping with these criteria is largely academic. See R, M. Haig, "Taxation," Encyclopedia of tne Social Sciences , Vol. XIV, pp, A. H. Hanson and H. S, Ferlorf, State and Local F inance in the National Economy (New York: W. W, Norton and Company, Inc., pp. 250-1256, 1

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2 additional revenue the federal government has led the way. The ratification of the Sixteenth Amendment to the United States Constitution, popularly known as the "income Tax Amendment," bestowed upon the federal government the power to so lead the way. The text of this sweeping amendment is both brief and to the point, leaving the intent clearly understood: "The Congress shall have the power to lay and collect taxes on Income, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration," The increase in federal taxes which has stemmed from the exercise of this power of access has served to make the financing of state and local government more and more difficult. Though the purpose of this study is not to explore the multiplication and growth in federal taxation, the above comments do lead to three observations. First, federal taxation, in its efforts to extract from the taxpayers more and more dollars of revenue for federal purposes, has all but exhausted the readily available sources. Second, state and local governments, to match federal funds on the one hand and to compete with federal authority over their citizens on the other, have been forced to renew their demands on those sources of taxation not pre-empted by the federal government. Finally, the taxpayer, subjected to such crossfire, has developed a keener sense of avjareness in the area of taxation, forcing all levels of government

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3 to strive for greater equity and fairness in taxation or, as an alternative, to engage in subterfuge. The ProbletB Illustrative of one problem of taxation is the ad valorem tax as imposed on the public utility industry. This study is specifically directed toward the electric light and power industry in Virginia with the assumption that the observations and conclusions presented herein are possessed of reasonable applicability to the public utility Industry 2 generally. This study will encompass tliree broad areas. First, an examination of the assessment practice in Virginia will reveal whether the assessment of public service corporation property differs from the assessment of nonutllity property. Second, since the question of equity in taxation can be considered only by reference to the total tax burden^ the method of classification of property as well as of rates of taxation will be considered. If inequities are found it is insufficient merely to point them out; therefore, the third area of coverage in this work consists of proposals to rectify those inequities uncovered during the course of this investigation. '^Data and research facilities have been provided by the Appalachian Power Company, a subsidiary of the American Electric Power Company. See Appendix A for'.i»ip showing the section of Virginia served by the Appalachian Power Company.

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4 Specifically, this study is concerned with the possibility of inequitable ad valorem taxation of public utility property in Virginia which might arise from the allocation of centrally assessed values to the taxing localities or from the imposition of local rates of taxation, where inequities are found to exist in these two specific areas some attempt will be made to develop corrective procedures. Limitations of Study This study of public utility ad valorem taxation is first limited geographically to a consideration of one state only, Virginia. Further, attention has been focused on the electric light and power industry in Virginia. Both of these limitations were necessitated by the physical difficulties of conducting a personal investigation in more than one industry or in more than one general geographical area; however, it is believed that neither the data nor the problems considered are peculiar to Virginia or to the electric light and power industry. On the other hand, the data and observations presented herein concerning the electric light and power industry in Virginia should not be considered as necessarily representative of all public utility industries in 3 11 states. However, a review of the literature indicates that these and related problems exist generally throughout the country and that the major

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5 difference between the problenis of the various utility industries and between the various states Is mainly one of 3 degree . As stated earlier, one of the purposes of this study is to investigate the possible inequities which might arise from the allocation of centrally assessed values to the localities for imposition of local tax rates. It should be noted that the allocation process is not the only way In which discriminatory or inequitable ad valorem taxation can be effected on public service corporation property. This study is mainly concerned with the allocation of centrally assessed values after such values have been determined. The detemiinatlon of assessed values, although given some consideration, is not given detailed consideration for the following reasons. First, just what constitutes value for public utility property where no active market for such property actually exists has been a problem plaguing economists and tax assessors for years. Much has been • written and many theories have been advanced; however, ^An indication of the widespread interest in this and related problems can be found in the annual Proceedings of the National Tax Association.

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6 there appears to be no generally accepted evidence of value 4 although certain "guides" are available to the interested. Second, the determination of value for ad valorem purposes is not, at the present time, of any real significance in Virginia.^ The Virginia practice of assessing public utility property at original cost, less an approximate depreciation allowance of 20 per cent, based on depreciation studies conducted by the Virginia Department of Taxation, apparently has been accepted by both the utilities and the State Corporation Commission. There is, of course, no excuse for continuing an assessment procedure which has obvious defects? however, there is little disagreement over this method in Virginia and it has been deemed beyond the scope of this study to consider as a problem an area in which no problem apparently exists. . , . . In its Appraisal of Railroad and Other Public Utility Property for Ad Valorem lax Purposes , the Committee on Unit Valuation of the National Association of Tax Administrators reports tliat: "There are several types of evidence that are commonly used in making appraisals. This report suggests that among those to be considered are: "(l) capitalized earnings, (2) market prices of stock and debt, (3) original cost less depreciation, and (4) replacement cost less depreciation." The report goes on to advocate some combination capitalized earnings and stock and debt evidences. (Page 3,) See also "Guide for Assessment — Sales Ratio Studies," a report of the Committee on Sales Ratio Data of the National Association of Tax Administrators, dated June, 1954; "Guide for West Virginia Assessors," dated January 1, 1958. 5see Chapter 5. 1

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7 Economic Considerations , In the examination of the property tax structure In Virginia it is probable that certain inequities shall be discovered, as they must be in an examination of any tax system created by man; however, it ii difficult to grasp the concept of inequity without personification. It is impossible for a corporation to be inequitably treated . . since equitable treatment is solely a human attribute. It Is necessary, then, when investigating the state and local property tax structure as to its equity, to inquire just who is it that is treated inequitably? Is it the stockholder of the public service corporation? Is it the consumer of utility services? Is it the owner of other . , property? For purposes of economic analysis the sole criterion for measuring equitable treatment of stoclcholders rests in the compensation necessary to call forth their capital in sufficient quantities to insure uninterrupted service by a growing industry. There is no evidence that such capital has not been forthcoming in the past, as confirmed by the fantastic growth in the electric power Industry to meet the needs of the consuming public. Though it may be argued that "inequitable" tax treatment of utility property has so impaired the rate of return to investors as to make the raising of capital more difficult, actual facts indicate that this problem is not significant. In the first place, present rates of return apparently are adequate to call

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8 forth sufficient capital to meet ciirrent needs. Indicating that if inequitable property taxation exists it is not presently inequitable to stockholders. Second, most regulatory commissions, follovjing the "end result" doctrine,^ would probably allow, if demand were sufficient, a return to the investors of capital which would be adequate to call forth such capital, inequities in taxation notwithstanding. To the extent that regulatory commissions in the future fall to allow upward rate adjustments, necessitated for example by discriminatory taxation, then the stockholders might well have room for protest on the grounds of unwarranted confiscation of property. This has not yet taken place and the future is still speculative. For purposes of the present analysis, it is believed that any inequities which might exist In the taxation of public service corporations have not necessarily been imposed upon the investor. If they had, capital would not have been forthcoming to the utility Industry due to an insufficiency in the rate of return, and this has not, fortunately, been the case. It follows, then, that the consumer of utility services is ultimately the one on whom the burden of taxation must fall, and where there are inequities in the taxing system It must be the consumer who iB Inequitably treated as long as the demand for utility F edera l Power Commission v. Hope Natural Gas Co. (320 U.S. 551), IW, —

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9 services remains relatively inelastic. Property taxes levied by one county, for example, must be paid by someone. When the burden of these taxes can be shifted to the citizens of another county, or a city, it is not the company which Is being inequitably treated but rather the consumers of that company who must pay someone else's bill. Where there are defects in the assessment practice or in the administration of the tax system, it is again not the company which is being discriminated against but rather people, and these people are most likely the consumers. Thus, it should be kept in mind that "inequities" as discussed in this study refer to people, although for purposes of presentation this point is not often emphasized. Preliminary Investigation Before making the more detailed investigation of the property tax system in Virginia as it affects public service corporations, the results of which comprise the basis of this thesis, it iijas necessary to make a few preliminary inquiries in order to ascertain whether Virginia was indeed faced with any problems in this respect and, if so, to what extent were they serious enough to warrant the more detailed investigation. It was observed that the Virginia Constitution, as is the case in most state constitutions, calls for uniformity in taxation. One aspect of uniformity In taxation is the assessment of property; therefore, it was undertaken in these preliminary

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10 Investigations to measure the extent to which assessing in Virginia achieved a reasonable degree of uniformity. The measuring standard favored by assessing experts is the "coefficient of dispersion," or "coefficient of deviation," which is the percentage which the average of the deviations of the assessment ratios of properties from their median ratio bears to their median ratio. Dr. John H. Russell, the former director of research for the Virginia Department of Taxation, referred to this measure as an "index of assessment inequality."'^ The method of computation for this measure is as follows. First, the median assessment ratio of the individual assessment ratios In the sample is determined. Second, the deviation in percentage points of each individual ratio from the median ratio is determined, and the sura of these deviations is divided by the number of ratios to ascertain the average deviation. The coefficient of dispersion is then derived by dividing the average deviation by the median ratio. Assume, for example, that eleven pieces of '''cited by J. Edward Rountry, "Equalization at Market value. Appraisal Journal. Vol. XXIV, No. 2, April, 1956, p • 222 •

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11 property each have a market value of $30,000, The computation of the "index of assessment inequality" can he illustrated as follows: Deviations Property Assessed Value Assessment Ratio from Median ;,1 . $ 1,800 ... 6.05^ -19.0 i 3,000 10.0 -15,0 i3>6oo 12,0 . . -13.0 ^,500 15.0 -10.0 § 6,000 20.0 . 5.0 7,500 25.0 0.0 , T . 10,500 35.0 . 10.0 8 14,400 1|8.0 23.0 9 17,700 , 59.0 , 34,0 10 11 37.0 46.0 Total deviations . , , , , , , » > 212.0 Average deviation . # , «... 19. 3 Index of assessment inequality (coefficient of dispersion) equals 77.2 ,^ per cent (Average deviation, 19.3, divided by the median ratio, 25.) It is seen in the above illustration that the coefficient of dispersion is 77.2 per cent. This relatively high coefficient stems from ti:ie lack of uniformity in the assessment patios. Assume, however, that the same properties

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are assessed at a more uniform rate. The following la observed : Deviations Property Assessed Value Assessment Ratio from Median 1 ^ 9,000 30.QSg -10,0 2 9,900 33.0 7.0 3 10,500 35.0 5.0 4 10,800 36.0 4.0 5 11,400 38.0 2.0 6 12,000 40.0 0.0 7 12,600 42.0 2.0 a 13,200 44,0 4.0 9 14,100 47.0 7.0 10 14,400 48.0 8.0 11 15,000 50.0 10.0 Total deviations 59,0 Average deviation ..... 5,4 Index of assessment inequality (coefficient of dispersion) equals 13,5 per cent (Average deviation, 5.4, divided by laedian ratio, 40.0.) With a higher degree of uniformity, then, the coefficient of dispersion is seen to be relatively low. There is some question as to just how low the coefficient of dispersion must be in order for a locality to qualify as a "good" locality, with respect to making reasonably uniform assessments; however. Dr. Russell is reported to have established, over twenty-five years ago, that " • an index as low as 20 should be considered a goal desirable of achievement and reasonably attainable, • that anything below this is to be considered as an excellent degree of

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13 equalization for uniformity, " and that " *an index as high as 45 should be judged cause for the gravest concern,' It should be noted that, in the preceding illustration, where there was illustrated a low "index of assessment inequality," even lower than the 20 per cent suggested by Dr. Russell as desirable, the assessed values varied 25 per cent, plus and minus, from the median. Therefore, there is some room for argument that the coefficient of dispersion, to reflect really acceptable assessments, should be considerably less than 20 per cent. A Minnesota tax study committee, for example, asserts that "a coefficient of dispersion of 10 per cent or less suggests that the assessor Is performing his job well."^ With these rough standards in mind, the preliminary investigation of the situation in Virginia was conducted. An examination of the assessment ratios prevailing in two counties and one city revealed that there was "cause for grave concern" of the assessment practice in certain sections of Virginia. '•^ The results of this preliminary investigation of the assessment ratios in those localities, and the coefficients of dispersion for each, are shown in Table 1. ^Ibid. ^Report of the Governor's Minnesota Tax Study Committee, State of Minnesota (St . Paul, 1056), p. I7 7 . ^ •'^Assessment ratios are based on a I956 study conducted by the Virginia Department of Taxation, the latest such study conducted.

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TABX£ I ^EDIAN ASSESSMENT RATIOS AND COEFFICIENTS OF DISPERSION, SELECTED LOCALITIES, . COMMONVJEALTH OF VIRGINIA Median Assessment Ratio Average Deviation from Median Coefficient of Dispersion^ Dickenson County^ 6.8 e Giles County 14.6 15.2 104.1 Roanoke City^ 33.6 8.0 23.8 Source : Working papers of the Virginia Department of Taxation for the 1956 real estate assessment ratio study* "The average deviation from the median assessment ratios divided by the median assessment ratio. *^sed on an examination of all real estate sales made in 1956. ^Based on an examination of 102 out of 333 real estate sales made in 1956, using random sample technique. %ased on an examination of 224 out of 772 real estate sales made in 1956, using random sample technique. In Roanoke City the "index of assessment inequality" shows that property is being assessed relatively uniformly; however. In the two counties observed, the coefficients of dispersion are shown to be in excess of the 45 per cent which Dr. Russell considered cause for grave concern. In Giles County particularly the coefficient of dispersion shows an extremely wide variation in assessment ratios. Where such a situation exists, as expressed in one study.

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15 "... the consequences of such wide variations In assessed valuations for the amount of the property tax burden of the individual taxpayer are staggering. . . .""^^ Further, in the initial examination of Virginia's property tax system, it was noticed that, in addition to the wide variations in the assessment ratios, there was general assessment at less than the 40 per cent ratio which is applied to public service corporation property. The question then presented itself as to whether there is any correlation between low assessments and high coefficients of dispersion. That there is this relationship is 12 shown by the following: Median Assessment Hatio Coefficient of for Nonfarra Houses Dispersion as of 1956 Median Area Less than 20.05^ 37.3 20.0 to 29.95^ 32.0 30.0 to 39. se^ 25.1 5o.Q^ or more 22,2 As an illustration of just how this relationship might affect individual taxpayers, consider the following. Assume there are three pieces of property in a certain locality, each Earnest E, Means and W. W, Martin, County Property Tax Assessment in Florida (Tallahassee: Florida state University, Bureau of Governmental Research and Service, 1957), p. 51. 12 Taxable Property Values in the United States (Washington: U.S. Department of Commerce, l^yj). Table 17, p. 86.

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with a fair market value of $1 inllllon. If the coefficient of dispersion Is low, say, 10 per cent, and the total tax desired Is ^48,000, and an attempt Is made to keep the assessment ratios relatively high, then the distribution of the tax burden Is as follows: ., . Property Fair Market Assessment Assessed Share of Value Ratio Valuation Tax^ A $1,000,000 78.0 $ 780,000 $1^,976 B 1,000,000 80.0 800,000 15,360 C 1,000,000 92.0 920,000 17,664 ^2,500,000 ^48,000 ^Assessed valuation divided by total assessed valuation times total tax of $48,000, On the other hand, if the coefficient of dispersion is high, say, 50 per cent, and an attempt is made to keep the assessment ratios relatively low, then the distribution of a total tax burden of $48,000 is as follows: Pair Market Assessment Assessed Share^of Property Value Ratio Valuation Tax A $1,000,000 28.0 $ 280,000 $11,200 B 1,000,000 40.0 400,000 16,000 C 1,000,000 52,0 520,000 20,800 $1,200,000 $48,000 ^Individual assessed valuation divided by total assessed valuation times total tax of $48,000. In the first illustration, where assessment ratios are .Jbigh and the coefficient of dispersion is 10 per cent, the owner of Property C will pay $2,688 more in taxes than the

PAGE 34

17 owner of Property A, due entirely to a difference In the assessment ratios of 24 percentage points. Hov'jever, in the second illustration, where assessment ratios are lower and the coefficient of dispersion is 50 per cent, the owner of Property C will pay $9,600 more in taxes than the owner of Property A, again due entirely to a difference in the assessment ratios of 2k percentage points. With high assessment ratios the owner of Property C is mildly discriminated against; however, with low assessment ratios the owner of Property C pays 85.7 per cent more taxes than the owner of Property A, It appears, then, that equality of assessment within a locality, though difficult to obtain under favorable conditions, is much more difficult to achieve when assessments are made at some fraction of a constitutional mandate of full value. Finally, in order to see to what extent Virginia had a problem worthy of further investigation, a comparison was made of this state with other states in the preliminary Investigation, An examination of the U.S. Bureau of Census data revealed that of all the states (48 at the time of that particular study) only three had coefficients of dispersion

PAGE 35

18 in excess of MO per cent, Virginia being one of these states, 13 The grouping for the states was as follows: Coefficient of Number of Dispersion Stat,es Under 10. QS^ l^one 10.0 to 19. 95^ ' 21 20.0 to 29. 9S^ 19 30,0 to 39. 95^ 5 Over 40.05^ 3 The causes of relatively high coefficients of dispersion, with the inequalities resulting therefrom, are many; however, centralized control of the assessment function appears to have some direct relation to the problem. In Minnesota, for example, it was held that "... the principal handicap to more effective equalization and review at the state level appears to be insufficient staff. Technical positions remain unfilled because the salary authorized does not attract men with the necessary qualifications,""^^ Another state's problem in this respect is illustrated by the following comment: Over the years property assessments in the great majority of Tennessee counties have got sadly out of line, one with another. There are many reasons for this, of which we need mention only a few. One of the main reasons, probably, is that we are still operating under an Assessment Act passed in I907, This act was an •^^Taxa ble P r operty Values in the United States, op. cit,. Table IB, p. H?. Ik *^ Report of the Governor's Minnesota Tax Study Committee , State of Miauesota jiix,, faul, i9bOJ. p. l63.

PAGE 36

excellent one— for 1907— but it was designed for a horse -and -buggy age and not for the conditions found in Tennessee today. Other contributing factors have been the low salaries paid "oo assessors and the inadequate help allowed them. In many count; les the assessors' salaries are still those-,(. which were established by the 190? act, Although the causes are not clear in Virgin:.a, it might be that the segregation of the property tax function to the localities within the state has been a contributing factor. Further, although the causes may well merit attention, the effects of a "high index of assessment inequality" were deemed to be of even greater importance in this study, particularly as they affect the public service industry which has found Its assessment ratio frozen. The Need for Equalization in Virginia At one time the major source of revenue to the state government in Virgj-nia was the general property tax, such levy being made upon the assessed values uf property located and assessed in the various taxing districts. It was only natural for local assessors to seek to minimize their constituents' contributions to the centralized state government in order to prevent an "undue burden" being placed upon them. Accordingly, assessment ratios were generally ^^Cecll Morgan, "Eleven Counties Start Assessment Reform," Tennessee Planner , Vol. XVIII, No, 2, OctoberDecember ,ni;55^Gfr~prTf3"I

PAGE 37

20 very low, Virginia then embarked upon a plan of restricting taxation on real estate and tangible personal property to the local authorities* This was supposed to alleviate inequities arising from divergent assessment ratios and the discrimination resulting from having one taxing district contribute a disproportionate share to the state governraeut. Although a particular injustice may have been corrected by segregation of tax sources becween levels of government, such a procedure may have done little toward relieving individual taxpayers of any inequities which may have faced them, for it is quite possible for discrimination of this type merely to be transferred from a statewide level to a local level. In segregating the taxation of real estate and tangible personal property to the localities, it should be noted that the state reserved the more dynamic and potentially greater sources of revenue for itself while giving to the local it es the more stable, if less yielding, sources of revenue. It is true, of course, tiiat total property tax collections have increased; however, the proportion of total revenues derived by locallt es from the taxation of real estate has declined from 69.2 per cent in I926, to 16 58.9 per cent in 1959. The cities and counties in Virginia Department of Taxation, staff reports.

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21 Virginia have thus been forced to expand their revenues by means of additional taxing devices ^.o augment the property tax, . . The reservation of the property, tax for the sole use by the localities, except for the rolling stock of railroads, made necessary some method of equalization of the tax burden betiween taxpayers located in Virginia but within divergent taxing districts. Although segregation was intended to relieve inequities in the assessing procedure, the transfer of the responsibility to local assessors with no provisions to correct inequities would quite possibly have resulted in a situation worse than the one which was beiwg corrected. Therefore, equalization boards were established by statute in the counties and cities to act primarily upon the complaint of an aggrieved taxpayer. Public service corporation propertj' was also "equalized"; however, the device employed here was State Corporation Commission assessment of utility property at a statewide average assessment ratio, computed at the t^rae to be 40 per cent of "market value." Local equalization boards, as established in Virginia, act upon the instigation of aggrieved property owners; therefore, taxpayers must first know and be able to prove an injustice in the assessment of tiielr property and then be willing to take their case to the equalization board if they are to obtain relief. That the average taxpayer and property owner is possessed of sufficient knowledge

PAGE 39

22 to adequately present his case s subject to some doubt. It is for this mam reason tliat local equalization boards have probably been somewriat ineffectual In acnleving their proper goa 1 • . . One of the tasics of this thesis is to examine the effectiveness of the other equalization procedure, namely, the equalization of public service corporation property by assessing such property at UO per cent of its warket value. A few of the more important questions to be considered are: Has the average statewide assessir.ent ratio remained at 40 per cent since tnis ratio was originally determined? Is it equitable to assess all public service corporation property, both realty and personalty, at an average statewide assessment rat^o determined largely by a study of real estate assessment ratios? Scope of Study The study of assessment ratios in Virginia is intended to yield some light as to the equity of Virginia's property tax system, particularly in relation to the utility industry generally. However, as has been noted, the assessment ratio is but half of the taxing process, the otner equally important half being the rates of levy applied to assessed values to determine the final tax bill. Further, in this respect, the rates of levy frequently vary between those imposed on real estate and those imposed on personal property. Thus, the classification of utility property into

PAGE 40

23 categories of realty and personalty becoraes an important problem to whicii some attention will be directed. In addition, there will be a general review of the assessment practice as it applies to public service corporations. Finally cowes the question of alternative courses of action to be taken in case deficiencies are found to exist in the present system. It should not be expected that this study will disclose all of the weaknesses of property taxation and proceed to correct them therewith; however, it is hoped tnat any deficiencies which this study does reveal will be noted for further investigation. Further, any alternatives proposed should not be taken as final answers, but as points of departure toward ultin-ate solutions.

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CHAPTER 2 HISTORICAL DEVELOPMENT AND BACKGROUND OF ?hOmm TAXATION The development of property tax schemes can be traced to the Middle Ages and to the influences exerted on Its development by the economic composition of the early feudal estates. The more significant refinements and crxaracteristics of today's modern property tax systems have been, however, largely associated with the development of the American economy and especially with the clarifications of state limitations under the federal Constitution. The rapid rise in this country's population and the increased demand for trade between the states precipitated many problems. States and local communities were in need of more and more funds to carry out their public functions. Further, it was only natural that the localities should attempt to protect their "home grown" businesses. As a result. Interstate commerce was subjected to heavy taxation by localities. Taxation of Interstate Commerce This taxation of interstate commerce did not proceed without protest by taose so engaged in such coimDerce. Numerous cases arose in which it became evident that state taxation of interstate commerce involved considerations which were not present when the issue related merely to the 24

PAGE 42

police power. In view of these considerations the Cooley rule"*" was not used to any great extent in the state tax cases. Uniformity, therefore, was considered to be of the utmost Importance in this area.^ However, if granting protection to those engaged in interstate commerce solved the problem of local interference with national matters it created another equally difficult problem. To give interstate commerce full immunity meant that competing, local business would have to pay an undue share of the cost of local government whose benefits interstate commerce enjoyed. Out of many cases brought into the courts, the general rule evolved that states and localities, under their taxing power, may adopt any method of taxation which they desire as long as it is not in conflict with the federal Constitution. In order to steer the tax vessel to the harbor of constitutionality, safely past the "Scylla of the commerce clause and the Charybdis of due process," the states were forced to rely upon taxation of property , and not taxation of business income obtained through interstate commerce. Cooley V. Board of Port Wardens , 53 U.S. 298,299 (1851)1; In this case was developed the "doctrine of concurrent power" in which the states were permitted regulation of commerce concurrently with the federal government except when in conflict with federal regulation. %'he Passenge r Cases, 7 Howard 283 (1849); State Freight Tax CaseT 15 ifeTTace 232 (1873).

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26 Unfortunately, the United States Supreme Court has shown a remarkable lack of consistency in Interpreting just what was a tax on property and what was a tax on income. It has been held, for example, that the property 3 of companies engaged in Interstate commerce may be taxed and, further, may be taxed at its value as it is, in its organic relations, and not merely as a series of unrelated items. It is therefore important to note that taxes on such property have been sustained tnat took account of the augmentation of value from the commerce in which it was engaged.^ On the other hand, the United States Supreme Court held a Texas tax, ostensibly one levied on property, 5 to be a tax on income and, therefore, invalid."^ The difficulty in distinguishing between the two, of course, is apparent. Since the commercial value of property consists in the expectation of income from it, and since taxes ultimately come out of income, obviously taxes called taxes on property, and those called taxes on Incooie* tend to run into each other in the long run. A brief examination of certain other important cases provides an insight into the rationale of the United States ^ McAhren v. Bradshaw , 113 P. 2d 932, 57 Ariz. 342; Pullman Palace Car Co. v." Pennsylvania , lUl U.S. 18 (I891). ^ Adams Express Co. v. Ohio State Auditor , I65 U.S. 194 (l897)7 Xdaro8 Express Co . v. Kentucky, Ibb U.S. 17I (1896); Fargo V. liart, l93 U.^. 4^0 (1904). ^ Wisconsin & M. Ry. Co. v. Potjers , 19I U.S. 379 ( 1903 ):

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27 Supreme Court, although the theory evolved Is dichotomous. In one such case. Justice Frankfurter, in the major ity opinion, held triat the commerce clause, even without implementing legislation by Congress, is a limitation upon the taxing power of the states. This "direct burden" rule would invalidate a tax not because it was discriminatory, or that other states might retaliate with a similar tax, or that it might increase the cost of production, but because there is interference by a state with the freedom of interstate commerce. On the other hand, when a regulatory measure has been called into judgment, the United States Supreme Court has generally followed the Cooley doctrine of "concurrent power," The "concurrent power" doctrine, however, has been limited by a decision which held that states can retard the flow of commerce under their police power to protect the health and safety of their people, but cannot 7 make a similar retardation for economic purposes.' Two more recent cases affirm the more modern view of the United States Supreme Court that "a tax on net income from interstate commerce, as distinguished from a tax on the privilege of engaging in interstate commerce, does not conflict p with the commerce clause." Although taxes on net income " ^Freeman v. Hewitt , 329 U.S. 249 (1947). 7h. p. Hood and Sons, Inc. v. DuMo nd, 336 U.S. 525, 69 . S. Ct. 657 " Northwestern States Portla nd Cement Co. v. Minnesota, 358 U.^. n^O, 7$ S. Ct. 357 {im)i Williams v. ^tociEhaiT Valves and Fittings, Inc ., 358 U.S. 450, 79 S. Ct. 357 (1959).

PAGE 45

of local businesses have become increasingly popular, and although recent decisions of the United States Supreme Court have permitted an expansion of the states' power to tax interstate commerce, emphasis has continued to remain upon the property tax as a major source of local revenue. Property Taxes The earliest rule applicable to the taxation of proper ty is said to have been expressed in the maxim mob ilia sequuntur personam . This rule holds that property be taxed in the owner's domicile, regardless of the location of the property itself. It has been suggested that this rule found its applicability during those tiroes Mhen proper ty consisted mainly of wealth in the form of gold, silver and jewels, and could easily be carried around by the owner or hidden by the owner in locations known only to hiro.^ More recently, however, the rule of lex situs has, in many cases, replaced the old rule. The large increase in the amount and kinds of personal property divorced from direct control of the owners has given rise to this law of the place where the property is kept and used. Generally speaking, the rules which have evolved to the present hold that real property is taxable only where located under the 9p. J. Hartman, Taxation of Interstate Commerce Buffalo, N.Y,: Dennis Co., Inc., 1^53 J* PP. 79-t>0.

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29 lex situs rule. On the other hand, tangible personal property generally follows the owner under the mob ilia sequuntur personam rule, with certain qualifications. First, where the tangible personal property tax is located permanently outside the domicile of the owner, such property may be taxed in the state of situs because the property obtains the benefits and protection of its 10 laws. Second, the problem arises as to when tangible personal property, used in interstate commerce, acquires a situs in a nondoraiciliary state in order to allow that state the power to impose a tax on it. It is generally agreed that a nondoraiciliary state can tax the tangible personal property engaged in interstate oomiaerce within it, disregarding the rule of mob 11 la sequuntur personam ; hov^ever, such taxation must be based on a fair formula and possess some reasonable relation to the benefits conferred by the taxing state. A final consideration is the possibility of double taxation; that Is, if the nondoraiciliary state can tax tangible personal property, can the owner's state also Impose a tax? The general conclusion apparently is that the domiciliary state cannot tax such property if rt:-"! ^ ^-"^ K-^^^^Ji £>ranirr Airway s v. Nebraska Ig^e Boar d of Equalization and Assessment . ^46 t].sT"5Er2

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30 there exists a pemnanent situs elsewhere; otherwise, the owner's state can tax under the rule of mob 11 la sequuntur personam . "^^ Constitutional provlslons--Vlrglnla Section 169 of the Virginia Constitution provides for assessment of real estate and tangible personal property at fair market value. Section 168 of this same Constitution provides that all taxes, regardless of who administers or levies them, "shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, ..." From these constitutional provisions there arise two important questions. First, can the property of public service corporations be classified separately from other types of property? Second, if property of public service corporations can be segregated, must the state assessing agency adhere strictly to the provisions of Section 169 or oust it assess public service corporation property In the same manner as other property is assessed, whether or not the constitutional provisions are being followed? In considering these questions, some general and historical analysis is necessary, the uniformity provisions being afforded attention first, it is generally agreed Northwest Airlines v. Minnesota . 323 U.S. 809 (1944).

PAGE 48

31 that classification by legislative action of property into reasonable and natural classifications violates neither the Fourteenth Amendment to the federal Constitution nor the equality and uniformity clauses of many state constitutions. This power of a state apparently is without dispute, and allows such classifications to be made "... with respect to the subjects of taxation generally, the kinds of property to be taxed, the rates to be levied or the amounts to be raised, or the methods of assessment, valuation, and collection. Granting the power of a state to make classifications in tax matters, it has been said, we must then grant the right to select the differences upon which the classification shall be based. ""^^ In addition to this power, it seems further that reasonable discriminations are permissible and, in fact, probably intended as a direct result of segregation. At least it is argued that classification does not prevent or bar unequal tax treatment between the various types of Til property so classified. Not only have state courts consistently held this position, but also the United States Supreme Court has maintained a position which affords little protection to property owners so discriminated ^•^^1 Am. Jur., Section 173, PP. 230-231. 14 City of Richmond V. Commonwealth of Virginia, E x Rel., Record Number 33^9, Opinion of Justice Abrara P: — Staples, from the State Corporation Commission of Virginia,

PAGE 49

32 against. In one case before the United States Supreme Court, involving a tax which, through exemptions, discriminated against out-of-state competitors, it was held that . . . the equal protection clause of the Fourteenth Amendment does not prevent a state from classifying businesses for taxation or impose any iron rule of equality. Some occupations may be taxed though others are not. Some may be taxed at one rate, others at a different rate. Classification is not discrimination. It is enough that those in the same class are. treated with equality. That is true here.-*--^ The equal protection clause, in relation to taxation, requires that states treat parties among whom there is no 1 ft substantial distinction in a reasonably uniform manner. By the same token, inequalities that result incidentally in the application of a tax law which is not systematically arbitrary are not sufficient, it has been held, to make the 17 tax unconstitutional. ' The United States Supreme Court has gone even further when It expressed the opinion that neither does the fact tiiat a statute favors a certain class render it arbitrary if the differentiation is based upon a ^^Caskey Baking Co. v. Commonweal th o f Vir gini a, 313 U.S. 117, 121 (1941). •'•^ U,S. V, Burnison, 339 U.S. 8? (1950); Stewart Dry Goods Co". V. Lewis , 29M U.S. 550 (1935); Hopkins v . Southern California Telephone Co ., 275 U.S. 393, 403 U92b). '•'^ Maxwell v. Bugbee, 250 U,S, 525 (1919), (inheritance tax); Keeney v. New York , 222 U,S, 525 (1912), (transfer tax on property); Beers v. Glynn , 211 U.S. 477 (1909) (inheritance tax).

PAGE 50

33 l8 reasonable distinction or difference in state policy. Thus, in effect, the United States Supreme Court has held that a statute which has the effect of encouraging needed and useful industries to locate within a state by exempting them, but not otiiers, from its taxes is not arbitrary and does not violate the equal protection clause, On the other riand, arbitrary and unequal taxation is proscribed by both the federal aud state constitutions.^^ Where the state constitution contains a requirement that the general rule of taxation on property s^iall be uniformity, the courts have so interpreted it as requiring all 21 property to be taxed as one class. However, where -1 Q Asbury Hospital v. Cass County, 326 U.S. 207 (19^5) (discrimination betv^een classes of farm owners presumed relevant to legislative purpose); Stebblns v. Hiley, 268 U.S, 137 (1925) (tax differentiation between uestameuoary disposition and inheritance permxtted); American Sugar Refining Co. v. Louis la nna . 179 U.S. 89 (I9OU) (discrimination between reflnxnE company and farmers who refined tneir own sugar allowed). 19 ^ Willlans v. Mayor of Baltim ore, 289 U.S. 36 (1933): Ohio Oil Oo. v. Oonway . 281 U.S. 14b riQ^Q): Bell's Gap r;r. »iA^.^»"«°y»X?-S^^ 232 (I890)j Colgate v. Harvey, 290 U.S. non, 439 (1935). — ^ 20 Ciunberland Coal Co. v. Board of Hevialoa . 284 U.S. 236 imi); Si oux uity iiridge Oo. v. riama-Cmlnty . 260 U.S. 4*41 ^1923). i-^^^^jyl^^f ^ V' state. 128 Wis. 553, IO8 N.W. FiA^^Tr it''^^'''';'^""^-^ Holmes . 246 ill. 362, |2/.E. 893 (ibiuj; upinion of t;.e Justices , 208 Mass.

PAGE 51

34 constitutional provisions merely impose a requirement of uniformity upon the same class of subjects, as in the case in Virginia under Section l68 of the Constitution, statutory classification of property is impliedly authorized and, apparently, reasonable differences in assessments between classes are allowable. A typical decision was handed down by a MinnesoT^a court in 1938 when it stated that "... unless a discrimination is manifestly arbitrary and unreasonable it will be sustained. , . • Any classification is permissible which has a reasonable II 22 relation to some permitted end of government. In a decision of the United States Supreme Court, involving the classification of railroad property for taxation, cited and quoted at length by Justice Abrara P, Staples in City of Richmond v. Comraonwealtii of Virginia Ex Rel ., supra, it was held tiriat . . . the states may classify property for taxation; may set up different modes of assessment, valuation, and collection; may tax some kinds of property at higher ' , . rates tnan others; and in making all these differentiations may treat railroads and otiier utilities with t'nat separateness which their distinctive characteristics and functions in society make appropriate-these are among the commonplaces of taxation , • and of constitutional law.23 '"''E state e x rel. Equity Farms, Inc. v. Hubbard, 203 Minn. Ill (l$3y). ^ ^^ Nashvllle C. & St. L. Ry . v. Browning, 310 U.S. 362, 60 S. Ct. 968 11940). — ^ ^

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35 Constitutional and statutory development m virslHa" An examination of the development of the constitutional and statutory provisions relating to the taxation of public service corporations should provide an insight to the development of property taxation in Virginia. The statutes relating to the assessment of all public service corporation properties follow the same general pattern as do those governing railroad property assessment, and since public service corporation assessment practice today was developed from the system used for railroad property assessment, attention is first turned to the development of railroad assessment practice. Originally, railroads assessed their own property for purposes of state taxation, applied the existing levy rate, and rendered payment directly to the state treasury. This procedure was provided for under Virginia law^^ and was upheld by the courts, denying the localities any power to make assessments and, consequently, to levy taxes against 26 railroad property. 2h Based upon data in City of Richmond v . Cotnraonwealth of Virginia , supra. ; ' ^^Acts of 1870-71, Commonwealth of Virginia, p. 93.

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36 It was not long, however, until the legislature, under pressure from the taxing districts, enacted legislation which permitted a local levy on railroad property located therein. Local tax collectors were barred, however, from making tne assessment themselves, being required to use the same assessment as that made by the state and, further, being limited to the imposition of a rate of levy uniform with that Imposed on other property. Even at this early date, classification was generally accepted; however, it appears that such separate classification of railroad property was made not for the purpose of discrimination, but to achieve equity between the taxation of railroad property and all other property. To attempt to place a value on railroad property located in one taxing district, without consideration of its operating whole, would be next to impossible. As a result, the General Assembly of Virginia specifically charged a central agency, the B
PAGE 54

I 37 service corporation property was furtiier developed as a separate procedure, both as to ascertaining taxable values and as to taxation. The effect of this system has been to standardize the assessments of all public service corporation property; hovflever, viith each taxing district assessing all other property, it must iiave been obvious, even to the engineers of this device, that local assessraent ratios would equate with utility assessments chiefly by accident. Justice Staples, on this subject, had the following to say in the opinion rendered in City of Richmond v. Commonwealth of Virginia^ supra: In view of this necessary result with respect to the inequality of the tax burden on their respective properties ^ which would fall upon railroads and other property owners, it cannot be doubted that the f raraers of the Constitution of 1902 intended to and did place the real and tangible personal property of railroads in an entirely separate tax classification. For many years prior to the adoption of the 1902 Constitution, it had been settled by the decisions of the Supreme Court of the United States tiiat . the equal protection clause of the Fourteenth Amendment required uniformity of the tax burden only upon persons and properties of tHe same class , and that it lay within the province of the state to classify its subjects of taxation, imposing on one kind of property one burden of taxation, and on another kind a lesser or greater burden. 29 ^ (lUl!!!^!?lJ°J.J^°^'"°"^ ^* Commonwea lth of Vlrp:inia. supra.

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38 • Further on, this same opinion asserts that "since the uniformity provisions of Section l63 (of the Virginia Constitution) could not possibly be applied to such conditions, it follows that the framers of the Constitution considered railroad property as constituting a separate and distinct class and not within the unifortpity provisions , "30 There has been in the past, without resolution to date, considerable confusion as to the exact meaning of the unlfortnity provisions. Justice Staples, for example, from the passage quoted above, is of the opinion that separate classi fication is permissible and was intended by the framers of the Constitution, an opinion to which there is little disagreement; however, it is to be questioned whether classification for purposes of making assessments of property values is sufficient, per se , to assure uniformity in the burden of taxation. Since the burden of taxation is measured by application of rates of taxation to assessed valuations, uniformity of the tax burden upon persons and properties of the same class would seem to mean uniformity in both assessments and levy rates. As shall be observed, this complete "constitutional uniformity" does not exist in Virginia. On the one Iiand, the property of public service corporations and nonutility property owners, when located within the same taxing

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39 district, is subject to uniform rates of taxation applied to divergent assessed valuations. On the other hand, two utilities serving a wide area, although assessed uniformly, are subject to divergent levy rates between counties and cities. This is similarly the case for one utility serving a number of taxing districts. Property tax revenues — general As a per cent of combined tax revenues of state and local governments, the property tax has been declining in importance over the years. This fact is illustrated in Table 2. The combined state and local property taxes rose from $4,730 million to $12,864 million in the thirty years between 1927 and 1957; however, expressed as a percentage of total tax revenue, the property tax declined from 78 per cent, in 1927, to 45 per cent, in 1957. This decline in the relative importance of the property tax is more significant in respect to state tax revenues, however, and reflects the gradual withdrawal by many states from the general property tax field in favor of other taxing devices such as the sales tax and the Income tax. The property tax is still the major source of local tax revenue, however, 86,7 per cent of all local government tax revenue having been derived from this source, in 1957. Although Table 2 shows a decline from 97.3 per cent, in 1927, to 86.7 per cent, in 1957, in the percentage reliance of localities

PAGE 57

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PAGE 58

nationally on the property tax for local revenues, the decline appears to be of minor significance. However, if one considers the tremendous increase in revenues from other sources, notably the individual income tax, the sales and use taxes, and federal supplements, it is seen that local governments are depending even less on the property tax than the foregoing figures would appear to indicate. As shown in Table 3, this fact has proved valid during the period of rapidly expanding revenue needs since World War II. vmile total local revenues were increasing 209 per cent, property taxes increased only l6l per cent. This lag In the increase in property tax revenues resulted in that source declining from 57.6 per cent of total revenues in 1946 to 48.7 per cent in 1957. Thus, although property taxes have declined in Importance only moderately in relation to total local taxes, the decline is more pronounced when viewed in relation to total local revenues. As Indicated in Table 3 property taxes are being supplemented by an increased reliance by local governments upon the other sources of revenue, in particular state and federal supplements. Although the preceding analyses are enlightening as to the role of the property tax nationally, they do not reveal either basic differences between states or, more important and relevant to this study, the actual situation which Is confronted in Virginia by the taxpayers of that state, including in particular the public service corporations

PAGE 59

42 CO g © in S o U -P o pi a\ c o c IP4 O P iH C (0 u % o o B < o CVJ o o H o in w Oi •> CO 0} c > u s O iH r-i 5 o incvj «hj3^ CO « • f-4C0 cu oovo CO 01 o •» CVJ c r-i CO G 01 p c © to?o s> © -p © -p CO CO CO MD CO CO ^ OJ CVJ • • CO o cu CO ON CO tCOrH O VO o 00 in ro l^^ 04 • • • • « « • • 0 0 in CVJ CVJ 0 cvi in rH c © u > O B hOO c H © b-co CO ^ in coco CO O CVJ trH CSi 0\ k « o to H E o c CO e o {^4 CQ © X to t8 © CQ -P K CO f>»-P § © O © E 03 D. O O O H ?:< C CO CL| H o © "q CO r-« P O c C CO ^ CO -P ei-ri U © © © CO © -P CO uo ta §) ^§ x: o o © iH © 0 !3 P C U 0 i © > 0 C5 CO ;-i 0 r4 OS CO 0 •H CQ 0 © +> 0 to •rl >n ON •«rH 3 ca c • © ON o in a\ © iH \G -P o 03 © CO CO © 3 © •H • c CO O ^3 ©VO A +3 © o CO © r-i G J=t H CO EH CQ © t Geo § . •H O

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43 operating in and serving that state. Table 4 is more revealing in this respect. The various states, including the District of Columbia, have been broken down into three groups. Group 1 consists of those states v^hich place heavy reliance (over 60 per cent) on the property tax as a source of local revenue. Group 2 includes those states which fall into the middle range of reliance, ho to 60 per cent, and Group 3 includes the remaining states whose emphasis upon the property tax is less and whose revenue from this source is less than 40 per cent. It should be noted that only three states, Nebraska, New Hampshire and New Jersey, placed sufficient importance upon the property tax as a source of local revenue to obtain greater than 60 per cent of their local tax revenues from this source. As shown in Group 3 in Table 4 , there were eighteen states and the District of Columbia which had relegated the property tax to a role of only minor significance. It is noteworthy that this group includes most of the southern and southwestern states, a fact which reflects the predominant agrarian economy of these states. Explanations of this relatively unimportant position of the property tax In these states can only be conjectural; however, in each case there is at least one apparent explanation, in Florida, for example, the subsidizing of home owners by property tax exemptions has brought a material narrowing of the property tax base. West Virginia, among others, has set a legal limitation on property tax rates. Many counties in Virginia

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< o * OB 56 «c CO CO SI uo o o ]fu o c (0 0) o o o r-l 0) -H (0 -p o a u Og o o 5^1 0 ca ©o ^ to •p 0) a o 0) p Q) a bOP I (0 O (Q O.P O CQ O O c a> r-l H o CO U 'OP J) oco U O o a o o 0) 0) en CD o> CQ O CO cj t-j a u © 0 0) S S ^5 H OJ CO (ncv»JTV£>(ni-»ONOoir\ocu-sr'-«vovo coon CU CM H CM f-* 01 <-• H OJ mrob-H^vo 01^ lAco o mrovovo !>-[>p^ OJHHpHH HOICVl CM rHCVt b-oi H lAO o OMncr\o o cococovo oco f-j o o ONiAUJ^ inova-co OJ CJ coco co^ • •••«••«••««••• CO iH\0 HCO H ONO CO t-CSDOOv^^ O-CVJ ifvvo iniAcOvO^ iTvro-*^ co^r ro^ -=r co CJNVO <-»C0 QJ lAlACVl lACOI^-O I>-lAr-< ^ O j3-vx)coojajcviovD cOfOOMnoco cr> cy\cj •• H oJ t>-co irvtoojco invoco jaco o cr\o OJ ^-03 cr»cy\CTvo\o\c--i>-o t— co t-fOoJ o o cr\oo CO CO b-jrf CO ^ 01 O O CO o • •••••••a***-*** COCOOOCO^OJHHt-IHOOOOO 00 00 lA lA lA lA lA lA lA UMA lA lA lA lA lA lA ^ ^ VO O P OJ o 5 o CO P P c :3 CQ p p 03 CO (0 . . CQ CO -H +3 C 01 5 o ^ C CO CJ ^ 43 01 „ „ Q W O "H fcCO H C 03 O C CO C P CO 3 sO;5'00 ScOMSHassSHiSOKHo CO o o x: H O it IA<0 t^OO ONO fH OJ CO^ lAVO t-CO C\0 iHiHHi-lrHi-IH.Hi-4 rHOJ

PAGE 62

o •p CO -p CO 0) o P4 o (D d c o > K CO EH P o O CQ Q) a O O o jOi O •» O 03 a a> •H u o p 0) CO bOP CO (Q © H O (0 t:w o CO O Oi o o CO X} -P c CD H Ca OJ (M H COCVI COrH cvi fOH CM cncvi cvi r^ ITVH O HVO QVO lAH -I coinc^iAirwo t-ifvsj-oo • ••••*•••• =r coo iTvco rococo CAVO t^covoco cnooN-o oNcvico rococo c^i-» t^in cvi^ cvj H o^rco irv=r l>-t»-V£>VOVO lfV=lCOCVJ 04 CO lAOO CVJt^r-l-=TVOO>OOCO cococu coro^ rococo^ co^ OCO O COU-AD-VO-^ O CVJ LTV^ corooj rorocococo^^ VOCO H O CVJ CO^ t^OCXDCOVO cvicvjvo::f^cviincvjcvjrot^i>inco CO tn^aO) vo la^ o cvi cvjcvjcococucvjojcvicvicvj COCVJ mt-o CM LTvco CVJ ^ cocomiA rot^o rHcooDvocxDrscrvt^'-J ^co co\o CO o\vo Lavo cocrvo VO coco lAlACO^ lACOCOOi CO CO COrH H:3-v0 O OMTVCO VX3\DV0 incOrH O CTVONCO f-VO CO CO CO CO CO CO CO CVJ CVJ CVJ CVJ CVI ^ c o o 3 iH SCO P O 01 -H O N (0 X! a •H K O E o (0 CQ CO a)C0f*(D2j0>2rj+3c3!H CVJCV1CVJCVJCV4CVICVJCVJCVJCO i u Q) c CO c H O 3 O CO u so CO a O o o s •r4 c c a o (0 o o a ^ (OP CD CO £ bO CO CQ CQ u o c -H ta 00 .c -H to o H x: (0 !^ C CQ P . , rj oj o -: ca . O H 44 CO 03S0HS2: ^ CO O CO "O 3 -a •<-• P P CO P4 oa c > o H m OJ M p o 5^ CQ H C C5 rH CM co^ invo i>-co cr\ o H CVJ CO CO CO CO CO CO CO CO co^ ^ ^

PAGE 63

46 0) CO p :0 o C o I CD p (1) O O C3 Q) C O O O 03 O U H a CO o a fl4 as o 5^ O (D O O H C3 0) 04 CO o CO •p H Q P Q) (0 faO . -5 (0 to q4p G 0) rH O (D f-i o CO O o H •a CO -^T -^T -^r -^J" .^T 01 cy»rorH cnoxo cj rH t-j^CVI in in • •••••• toco M H o cvi in W H rH CUOI CU H tnvO;:?^ ONOMn in^ ^ 00 00 cTi^T «^Doo ojvo cnino ^ ^ CO P CO -P isj CO iH 5 d a> 0) (u o <: 3: « S c/3 CO •H CO E CO CO -i ^ CO O o o o E =5 03 3 CO in ON § a a ON H o G P o c Q> ft* m p -p • G O «n o d % 3 H CO H ^^ o C3 «-4 • O • CO • • CQ P •f »« c G <0 u o s P G 3 o ^OJ CO (Wash of Go

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^7 have generally placed a low celling on the availability of property taxes through the practice of assessing property at small fractions of full value. Nevada, V4here gambling is legal, has an alternative source of revenue not readily available under existing laws to many other states. Washington State has taken over most of the responsibility for administering or financing the local administration of certain commonly local functions, such as schools and vnel* fare, using for this purpose revenue from sources other tiian property taxation. It should also be noted that, on a per capita basis, with only minor exceptions, the rank of the state is similar to that obtained when comparing local property taxes with total taxes. The exceptions, taking I'iassachusetts as an example, show tliat where the per capita tax is exceptionally high, so also is per capita income. Per capita figures are not, however, a very good measure of the comparative property tax burden. For example, though New Jersey, California and New York rank high in per capita taxes, they rank 15th, 17th and 19th respectively in property taxes per $1,000 of personal income. On the other hand, these data show how a combination of moderate per capita income and relatively great reliance on the property tax creates an extremely high burden of taxation per $1,000 of personal Income. North and South Dakota are cases in point. . That the property tax accounted for 86.7 per cent of all local tax revenues in the United States in I957 is an

PAGE 65

48 indication that other taxes have not become a material fac tor in local tax systems nationally. Though locally administered nonproperty taxes are a substantial source of revenue in some cities and of lesser importance in many others, they are not a satisfactory substitute for local governments generally. The more productive nonproperty taxes are not well adapted for local administration; however, it might well be possible to permit the localities to participate in state-administered tax schemes as a supplement to the property tax. Property Tax Revenues in Virginia Virginia is not distinctive in the relative decline of the importance of the property tax as the chief source of revenue to the localities. Table 5 illustrates this point. Prom it, it is observed that Virginia's counties continue to rely chiefly upon property taxes as their largest source of revenue; however, it is noted that, as a percentage of total local revenues, property taxes have declined in importance, dropping from 47.00 per cent in 19^3 to 42.72 per cent some fifteen years later. It is also noteworthy that all sources of revenue have Increased more rapidly in Virginia than the national averages; however, even in this case property taxes have increased to a lesser degree than have the remaining sources of revenue. This indicates that in Virginia as well as nationally property taxes are being supplemented by an increased reliance of local

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49 in R 03 O O 3 ra S o H -H o s o CO f3 (!) S 02 U 0) 14 O © C p4 H aC ;> o a • • • • • H iH CTvCM vO O OMACO Jit ON^r Srco avo in • * • • • ^ CO in a\ crviT ct\ coinvooj ^ •» i% % ^Hvo CO in • • • • • c-cvj ozT in H o inco H ino B •» n ^ in CO to 0) X (8 P -P 0) a > O J4 o «9 03 +5 to c Q> Q) tas a r-i o o. ^« 03 II G (1) 03 Q. a 03 CO 0) . _ Q) ft* CO CO Pc« -1-3 -p -p o o o o vo H CX5 n o « o o 03 -p o EH (0 o o c O > ^2 S odd Ok CO •p c (0 «H H 3 H CO u •o 0) cn 4> Q) O o O c -rt la -p c e a H f4 O (D C CO H iH O o 10 •H s c (0 03 > O

PAGE 67

governments upon the other sources of revenue, in particular state and federal supplements and increased service charges. Summary In this chapter some historical background of the property tax was presented, including the taxation of interstate commerce and the development of rules applicable to the taxation of property. Also considered were the constitu tional provisions for the taxation of property in Virginia, It was noted that the constitutional and statutory developlaent of the ad valorem tax system in Virginia followed the same general pattern as the development of taxes on railroad property. These constitutional provisions, as they have developed, have never been precisely defined in all cases. In particular, the provision of the Virginia Constitution requiring uniformity in taxation does not spell out whether uniformity in assessment means uniformity between all property or between classes of property owners. Background data relative to property tax revenues were also analyzed and it was found that nationally the property tax has declined in importance over the years, especially as a source of state revenues. Although it has declined somewhat as a source of local revenues, it was noted that the property tax continues to provide a substantial percentage of total local revenues. An analysis of property tax revenues in Virginia revealed that this tax scheme has similarly declined in relative importance as a source of

PAGE 68

local revenues, being replaced In large part by state and federal supplements and non-tax revenues. However, Virginia's localities continue to rely on the property tax as their chief source of revenue. Because the property tax does continue to play such an important role in local government revenues, the problems of equity in the administration of this tax system continue to have considerable significance* It is to one administrative aspect that this study now turns — the assessment function.

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CHAPTER 3 ASSESSMENT ADMINISTRATION The assessment of property on some equitable basis has been the most difficult problem facing the tax assessor throughout the long history of this type of taxation. As long ago as 1692, a petition to the Governor of the Colonial Assembly of the Colony of New York urged: , . . that there may be a certain method for the equal and proportionable assessing of subsidies. We doe pray his Excell. would appoint Commissioners in each respective County for the making of an Estimate of their Estates, that for the future there may not be such uncertainties,* That the basis for such complaints exists even today is evidenced by recent findings and reports of state tax commissions throughout the country. For example, the final report of the State Tax Study Commission to the Governor of West Virginia states that "West Virginia's problem is not so much excessive taxes, as it is extreme 2 unevenness of burdens," The 1956 Report of the Governor's ^i'rederick D. Bidwell, Taxation in New York State Albany: J, B. lyon Company, 191»J, pp, liJ-l3, ^West Virginia State Tax Study Commission, West Virginia Taxes, Charleston, West Virginia, November, i960, p, 5l» 52

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$1 Minnesota Tax Study Committee states that in "... examining Minnesota's tax problems, the Research Staff and the Committee itself found the property tax to be the most deficient major element of the Minnesota tax system not only in terms of its inequity in structure and enforcement, but also in its discriminatory impact on industry and 3 agriculture. " This same problem was also recognized In New Jersey,, as indicated by the statement in a 1953 Report of the New Jersey Commission on State Tax Policy that the: , . . study of the general property tax touches upon the most sensitive issues of state and local government. It was undertaken because of a long-held belief that property valuations and assessments were marred by the grossest inequities. The study demonstrates and confirms this belief. . . . That uniformity In the assessment practice Is essential to the health of the nation's economy is a fact which occasionally goes by unnoticed in the efforts of many tax assessors to obtain revenues. As stated by one authority, equity in the assessment practice ... is essential to the continued success of our demcratlc system of government. Local government, the bulwark of our democratic system, cannot be considered -' Report of the Governor's Minnesota Tax Study Commit tee , State of Minnesota ^St, Paul, 195^), p, isbti. ^New Jersey Commission on State Tax Policy, Sixth Report . , . The General Property Tax in New Jersey; A Century of Inequities ^Trenton, 19!?3J, p. Ix.

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5^1 on a sound financial basis unless the cost is equitably distributed among its taxpayers. Uniformity aiid equality are also essential in an economic system of free enterprise and fair competition. The tax cost is a substantial item in the overhead of commercial and industrial organizations. If the cost is not equitably distributed, it disturbs the economic structure of our society. If a business concern could count on its assessment and Its competitors' assessments always being on a sound and equal basis, it could better plan a sound future program,-' Making the Assessment The first problem confronting the local assessor is one of locating taxable property and adding it to the tax rolls. Some pieces of property escape the tax rolls for some period of time due to questions of situs and jurisdiction, failure of the property owners to disclose the existence of the property, or the failure of the assessor to "find" such property through ignorance, incompetency or error . Once property is located it is the assessors* Job to determine its value, according to a uniform standard, so that each taxpayer contributes to the cost of government in proportion to the value of his property, this being the essence of ad valorem taxation. ^Clifford Goes, "Appraisals," Proceedings of the Forty -First Annual Conference on Taxation (.Sacramento ^ caiii: National 'fax Association, WH), p. 149.

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55 This is no easy task, however, since there is little agreement as to which standard of value should be applied by the assessor. The statutory and constitutional provisions of most states provide for the assessraent of property at some percentage, most us\aally 100 per cent, of "full** value, "fair" value, "fair market" value, "fair cash" value, "cash" value or some other varying term which ia lacking in both uniformity and clarity between the states. Section I69 of the Virginia Constitution provides for assessment of real estate and tangible personal property at its full fair market value. This leaves unsolved the problem of the determination of fair market value. For some types of property the determination of fair market value is relatively simple conceptually if one accepts the general definition that fair market value is V ... the probable price at which it .. would have been sold, had it been sold, . on the taxing date at a sale between a willing buyer able but not compelled to buy, and a willing seller able but not compelled to sell, if both buyer and seller had been fully conversant with the property and with current public opinion concerning prices in general,' Even though sales prices of parcels of property can be objectively determined in many cases, there are limitations The determination of fair market value of public service corporation property is taken up in Chapter 5. "^Philip H. Cornick, in A. E, Buck and Others, Municipal Finance (New York: Macmillan Company, 1926), p. 313.

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56 to its exclusive use in establishing taxable property values. First, it is necessary to eliminate from consideration sales of property which might not be "arras length" in nature, such as transfers between relations. Second, as is frequently the case, economic coaditiooB might exist which affect the degree of willingness to sell or buy. A recessionary period such as the I96O-I96I downturn in economic activity, for example, may well encourage some owners of property, unable to meet mortgage payments, to sell on terms less favorable than they might normally sell. Further, not only is the number of sales of property in a given period of time a relatively small percentage of the total property available, but also it is questionable that the properties actually sold are truly representative of all types, ages, and conditions of such other properties in the area. As a result, sales price data must be supplemented by other analyses in order to arrive at a "fair" market value which may or may not be the same as market price. Though many assessors copy the preceding year's assess raent roll to satisfy their responsibility for the current year's assessment, making little real effort to achieve uniformity or equity, their excuses often are plausible. The assessment of property-, which exists in a multiplicity of kinds of land and improvements and for a leg_on of purposes, is a formidable task even for the most experienced and objective assessor. Although the Job of assessor is

PAGE 74

5T perhaps one of the most responsible in government, most governmental units do not pay a salarj^ sufficiently high to s tract the more qualified individuals to seek the office. In many cases, the local government's budget is such that sufficient funds are not available because of the small size of the taxing district. In Virginia, the Department of ' Taxation has a team of expert assessors who will lend their assistance to the assessors in the localities^ however, there is no evidence that the use of this service Is widespread. • ' In addition to the possible lack of competency on the part of the local assessor, other obstacles exist to impede assessment practice. One of the foremost of these obstacles is the scarcity of adequate funds to properly staff the assessment function. Closely related is the matter of time. Without adequate staff, regardless of the qualifications of the staff already on the Job, it is impossible to devote uch time to the determination of a fair value on each and every parcel of property. The treasurer of one city, for example, states that if the number of working hours per year devoted to the assessing functioii were divided by the total number of parcels of property under the jurisdiction of his office, the average time allowable for the assessment of eacn piece of property would be approximately thirty Q seconds, "'Personal interview with Johnny H, Johnson, Treasurer, City of Roanoke, Virginia, July 14, i960.

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98 What, then, can the assessor do? Whether the assessor meets his responsibility by guessing, by copying last year's assessment roll, or by applying objective appraisal methods depeuds largely on his training and the k.nd of organization and assessing aids he has at his disposal. It is further dependent on the particular problems with which he is faced. For exaraplc, in the case of certain classes of real estate, such as industrial property, sales may be both infrequent and unrepresentative of market value. Frequently, improvements have been made to property for which the market price depends on either how well these improvements serve their intended purposes or how well they can be adapted to other uses for which there is some demand. Illustrations of these problem situations would be a moat around an eccentric's house, a bomb shelter of unknown adequacy, or a railroad station where service has been curtailed or abandoned. In th^s respect, one writer reveals that older houses present a problem xn that they . . . are frequently the materialized dreams of their wealthy owner-buxlders (nightmares, iiowever, for the assessor), which range from miniature replicas of King Arthur's castle at Camelot to Brobdingnagian monstrosities combining features of Gothic, French Renaissance, Tudor and Byzantine architecture. . . . Monumental residences are hardly more disposable than would be an elaborate tombstone inscribed with the name and crowned with the family crest of the owner-builder. ^ Albert E. Cnarapney, "Obsolete Mansxons," Assessors * News Le-Qter (National Association of Assessing Officers, XX, Ko. 7, July, 195^), 50-51.

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99 Few people question the maguitude of the assessing function itself; however, few people seem to be aware of the complexity of the processes whereby property is assessed. In the assessing of personal property, for example, the assessment function ranges from being no problem at all in those states which have exempted persoiial property from ad valorem taxation, to being a problem of great futility in those states which still attempt to tax kinds of personal property that do not readxly lend themselves to assessment. In the assessing of real estate, which comprises the largest base in any ad valorem tax system, no few problems are encountered. Land itself is of different kinds, improvements are of varying effectiveness and type, and both land and improvements are devoted to a multitude of uses. It is the duty of the assessor to take cognizance of these elusive factors in determining market value. Most assessing agencies are aware that "fair property ^ . 10 taxation is possible only with fair assessments," and are making efforts to stay abreast of changing conditions. It is interesting to note that such efforts made by one state brought to light the following conditions: 1. Many property owners have continued to pay taxes on a vacant lot years after constructing a home or building on the lot.

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60 2. Iteny properties, commercial and income* are classified as residential and paying half the tax rate that similar properties are paying, 3. Many property owners paying taxes on a value based on the property before the levy limitations law v^as enacted. In other words, their property valuation has remained undisturbed for over twenty -five years, . 4. Many properties built in the last ten years carry high assessed values based on the inflated cost of labor and material, therefore have no relationship to the values placed on properties prior to 1930, The problem with which assessors are generally faced center mainly in unequal assessments and under-assessments. Though complete equality of assessment Is doubtful of achievement, even with the advanced scientific tools of the progressive assessor, reasonable approximations of equality are certainly feasible. Under-assessment, or assessing at some fraction of the legal requirement, presents certain difficulties of itself. Each of these problems of assessment administration will be given some consideration. Unequal Assessment All states require uniformity of assessment, irrespective of whether property is assessed at full value or some fraction of full value. As long as all taxable property within a given taxing district is assessed at the •^•^Ibid.

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6X same ratio to market value. It may be stated, with certain qualifications, that there is equality of assessment. Within one taxing district, however, if one piece of property is assessed at ko per cent of full value, as are public service corporations in Virginia, and another piece of property substantially tl^ie same is assessed at only 8,5 per cent, the bias in favor of the latter is immediately evident. Though it Is possible to correct the lack of equality of assessments within one taxing district in a state there may remain inequality between taxing districts. This, too, creates certain problems. For example, and of paramount importance in th..s thesis, many states assess the property of certain kinds of property, notably public service corporation property, and certify their assessments to the localities for application of local tax rates. Frequently, however, these state assessing bodies cannot or do not adjust these assessed values to the widely varying levels of local assessments. Often the local assessment ratios are used for purposes of allocation of state aid, as in 12 the case in Virginia. Virginia, as many states do, limits the borrowing power of the localities to a fixed percentage 13 of local assessed valuations. Thus, because of varying ^^irginia is still using 1950 assessment ratios for this purpose, 13 -•Only the cities in Virginia are so limited.

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assessment ratios, the various local governments are limited unevenly in the use of their fiscal resources. These considerat ons help to explain why "it is essential that the state law provide a uniform standard of assessment for all taxing districts in the state, together with adequate administrative means for enforcing the use of the nl4 common standard, Under-Assessment In some states fractional assessment is provided for 15 by law but the majority of the states seem to contemplate assessment at full value. However, investigation of the assessment practice of the various states reveals that no state actually meets the requirement of assessment at a full 100 per cent of full value. This situation of legal, or Illegal, under-assessraent raises three fundamental questions. First, why has assessment admin_strat xon failed to comply with the law? Second, in what ways is underassessment deleterious to local government? Third, what are the relative advantages of assessing at 100 per cent of full value, or of assessing at some fraction of full value? A, E, Buck, et al,. Municipal Finance (New York: Macvnlllan Co., 1926), p. 31^^ •^^Alabania, 60 per cent; Arkansas, 18 to 20 per ce.it; Indiana, 33 1/3 per cent; Iowa, 6o per cent; Nebraska, 35 per cent; Oklahoma, 35 per cent; South Dakota, 60 per cent; Utah, 40 per cent; Washington, 50 per cent; Connecticut and Oregon, option of county assessor; Pennsylvania, county option not to exceed 75 per cent.

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Failure to comply with the law . ^. , Historically, one of the major reasons for the failure of certain counties and cities to comply with a law requiring assessment at 100 per cent of full value has been the policy of protecting the local cit.zens from paying either an unfair share of state taxes or perhaps eveii a fair share of state taxes. With more and more states withdraw] ing from property taxation as a source of revenue, leaving this source to the localities, the impetus for lower assessments on local property for this reason no longer exists; however, the practice in many cases seems intrenched. Further, some states apportion school aid and other forms of assistance to their poorer localities in greater proportions per capita tiian to the more well-to-do localities, and one of the measures of "poorness" is frequently assessed valuation. This practice would naturally encourage assessments at something less than the legal minimum. Also, many localities purposely retain low aa»essraent ratiOs in order to appear more attractive to i potential industries who might relocate or expand in that ' area. Unfortunately, many localities fail to realize that firms generally tend to consider the fairness and stability ; of the local tax structure as well as the short -run benefits which might temporarily accrue to them, I There are a few other poss-ble causes of assessment at less than the legal minxtnum. First, it is entirely possible that influencial property owners, in some cases.

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6M bring pressure to bear on local officials to concentrate their revenue-raising efforts in some direction other tiian the property tax. Just how this is accomplished and to What extent It is successful is open to debate; however^ it is reasonable to expect that some assessors can be so Influenced, particularly when the assessing function is conducted by an elected official. Second, the assessment of property at less than tne required miniuiura may tend to make the property owner in general feel as though he were "getting a bargain" regardless of the rate of taxation applied to his assessed valuation. Thus, as loi^g as the taxpayer thinks he is "getting away with something, " this may tend to make the assessing and collection function considerably easier for the local officials. Finally, underassessment can either obscure unequal assessments or niake protests less likely, Wt.ere the state law requires assessment at 100 per cent of full value, and one taxpayer is assessed at only 50 per cent, he is not only less likely to know that he is unequally treated, even if other taxpayers are assessed at only 10 per cent, because of his desire to keep his "bargain" a secret, but also he is less likely to protest since he knows his assessment is less tlian that required by law. As expressed by one writer on the subject, "Historically, the full-value law has been

PAGE 82

65 used by see escape-minded assessors as a^convenlent method of turning aside complaints of inequity." E ffects of under-as sessroent on local p;overntiient ~ one of the n^ost serious effects of local assessment practice is the exercise by the assessor of legislative powers not intended for hin.. In Florida, for example, the legislature l^s provided a homestead exen^ption of $5,000, presun^ably, according to the Florida Constitution, an exempt.on of the first $5,000 of full value of real estate. If one local assessor decides to assess local property at 10 per cent of full value, he Is in effect, multiplying the legislative Intent by ten. As mentioned earlier, state aid to localities is frequently measured by assessed valuations. Therefore, local manipulation of the assessment ratio results in erratic deviations from the intent of state policy in the distrihutlon of state funds. Further, local debt is often restricted to some percentage of assessed valuation, as is the case of the cities in Virginia, and local tax rates are often limited by state law, in consideration of what the state considers an acceptable assessment ratio, as is the l^Leslle E. Carbert, "Pull-Value Assessment Versus Fractional-value Assessment," Proceedinp-s . ^;^®,.^°y^ySixth Annual nnnference on Ta xation ^acrarr,entQ, Cui.ll. Rational 'i'ax Association, lytjji), p. 17^.

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66 case in West Virginia j therefore, low assessments may cause many local governraents to suffer a material erosion of their general borrowing and property taxing powers. Curtailment of borrowing power has in many cases resulted in further complexities of local government plus added, unnecessary cost. In Washington State, for example, where the assessment ratio is "fixed" at 50 per cent, and where the tax rate is similarly restricted, the counties have established special districts as "separate governments" although they are actually merely taxing and borrowing districts set up to skirt the legislative restrictions* The result has been, in many cases, the injudicxous and costly use of revenue bonds and the creation of "authorities" through which capital facilities are financed indirectly from property taxes. Valuations of property at less tiian the legal minimum have not received consistent judicial approval. In a fairly recent case the Supreme Court of New Jersey upheld assessment at 100 per cent of full value, in spite of local practice to the contrary, and vowed to uphold this principle in any case brought by an "aggrieved" taxpayer. "'"'^ ^^swltz v. Middletown Township, 23 N.J, 58O (1957).

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if The Connecticut Supreme Court, In a similar case, has held that the under -assessment practice is invalid and counterlesislative, saying: Nor can we overlook a further matter in demonstrating the impropriety of pursuing a role of fractional valuation, Wnen assessors adopt sucn rule, they indirectly assume a role which rightfully is not taeirs to plan. For If such a rule is applied, the assessment roll will obviously be smaller in amount than it would be if the mandate was carried out. Under such circumstances the borrowing power of the municipality is affected, since its Indebtedness may not exceed specified percentages of the grand list. Assessors who use fractional valuations to determine tiieir assessments therefore interfere, perhaps unwittingly but nevertheless effectively, with a power that belongs to other s.-*-" Full-value assessment versus fractiona!n?aluation Fractional valuation is frequently supported on the grounds that it makes little difference so long as there is equality of assessment. This point of view overlooks the fact that assessed value, in addition to providing a tax 4 base, usually controls or influences certam basic fiscal powers and policies of local government. Objections to raising assessed value to full value are numerous, a popular one being that an abrupt departure from the various established conventions would result in disclosure

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68 of built-in inequalities between different classes of taxpayers, loss of local government revenues, a redistribution of the tax burden, and a loss of revenue from public service corporation properties which are frequentlyassessed at a percentage of full value somewhat higher than local property. Arguments in favor of assessment at full value include the following: it gives taxpayers a better opportunity to spot inequities and obtain relief; it encourages a more professional and scientific approach to the assessment function itself; and to the above ends, it makes iiiequalities in the assessment practice more noticeable and, thus, more subject to protest. In the words of one proponent: Does it really make any difference whether assessments are at full or at a fraction of full value? From the point of view of uniformity, it probably does not, although it is often said tiriat relative underor over-assessment is more easily discerned at full value. There is probably some truth in this, which would impel me to believe tiiat assessments would be better made if their levels were up reasonably near wiiere they ought to be. The Assessment Practice The manner in which assessments are currently administered helps to account for the inequities which might 19 Thomas A. Byrne, "Full Value Assessments in Practice: Reasons For Under-Assessment, " Assessors* Hews Letter (international Association of Assessing Officers), JOCV. No. 1, January, 1959), 3-7. '* ^»

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69 . exlGt, as well as to account for the general under' assessments which are prevalent. Without coordination of the assessment practice within a state where there are a number of independent assessors, there may be a nurr,ber of divergent opinions. With a separate assessor employed in each of the state's localities, large or small, the rate of compensation generally has been quite low. Revealing that, m 1956, nearly 60 per cent of the assessors in New York State earned less than $500 per year, the New York director of tiie equalization board commented: "Is it any wonder that the assessing Job in many towns and some cities Is confined primarily to copying last 20 year's roll?" An economist at the University of Washington similarly observed that . . . it should be said that the compensation paid these officials is grossly malproportloned to the Importance and technical character of the assessment function. If technical qualifications were required of those standing for election as county assessor, based on specialstenH^^S^^^i -"^ accepted professional standards, lo is questionable whether there would be any candidates for this office.?! The conclusion to be drawn from these statements is that the assessment function iias been divided into too 20 Frederick L. Bird, "Equalization in New York " p. 5i28, "-"t-ti* AWbxuaaj. lax Association, Ip57T»

PAGE 87

70 many segments, few of which are capable of supporting a qualified assessing office. As early as 19^1 the National Association of Assessing Officers reported that: I The political subdivision serving as an assessment district should have sufficient resources to afford adequate assessment machinery, and should provide an assessment task large enough to realize the economies of large-scale operations . V . . and to warrant tlie employment of one full-time assessor and at least one f ull• ! ' time assistant." . , . Though it is true that the assessment function has not been given adequate consideration in many localities it is equally true that certain other localities have made considerable effort to improve their assessment practice and to achieve a greater degree of uniformity and equity. , . A brief examination of the procedure developed in the City of Richmond, Virginia, for the assessment of income producing properties illustrates some of the efforts made in this direction. Assessment of Income -Producing Properties, " City of Richmond, Virginia^ The City of Richmond has used capitalized income to determine assessed values for over twenty years; Report of the Committee of Assessment Organization and Personnel t,Chicaco, 111.: National Associa-bion of Assessing Officers, 19^1), p. 51. ^^The data following result from a personal interview with Mr. Richard A. Chandler, Assessor of Real Estate, City of Richmond, Virginia, With yir. Chandler's permission, considerable use of data provided by Mr. Chandler is made. Date of interview: July 21, i960.

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consequently. Its method of using this technique, as evolved over the years, is relatively well-developed. The advocates of this procedure point to six key reasons for its use: 1. To demonstrate that assessments are not arbitrarily made and to instill confidence In assessments by conforming with the practices of the market. On income producing properties particularly, lack of use of this approach creates public skepticism in the value estimate. 2. To provide an essential check on the other approaches to value. 3« To provide a measure of all forms of depreciation. ,.. ^. To avoid the elimination of basic concepts of value. Each of the three approaches attempts to measure a different motive and each is based upon different theories, laws '. and principles of economics and value. To ignore this approach is to ignore established concepts of value. 5. To comply with the rulings of the courts ' and thus avoid having an assessment declared erroneous. Since 1861, Supreme Courts of various states and the United States have insisted that the rental or income of a property must be considered and evaluated in determining assessed values. . 6. To produce equitable assessments based upon fair market value, which is required by . law in most assessing Jurisdictions, Use of groes income rather than neo Income In utilizing the capitalization method, one of the first decisions confronting an assessor is whether to gross income or net income. The City of Richmond uses gross income for three reasons. First, the use of gros

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income In mass appraisals makes it unnecessary to study large volumes of incoTue and expense statements, some of which are distorted. Second, the use of gross income assures the prudent manager of real estate that he will not Jae penalized in favor of the inefficient or imprudent Trtanager. Last, the use of gross income leads to uniformity and equality and, thus, equitable assessments. Use of rental value x'ather than actual rental In determining value based on income the question arises whether to use the actual rent a property produces or whether to use its rental value. Once again, the City of Richmond prefers to use economic income, or rental value, following the recognized practice in the appraisal profession at large. The use of this value avoids erroneous values created by using unusually high or low leases. Actual rental income would develop different values and would result in inequitable assessments. The problem of estimating ^ rental value There are numerous sources of obtaining this data. An analysis of what the majority of similar space is renting for frequently helps ascertain the rental value of a particular piece of property. Also used in the City of Richmond is the device in which gross sales of the property are determined, and using a percentage lease

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table, estimating the percentage of gross sales that the . particular t^pe of bus .ness can aff -^rd to pay for rent, ' Select xon of tixe proper capitalization rate In the City of Richnnond three methods or sources are utilised for selecting gross rates. First, ^ihenever there is a transfer of income producing property, the assessor's < office obtains the gross inoorae, the sales pr^ce and the operating statement when ava .lable. Tue rate is tnen determined by dividing tiie sales price into the income. The resultant rate is then catalogued as to the type ' • ^ property and location, from which a pattern is developed* Second, informed opinion of realtors and appraisers rias, over a period of time, helped to develop gross rates for each tipe of rental property according to condition, use and location, , . • . Finally, the "built-up" method is used to determine the proper gross rate either for a general class of property or for an individual piece of property. The gross rate is composed of the interest rate, trie depreciati.on rate and normal expenses expressed as a rate. To develop the gross rate by the buiit-up method, only the typical operating ratio of the type property under study, the typical land and building ratio, and either the interest rate and estimated remaining economic life or the over --a 11 rate need be known. The typical operating ratio can be ascertained from national studies or from analyses of operating expense

PAGE 91

statements of similar properties. The use of typical or avera£:e operating ratios in lieu of actual expenses or other methods is preferred for the aaine reasons gross income is used rather than net income. The typical land and building ratio on any general class of property/ is normally generally known or can be readily obtained. Interest rates and depreciation rates or over all rates are obtainable from the market. The process of these items into a gross capitalization rate is illustrated in Table 6, Appropriate use of the capitalization process This process is most generally used in those cases where the real estate market itself gives pr.roe consideration to value factors such as anticipated earnings or income producing potential, Tiiese cases would include commercial stores, apartment houses, factories, theatres, shopping centers, motels and simxlar properties. t Illustrations f In Table 6 the gross capitalization rate for apartment property, with gross income of $19,500, is determined. It will be noticed that if the gross capitalization rate, determined therein to be 18 per cent, is divided into the gross income of $19*500, trie capitalized value of $108,333 is determined. To see how reliaole this metaod is. Table 7 is presented, using the income approach to value;

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75 TABLE 6 • GROSS CAPITALIZATION RATE Capitalized Value of An Apartment Building Typical operating ratio 55^ Typical ratio of land to total 20 Typical ratio of building to total 80 Interest rate 6 Remaining econoniic life, 40 years 2f Gross rental per year $19*500 Rates: Land, 20^ x 6^ 1^ Building, 80^ X (656 / 2^) 6.8 Over-all rate 8.0^^ If expenses represent 55^ of gross xnconie then the over-all rate (8.0g^) represents 45$^. Gross capitalization rate equals lOO.Cg^* Therefore, 4^ of X = S.QSt X = 18.QS& (gross capitalization rate) Capitalized value = $19,500 divxded x8.QS^ = $108,333

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76 TABLE 7 INCO^E APPROACH TO VALUE OF AN APARTMKT BUILDING Based on Actual Operating Statement Gross income (100^ occupancy/) ^ ^'"^'nS? Less: vacancy and collection loss of 'JiO Effective gross income $18,525 Less: ^ g. Operating expenses $D,o OOP Indicated value of tiie property by capitalxajation $112,988

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77 that is, valuing the real estate based on reconstruction of an actual operating statement and using building residual straight line depreciation technique of capitalization. As can oe seen In an examination of the two preceding tables, the application of the gross capitalization rate yields an estimated value whiCi. varies less than 5 per cent from tae 1^112,988 developed from the full processing. Another example to be considered Is a warehouse, one story, with 7,000 square feet of rental space. The warehouse was built In 1948 and has an estimated remaining useful life of fifty years. From the trend tables of the City of Rlciimond it was ascertained tiiat typical rental for similar properties is 60^ per square foot and that the average gross rate of capitalization for such property Is an estimated 12 per cent. Seven thousand square feet at 60^ per square foot would yield $4,200 of gross Income waich, when capitalized at 12 per cent, gives a value of $35,000. Table 8 shows a value indicated by the time -consuming income approach of $38,344. This compares with the value, $35,000, obtained through the use of a gross capitalization rate. Tx.us, it is seen tliat appraisal and assessment tools are available to the harrassed assessor and Wxll provide Within a tolerable range equitable and uniform assessments with a minimum staff. Though these tools exist and can facilitate the informed assessor in his task.

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78 TABI£ 8 WAREHOUSE VALUE INDICATED BY II^JOME APPROACH Gross income: 7,000 square feet © |4,200,00 Less: vacancy and collection loss, 3^ ' • • 126,00 Effective gross income $4,074.00 Less J I^nageinent fee, 6^ |244.44 Taxes 600.00 Insurances 122.00 Repairs and maintenance 100,00 Reserve for depreciation: Roof 100.00 Heaters 40.00 V Total 1,206.44 Net income before depreciation on building $2,867.56 Return of land value, ^ of $10,000 ' 60O.OO Net income imputable to building $2,267,56 Interest rate 6$^; remaining economic life of building is 50 years, or 2^. ;/ Capitalization rate for interest and depreciation ^. $2,267.56 capitalized at equal $28,344 Add value of land 10,000 Value indicated by income approach $38,344 there is still a wide range in which he must use his Judgment. For example, property substantially identical in every respect may vary in market value because of improving or deteriorating neighborhoods, location in respect to bus service, shopping or schools, scenic vieus^ noise^ Excerpt from independent appraisal of this warehouse

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79 and a aultitude of other factors, vrnere staff is inadequate or incompetent, it is impossible to stay abreast of all the changing factors. As a result, frequent unequal assessment or under -assessment becomes a raajor deficiency in the assessaent practice, • ' Summary This general review of assessment administration eomoenced with a discussion of the basic problems facing the assessing officer. First, property subject to taxation must be located and placed on the tax rolls. Second, a reasonable valuation of auch property must be made. It was noted that both of these problems are frequently complicated by the fact that not only are valuations difficult to make for all types of property but also the assessing office is frequently limited as to staff and operating funds. . As a result both of these internal limitations of the assessing function and of the fact that not all property within a given locality is assessed by the same office, unequal assessments within taxing districts and between taxing districts may give rise to discrimination in ad valorem taxation. If assessments which are not ' equal result in inequities, then the alternative of uniform assessments must be followed to insure a greater degree of equity. In making uniform assessments, however it was noted that certain problems remain. Should all

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assessments be made at "full value" or uniforrnly at some fraction of full value? The general conclusion was reached that from the point of view of uniformity it probably makes no difference; however, from the point of view of the fiscal poviers and policies of local government as well as of the best interests of property owners, assessments closer to full value seem more desirable. Finally, the procedure as has developed in the City of Richmond, in respect to the assessing function, was examined in order to show what one city has done toward achieving reasonable uniformity in the assessment of its nonutility properties in spite of fiscal limitations. The significance of this general review of assessment administration for purposes of this study lies in the extreme importance attached by the utility industry to the assessment of nonutility properties. Utility property is currently assessed centrally and where assessment administration within the localities differs from the administration of central assessment, inequalities and possibly inequities, the object of inquiry in this study, are likely to exist. Turning from a general review of assessment administration to the assessment practice in Virginia, it is felt that an analysis of the specific facts as they exist In Virginia will reveal whether there is in fact cause for concern at the variance between central and local assessment administration.

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CiiAPTER 4 THE ASSESSMENT PRACTICE IN VIRGINIA General Practice Constitutional and statutory provisions to the contrary, the practice of assessing property at some percentage of full value has been approved by the courts. In Virginia, the courts have permitted the separate classification of utility property and its assessment at a percentage of market value, even where nonutllity property is assessed at different ratios between and within taxing 1 districts. Decisions in other states offer similar conclusions, a more recent court in Kentucicy holding that assessments at some ratio of market value was acceptable In the interest of uniformity and equity, in spite of a constitutional requirement to assess at full value. ^ An examination of Table 9 of assessment ratios in Virginia reveals some cxiaracteristics of the assessment Comparison of Assessment Ratios 3-n Virginia' 1 . h^!^y„Pf .•^^^^^"^Q"^ ^* Commission, 188 Va. 100, 59 S.E. 2 i'n^H V u^.Tur.Mt""®^^^^ Transmission Company . Ky, 331 81

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raoo lAc^rscxj^ cncorH ov=r H row o cu o ih in inirv^ co in |Ai^>|A^-^ 09 rococo CO cu cvi cvi -h h h o o a>cooocooocovo B O P a CO o § -P -H i -H o toi; OH ©©OcoWGp;::© 0J-P5'~'H (0 c CO C? B 3 -H H O P4 Pi n _ o CB H 53 5S 03 O (D G O H CO-P a -H o o CO 00 H H u ^ -z ^ \. \^ ^ --^ ^ ca r-i TS CS Qi) U -ri Q) U 3o c o •p CO 2 CO O C/3 3 ^^1>^c-00 CO cxD CO CO CO (3 CO 00 CO ch a\ ON ctI ON a\ ON ON CUCUHHOOONONt-MDu'Mrv^OJCMOaNaNaOCOfOHO ON rHHHHHHrHHrHrHHHrii-IHHf-lr-IHrHHrH H H H O O C (D G -H CO "O X3 U. 3 a c o S P CO CO -O fi s C r-iTS CO CO H (xj Q> H G •H P4 C S Q) _ — „ _ tD 3 3 M (U 3 s =s C -H Q3piC03iH^p C CO 3 -P O -H O CO C 3 c -p s CO •H H H •H 36 a a? G O -P "O O o G a -H B-r* Q> ca U O H © CO O tsOt? JsJ G}:43Ga)!::4.... .vw>, O CO © X ca o o 0) © H <;h © PiraH3'H'OcO©P j3 CO o ID O G bOCQ © ^ S Qi '''^ ^0^5 ONO H CM CO:* invo t-CO on o h ru m ^ irkinininLnininiAininvovovD>o3vovSS^o^&S.til H C:^ONCOCOj:r COCVJ H ONVO LfMfNHO ONCO lA^ COCVl rH HO^ ^ £^ s;] j;] d d d d s s s i i ^^^^i^^^i^i © •H -P c O f>sC O CO CO -H to 3 <; H p> G d © ^ -P bOH CO •H c CO 03 fcOi-l rH m 03 ^ CO © c © © 'P_2'S 2 S^lJ SlJ-e fcbrH^H^ S ~ ca G 0+^03 PCO©00 S^H •oSoooGSG © r'55|iS^sHoca-HH^H©ooi5w3 S^biS ^ -a o -H p; C -H o 0) o 3 © CO c5 ^ G O +» © Q.P S -P !«; ffl o . ©^
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84 practice in this state. Table 9 is based upon a I956 study made by the Virginia State Department of Taxation and represents the latest such study so made. It shows that the assessment ratios generally are higher in the cities than in the counties, the weighted average for cities being 45.9 per cent, the assessed value being stated as a percentage of sales value, while the statewide weighted average county assessment ratio is only 22.3 per 3 cent. Seventy-five counties of a total of 98 show ratios less than the statewide weighted average for counties, and 28 out of 32 cities have ratios below the statewide weighted average for cities. Of significance is the fact that the median assessment ratio for all cities is 36,0 per cent, considerably less than the weighted average. For the counties this picture is similar, the median being 18.3 per cent, four percentage points lower than the statewide county ratio. To further illustrate the wide variations in assessment ratios, the two extremes should be considered. The lowest assessment ratio exists (as of 1956 at least) in Washington County, where the ratio is 6.5 per cent. This Is contrasted with an assessment ratio in the City of Richmond of 8I.0 per cent. This comparison, of course, is one between an urban area, complete with its •TThe weighted averages vjere obtained by dividing assessed values by sales values. In toto, for the specific taxing districts m question, These"13aTa were supDlied by the Virginia Department of Taxation,

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85 generally higher requirements for governmental services, and a rural cominunity whose requirements for a highbudget government are relat:.vely less. Where the inequities exist, however, is not shown by this simple comparison of assessment ratios. Table 9 does show that some problem, and probably some inequity, will accrue to property owners with domicile in one taxing district and substantial requirements for government services in another in which business is transacted. Further, when the state constitution requires uniformity of taxation between taxpayers of the same class, then this mandate is violated when taxpayers of the same class, operating in different taxing districts, are subjected to assessment ratios as widely varying as those In Virginia. " In order to emphasize the above poiuts. Figure 1 has been prepared to show the distribution by counties of assessment ratios. The most striking divergencies from market value occur in the southwest part of the state where almost all of the assessment ratios less than 15 per cent are in effect. On the other hand, with but a few exceptions, the highest ratios are found in the more urban counties in the eastern Tidewater area. Further examination of Figure 1 yields an additional observation, especially in respect to the possible effects of such Widespread deviation in assessment ratios on public service corporations. The property of public

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87 service corporations is assessed by the Virginia State, Corporation Comniissiori at 40 per cent of "market value," this percentage originating from a statewide average assessment ratio study conducted by the Commission, After assessment by this central agency, local assessors apply local rates of levy against the assessed values of such public service corporation property with situs in the locality. Where the assessment ratios are lowest, that Is, where the difference between the local assessment ratio and the 40 per cent ratio applied on public service corporation property is the greatest, public service corporations carry a disproportionate share of the local tax burden. Since a sxngle public service corporation rarely operates throughout the entire state, application of a statewide average assessment ratio produces the greatest Inequalities when applied to a public service corporation doing business mainly in the low ratio counties, 'lables 10 and 11, utilizing as an example the data relative to the service area of one public service corporation which operates In the central and western sections of the state. Illustrate this particular Inequality, Table 10 shows the amount of property taxes this company would have had to pay, Ir; 1959, had its assessed values been determined by the weJ.ghted average assessment ratio

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89 c5 in o\ X cO c >:< (D -P m o ? x: •p o CO CO CO -p o 0) DO 3 O EH CO CO n C30 r-i CO ON •» (M (M o CO vo o tH m CO CO in Cf\ CO •> CO o id !h CD CO 0) s o CO to 0) -1 (a CO i« O 3 •H -H O e-p 0) CO H -P CO CQ > >»-P to c 'O o 0 0) E to bOCQ 03 CO CO (0 U VI < CO CO in CVJ in co H CVl 03 CO in H CVJ 0) •> •» •» 00 in CO CVl =r P CO vo CO CVJ •H CTv CO r-i H vo 00 00 r-l CM o H CO !>^ CVJ 00 P I>CO >-* vo O ro cu 3 •» •> •» •» O o CO H in o CO CO vo vo H CVJ C3\ vo <« CO in CO vo CO •« iH U -P CD Q) C CQ > fl) bO f-* 03 CO S O 09 •H ca ^ 03 !> GO •H O CO (0 Q< CQ 0) CO CO c 03 rH CO H O ^ 'O CO K CO <1) 'O p /-« (0 o •P CO H 03 O. 3 3 •H P rH S Xi u o 03 0) O •H 3 3 Q) -p -H CQ -O rH -P X 03 -P 03 Q CO o CO >» CO O 0^ > cH 03 ?^ CU 3 0) o (0 rl C H bO o EQ U CO a o a c CO -p a 5} 0^ • G O H 10 CO c o tH 03 03 o o c o »4 iH O CO D. ?> O -P oo u « p c Ci> o CVl CO CVl o +> C3 U P c CO +> CO cs c bD O •H -P > 9 Si p CO CO Q) 03 B CO CO •H Q) CO -o i •o 0) K CO P O -p rH CO CO G ? O +> •o -p CO o o u O CO o 0) 3 B QD P CO OQ rH O O cd;3 c O CO +> o ?4 -P Q> O. >» O -P ^ S a r> o o CD O X! 3 -P r-i CO C W O 03 f» -P «I3 CO K CO CO C 03 O . U O o. a-p o ca a; o CO j3 pr; 3; « Eh to -g CO 2 OJ rH 03 O CO C ca CO P O 13 O o o 03 i

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90 existing in Vivslnia, in 1956, instead of the Uo per cent ratio actually employed. The assessed valuation would have been reduced by $15,464,2^7 and the actual tax liabil Ity, assuming the rate of taxation to remain constant, would have been reduced by $553*400. Although the 40 per cent assessment ratio may aave cirrectly reflected the statewide average at the time of its original computation, its use in the present instance resulted in overburden of taxation. Had the spirit prevailed, in 1959, which gave rise originally to equalization of public service corporation property/ at the statewide average assessment ratio, the instant company would have liad a tax bill more than 20 per cent less than the one actually rece.ved and pa_d. This IB not to say that the burden of taxation was too great; however, it is notable that tiie equalization factor used no longer equalizes. Table 11 brings out the same conclusion more eKpiiatically. In i,he preparation of this table, instead of using the weighted average statewide assessment ratio of 31.5 per cent, the weighted averai^e assessment ratio prevailing in the serv-ce area of tne company studied was There is liotle reason to believe that assessnient ratios nave altered apprec abl^ since this last study was made iri 1956. Tue Virginia Department of Taxation holds this view and has no plans in the near future to conduct another study of assessment ratios.

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91 employed. This ratio is the we-ghted average ratio imposed on all nonutility property in the company's service area and compares even less favorably with the present statewide average ratio. It should be noted ti-iat had an average ratio of assessed values to market values prevaxl^ng in the area served by this company been used Instead of the utility ratio of 40 per cent, the assessed value of taxable property would have been reduced by $30,564,633 and the ultimate tax burden would have been lowered by $1,093,950. It has been observed that there exists a considerable difference between the statewide averaj^e assessiuent ratio and the rat o which prevails on the average throughout the area served by the company studied. Tne resultant tax burden which accrued from the use of the utility ratio • of 40 per cent, and without consideration of the systemwide average ratio, has been shown to be discriminatory. An even greater discrimination can be snown, moreover, if a similar comparison is made of the effect of using the utility ratio as opposed to using the average assessment ratios prevailing In the cities and counties served by tae company, each considered separately . This -^The weighted average was obtained by dividing assessed values by sales values, in toto , for the spec f Ic taxing districts in question. Taese data were supplied by tne Virginia Department of Taxation.

PAGE 109

92 comparison Is made in Table 12, whi.ch uses the averagjt assessment ratio existing in tiie c.tles served by the company, M2.3 per cent, and the average ratio employed by 6 the counties in this same service area, 14,7 per cent. If these service area assessment ratios are used, separated as to cities and counties, it is noticed taat this particular company would have saved in property taxes more than 50 per cent of its actual tax bill for 1959. In addition, the amount of taxes tnus saved, $1,492,865, would have amounted to almost three times the savings which would accrue if the statewide average assessment rat..o were used. Thus, if the 40 per cent assessriient ratio used to value public service corporation property for property tax purposes is d scriminatory to all public service corporations, the discrimiLiatlon is compounded in the case of this one utility which Is faced with a local situation in respect to assessment ratios even worse than the use of the 40 per cent statewide average assessment ratio precipitates. One other observation is to be gleaned from an examination of Table 12, namely, that if service area assessment ratios were used, separately for cities and counties, the company In question would l:iave ended up paying more The weighted average was obtained by dividing assessed values by sales values, in. toto , for the specific taxing districts in question.

PAGE 110

93 i CO 2) ^-^ 5 =^ Ho C o 00 O -) o c :3 O O CI r-l 4*> s m CVJ in lA ft o CO to <» CO ON 01 O d CO CO -H 0J to o o 09 «

19 o o p o a P g O u O P c»« S % r4 P «0 • 03 « P P« O 2 O H •rt p Mt O > C -P tJ «4 P O OH O O O O O p» ^ os: *^ U 3 c ^ § CH 3 o P •oj» CO ffl fl) <& • Mi a> ^ -r4 C
PAGE 111

91 property tax to the cities than they actually paid. The explanation for this lies in the fact tiiat tiie city averai:^e assessment ratio, in this company's service area, iB 42,3 per cent, slightly higher than trie assessraent ' patio applied to public service corporation property. The significance of this fact is that the cities, in their efforts to raise more revenue, liave at the same tiwe achieved more uniformity and equity in property taxatldHi by taxing nonutility property owners to at least as great an extent as public service corporations are taxed. That the citi/ average assessment ratio, in this service area, exceeds the ratio of assessed value to "fall" value on utility property is indicative of greater local effort on the part of the c_ties; however, it is not an indication that the cities are being discriminated against In favor of the utilities. Public service corporations are rigidly controlled and all records of such corporations are made readily available to state retiulator^agencies periodically. As a result, there is no piece of utility property which escapes the tax rolls. On the other hand, although there are few statistics available, there exists considerable property of nonutility property owners, both businessmen and individuals, which either never finds its way onto the tax rolls or receives preferential treatment by local assessors, Evidence in support of the assertion that some property never finds its way onto the tax rolls is not easy to find.

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95 t precisely because such property la not on the tax rolls. Some state and local officials are, however, aware of Instances of this practice. For example, a Virginia State Corporation Commission official revealed that certain gas line property in southwest Virginia, not subject to state regulation, iiad not appeared on the tax rolls since its construction over ten years ago, and was just discovered while inaking aerial photographs of tliat section 7 of the state. Where certain property owners are not subject to the rigid regulation imposed on public service corporations, the lack of public knowledge of existing property allows the owner to "neglect" to report same. This is especially true of personal property of certain types. . In the City of Richmond, for example, it was revealed that. In 1958* only six diamond rings with a value in excess of 8 $1,000 were reported for personal property tax purposes. Although real property is irjore easily detectible than diamond rings, one is led to suppose that a similar situation could and does exist in real estate assessments, if but to a lesser degree. •Personal interview with Mr. Lee S, Younger, Assistant Director, Public Utilities Taxation, Virginia State Corporation Commission, July 7, i960. Q Personal interview with Mr. Cornelius Sykes, Treasurer's Office, City of Richmond, Virginia, July 8, i960.

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96 Numerous reports of annexation proceedings, where surveys are required, shovj that property iias been discovered 9 which the local assessors never knew existed. It is reasonable to assume, then, that this property for some unknown time escaped taxation entirely. Further, general re-assessments are made only periodically, ce^^erally in Virginia no less than each six years. Dvirlng this time it is reasonable to assume that certain new construction goes undetected for property tax purposes, and if well hidden may escape the tax rolls Indefinitely. , , .. , That certain property owners receive preferential treatment by the tax assessor is even more difficult of authentication. Although local assessors are undoubtedly guilty of dereliction of duty in certain isolated cases, it is to be expected tiiat preferential treatment of certain property arises mostly from error and from the lack of scientific precision in the assessiTient procedure, ., . One city and two counties were selected to observe the extent to which preferential treatment can be given to , property owners. Personal Interviews with state and local officials revealed that, although these localities may engage in other discrinjiuations as discussed elsewhere in this thesis, the assessing officials had performed their Jobs with conscientious objectivity in minimizing Personal interview with Mr. Lee B. Younger.

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97 preferential treatment. Table 13 shows that in the case of Roanoke City, a randoir. sample of 2S per cent of all sales of real estate revealed that property with a sales value of less tlian $5,000 was being assessei at UO.6 per cent of that value on the average, while property selling for between ;^25,000 and $30,000 v^as being assessed at only 30,3 per cent of sales price. This saiiie situation prevailed in Dickenson County where, although real estate values were generally rauch lower than tnose in Roanoke Cltj, the lowest classification of property by sales prices was assessed at 11.9 per cent of sales price while the relatively higher priced property, in the ^^10,000 to $15,000 classification, vMas assessed at only 2,0 per cent. Similarly, in Giles County, the ratio of assessed values to sales prices declined noticeably as the sales prices > increased. Figure 2 shows these data graphically. • t • . It appears, therefore, that some property escapes taxation tlirough the device of consistent underassessment. This assessment practice results in inequities between taxpayers of the saae class, depending upon the value of their property while at the same time perpetuating the discrimination against public service corporations. Referring again to Table 33 j Giles County provides an excellent example. In Giles County the average assessiiicnt ratio, based upon the 195^ Department of Taxation study, was 13.4 per cent, although from Table 13 it is seen tliat the assessment ratio ranged from 7.9 per cent to I9.7 per

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9& . TABLE 13 RATIOS OP ASSESSED VALUE TO SAIES PRICE, REAL ESTATE, SEI£CTED LOCALITIES, 1956 Sales Frices by Classification under $5,000 4-5,000 to $ 9,999 ! 10, 000 to $14,999 13,000 to ilQ,999 20,000 to $24,999 y25,000 to $29,999 Over $30,000 Roanoke Dickenson Giles CityS County^ County ° 40,6^ 11.9^ 19 '7% 34.7 5.0 15.2 34.6 2.0 10.1 34.1 10.3 31.3 30.3 7.9 31.6 7.9 Source x Working papers, Virginia Department of Taxa tlon, 19^D Real Estate Survey, ®Based upon a random sample of 224 out of 772 real . estate sales. ^Based upon examination of 125 out of 125 real estate sales. ^Based upon a random sample of 102 out of 333 real estate sales.

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99 Ratio of assessed value to sales va lue 35 30 25 20 15 10 ^% -».____Roanoke City \ ^\ Giles County \ \ V Dickenson County Under $10,000$20,000 $30,000 and I over $5,000. $15,000$25,0009,999 19,999 29,000 Sales value by classes Figure 2, Assessment ratios by sales values of of*^lB|lMS* areas, coraiuonwealth

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100 cent. Neither the county average of 13,4 per cent nor the highest rate of asseBsrrient^ on low-value property, compares favorably with the 40 per cent assessment ratio borne by public service corporations with property located within the county. Thus, not only is there discrimination between public service corporations and other property owners generally, but also there is discrimination between nonutility property owners.. .... Significance of Local Assessment Ratios The significance of the preceding assessment ratio schedules is twofold. On the one hand they show that discriraination results from the application of an outdated utility assessment ratio. Although a 4C per cent assessment, ratio may have at one time actually reflected a statewide average ratio of real estate assessments, it Is presently considerably less than 4o per cent, a factor which results in discrimination against public service corporations still assessed on that basis. On the other hand, not only does a utility which serves the low-ratio areas of the state find Itself discriminated against on a statewide basis, but also it suffers additional discrimination by virtue of the fact that nonutility property owners in its service area enjoy assessment ratios even less than the statewide average. It has been shown that, in the case of one utility, a substantial savings in tax would have been realized, in

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101 1959) had public service corporations been assessed on some basis more nearly reflecting current assessaient practice. Had this same company been located in the relatively high-ratio eastern Tidewater area the tax saving would not have appeared as large. Thus, one might conclude that not only do public service corporations 'generally suffer discrimination as a result of the actual statewide assessment ratio being less than the Mo per cent ratio applied to utility properties, but also a second layer of discrimination exists as between public service corporations to the extent that one company may bear a larger proportion of the tax burden in its service area than another utility may bear operating in an area making a greater local effort. Geographical Dispersion of Assessment Ratios Referring once more to Figure 2, one is hard pressed to find a reasonably complete explanation for the geographical dispersion of assessment ratios. It has been suggested that possibly the answer lies in the relative values of farm land in the various sections of the state. in the western section, where agricultural land is both more productive and coraraands a higher price per unit than farm land in the eastern section, a lower assessment of full value William H, Stauffer, Taxation in Virginia (New York: The Century Company, 1931), p. tS4.

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102 villi produce a tax base similar to that resulting froin a high assessment of low-value land. Along these sarae lines, it is not unlikely tliat when the property tax was a state device for obtaining state revenues these same , high liind value areas encouraged low local assessment . ratios In order to prevent the land owners in this area from paying a disproportionate share to the state. This possibility was eliminated, of course, with the ratification of the segregation amendment; however, due to the fact that public service corporations are assessed at 4o per cent of full value by the State Corporation CoiMission, there has been little incentive to raise local ratios. For these reasons and no doubt others, including inertia and resistance to change, assessment ratios remain generally lower in the counties and cities In western Virginia, The Trend of Assessment Ratios H6t only are assessment ratios generally lower in the western section of the state, but also there has been little apparent effort exerted to improve the assessment practice. If inequities existed originally to public service corporations serving western Virginia as a result of a higher assessment ratio than that imposed on nonutlllty property, they are more pronounced today. This has taken place as a result of declining assessment ratios on nonutility property coupled with rising rates of taxation on

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103 all property. An examination of the cities and counties served by a southwestern Virginia povjer coinpany provides a case in point. The data assembled in Table l4 have been plotted graphically in Figure 3. In 1936, the average assessment ratio, not weighted, for the cities and counties served by this company, vjas ^1.1 per cent, with an average nominal tax rate of .;i»l,37 per $100 of assesses value. Each year presented after 1936 shows a reduction in the average assessment ratio and an increase in the levy rate. In 1956, the last year in which a state assessment ratio study was made, assessments had declined to an average of 13,7 per cent, while the average nominal I'ate of levy had risen to 4'3»57 per ^100 of assessed valuation. The effects of these trends on a public service corporation can be illustrated by means of a hypothetical illustration. Assume that the "total," "full" or "market" value of all property in the area served by such a corporation amounted to ;^11 million in 1936, of which amount $1 million represented the value of the utility's property and $10 million represented the value of all other property. Applying the assessment ratio of -40 per cent to the utility property and the average ratio of all cities and counties served by the utility to all other property, a computation as shown in Table 15 can be made. The

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10k TABI£ 1^ TREND OP RATIOS OF ASSESSED VALUE TO SAIES VALUE OF HEAL ESTATE AID TREIID OF APPLICABLE i^TES OF I£VY THEREON, CITIES Al^ COUNTIES IN AREA SERVED BY A SOUTHViESTEIffi VIRGINIA POVJER COtiPAlIY • Selected Years Year Average Assessment Ratios Average Ilomlnal Rates of Levy Per $100 of Assessed Value 1936 1939 37.1 1.95 19^2 3^.5 2.09 1944 29.5 2.09 1950 21.1 2.69 1956 18.9 3.57 Sources : Virginia State Department of Taxation; ^ , , study made by Dr. Russell (19^2); study made by \' Dr. Stauffer (19^^). . • TMI££ 15 COMPUTATION OF TAX REVENUE, AREA SERVED BY HYPOTilETICAL UTILITY, 1936 Utility All Other Property Property Total "Real," "full" or "market value" $1,000,000 $10,000,000 $11,000,000 Assessed value 400,000 4,110,000 4,510,000 Tax levy, $1.87 per ^100 of assessed value 7*480 76,857 34,337

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105 Ratio of assessed value to sales , valua ^0 35 30 25 20 15 10 \ Assessment ratios / \ / >^ J Rates of V / levy X \ \ \ )3,60 Rate of levy per $100 3.20 of assessed value 2.80 2.40 2,00 1.60 1.20 .80 .40 1936 1939 1942 1944 1950 1956 Years of assessment studies Figure 3. Real estate assessment ratios and rates of levy, service area of a southwestern Virginia power company, years of assessment studies, 1936-1956

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lo6 total assessed value would amount to $4,510,000 on which the levied rate of taxation prevailing in 1936 would yield $8M,337 in tax revenue. If it may be further assumed, for illustrative purposes only, that only enough additional investment is made during the ensuing twenty years to maintain the identical full values as existed originally, then a shift In the tax burden can be seen. Applying the assessment ratio of MO per cent to the utility property, and the average ratio of all other property found to exist in the service area, in I956, to nonutility property, the following is observed in Table 16, TABLE 16 COMPUTATION OP TAX REVENUE, AREA SERVED EY HYPOTHETICAL UTILITY, 1956 Utility All Other Pro perty Property Total "keal," "full" or "market value" $1,000,000 $10,000,000 $11,000,000 Assessed value 400,000 1,870,000 2,270,000 Tax levy, $3.57 per $100 of assessed value l4,280 66,759 81,039 What Is particularly notable is the fact that the taxes levied on the utility's property increased, in this hypothetical situation, almost 100 per cent, while those imposed on all other nonutility property actually declined

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107 well over 10 per cent. Thus, though the total tax showed a slight decline in this illustration, the relative burden placed upon the hypothetical public service corporation doubled, taking up most of the slack caused by the rapidly falling assessment ratios on nonutility property. Wherever this inequity prevails presently, without rectification it can only be multiplied in the future if the past rate of utility growth is maintained. The rapid growth in the population of the United States in recent years has been accomplished along with an even more rapid growth in the production of goods and services, in numbers, between 1946 and 1959 j the population increased by 30 million people to over 171 million people, an increase of over 20 per cent, ifeasured in dollars, the national income increased by $179 billion to $358 billion, an Increase of 100 per cent. As contributors to production of national income, public utility industries increased almost 200 per cent, or in amount, by $3.5 billion to $13.3 billion. ^"^ That public utility services have increased in output relatively more than has the economy as a whole is indicative of the importance of these services— electricity, gas, telephone, transportation— to the American people. In fact, they play a dual role: on the one hand. Roland B. Eutsler and James E. Brown, "Regulated Industries and the Capital i^iarket," Public Utilities Fortnightly (July 30, 1959), p. 3. —

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108 they are used in productive processes by other industries to contribute to their increasing output of goods and services, and, on the other hand, are used in everincreasing quantities in the direct satisfaction of vjants, witnessed by the increasing quantity of all these services in homes. To attain this position, the public utility industries have had to make ever-increasing and relatively larger investments of capital funds into property subject to the property tax, ... The Experience in Giles County, Virginia Though analyses reveal the presence now of inequities in taxation it is interesting to observe that there is ^ also a progressing Inequity imposed upon public service corporations through manipulation of assessment ratios and rates of levy. The experience of a utility company in Giles County, Virginia, is a case in point. Figure 4 shows the trend of assessment ratios on local nonutility property and of levy rates from I936 through I958 in Giles County, The assessment ratio declined substantially, from 32,7 per cent,' in 1936, to 13.4 per cent, in 1956, Since no further study of assessment ratios has been made since 1956, it is possible that the actual assessment ratio, in 1958, for Giles County may be lesser or greater than 13,4 per cent; however, the assumption that the ratio has not changed materially since I956 does not appear unreasonable. The rise in the rate of levy in Giles

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109 Ratio of assessed value to sales value 30 25 20 15 10 levy Rate of X Assessment ratios $3.50 Rate of levy per ;flOO 3,00 of assessed value 2.50 2,00 1.50 1.00 .50 1936 1939 19^2 19^4 1950 1956 " Years of assessment studies Figure 4. Real estate assessment ratios and . ' rates of levy, Giles County, Virginia, years of assessment studies, I93D-I956.

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110 County, although not as perceptible as the fall in assess ment ratios, is nevertheless substantial, having risen from $2.05 per $100 of assessed value, in 1936, to a high of $3.40, in 1957, an increase of over 65 per cent. In 1958, this rate fell to $2.75* ^'ut again rose to $3.^0, in 1959. In order to achieve as much objectivity as possible, the year 1958, with the lower rate of levy, is chosen for purposes of this analysis. The assessed value of all property subject to local taxation. In 1958, in Giles County, Virginia, was as 12 follows: Real estate (nonutility) Tangible personal property Machinery and tools Merchants* capital Public service corporations! I 5,925,400 2,618,540 3,334,580 496,700 Appalachian Power Company 15,149,545 5,341,314 All others Total $32,864,079 Report of the Virginia Department of Taxation, Fiscal Year Ending June 30, 1959, tables 17 and I9. <

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Ill If certain of these assessed values are converted to full value by means of their assessment ratios, the following comparison can be made: ; Full value of real estate"*-^ ,, $44,2CA,478 " ' Pull value of tangible personal propertyl** 19>5^1j3^3 Total , . . $63,7^5,821 Full value of Appalachian Power '' ' " c Company property 15 $37*873,862 On the basis of this conversion it can be seen that the full value of real and tangible personal property of nonutility property owners was 1,68 times as great as the full value of the property of the Appalachian Power Company in Giles County, in 1958. In view of this, then, it is startling to observe the relative tax burden of these two classes of taxpayers. Taxes actually levied Giles County, 16 Virginia, in 1958, were as follows: On real estate $ 162,893 On tangible personal property 72,010 Total $ 234,903 On Appalachian Power Company $ 4l6,6l2 -'Computed by dividing assessed value of $5,923,400 by the assessment ratio of 13.4 per cent. 14 Computed by dividing assessed value of $2,6l8,540 by the assessment ratio of 13.4 per cent. ^^Coroputed by dividing assessed value of $15,149,545 by an assessment ratio of 40 per cent. •^"Report of the Virginia Department of Taxation, Fiscal Year Ending June 30, 1959, Table 21.

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112 Thus, though the full value of the Appalachian Power Company's property v.-as almost half that of nonutility real and tangible personal property, its tax burden vjas 1,77 times as great. This Inequality in taxation arises out of the assessment practice: the power company's property was assessed at 40 per cent of "full" value; » other nonutility property was assessed at only 13.4 per cent. As has been shown, this assessment ratio of 13.4 per cent has evolved from a series of reductions in the assessment ratio and, concurrently, a gradual shifting of the tax burden to public service corporations including, in particular, the Appalachian Power Company which owns approximately 75 per cent of all public service corporation property located in Giles County. ' Other Effects of Under-Assessment i" Giles County, Virginia The inequity illustrated above is not limited, furthermore, to that which the observed power company itself bears, but is felt as well by the customers of the company. Because the situs of ger^eratlng equipment is the basis for allocating assessed value for purposes of taxing public service corporation property, the taxing districts in which such property is located frequently reap benefits from taxation out of proportion to the revenues they contribute as consumers. The consumers of electricity in the cities, where little generating equipment is located, must pay, through

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113 their utility rates, fiitids suff icieao enough to allow the public service corporation to pay more property \.axes to those districtD xn which more of the property is located. As has been seen, the situs basxs of property taxation xs one factor which causes certain localities to lower their assessment ratios, forcing the public service corpora oiuns located therein to bear an unequal share of the tax load. Accordingly, althougii the cities, with thexr concentration of people, consume larger quantities of power tiian the less densely populated counties and thus contribute more revenue to the utility serving them, they have been denied revenue themselves, notwithstanding the fact that generating equipment benefits the entire operating system uf the utility in much the same way as rolling stock of railroads is deemed to be of benefit to an entire system, , Table I7 illustrates the effect of low assessment ratios in localities with a large proportion of utility investment located therein. This table shows that in Russell County, wherein .s located 57.2 per cent of all state-based generating equipment of one southwestern Virginia power compawy, the assessment ratio on nonutility property is roughly but a fourth of the statewide average and only 21.1 per cent of the assessment ratio applied to public service corporation property. This indicates that local taxpayers in these counties are escaping some taxation which they would have to bear were it not for the location and taxation of public service corporation property within their boundaries.

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TABLE 17 INVESTMENT Awl) ASSESSMENT DATA SELECTED COUNTIES, 1959 A Southwestern Virginia Power Company Giles County Kussell County Investment in generating equipment® $10,420,700 $15,510,700 Per cent of tc^:al syscem generating equipment 57.2S< Local assessment ratio 13.4 8.5 . . Local assessment ratio as a per c^nt of statewide average ratlo'^ 42.5 26.9 Local assessment ravio as a per cent of utility ratio° 33.5 21.2 Annual Report to the State Corporation Commission of Virginia, Appalachian Power Company, April 15, 196O, schedule II. ^31.5 per cent as of I956, ^40 per cent. To the extent that some taxes are thus avo.ded by nonutility property owners in these and other sim_larly situated localities and is transferred to publ.c service corporations, the consumers of util ty services in other localities must eventually bear some of the cost of sucn local governments. Inequity arises, therefore, from two factors. First, in those areas where there is little or

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115 no publj-C service corporation property/, the cost of local government must be boriie in major part by the nonutility property owners. This results in higher assessment ratios, higher rates of levy, or both. Second, while having to bear the major portion of local government cost, these same consumers also bear, through rates charged for zhe services of utilities, some portion of tiie cost of government in localities fortunate enough to have located within their boundaries more public service corporation property onto which the tax burden can be shifted. Trend of Assessment Rati-os and Rates of Levy, Service Area I.Llustratlon Figure 5 illustrates the trends In assessment ratios and rates of tax levy with which the public service corporations serving southwestern Virginia have been faced over the years. The decline in the assessment ratio, from 4l.l per cent, in 1936, to l8.9 per cent, in 1956, is coupled Wxth the rapid rise in the average rate of levy, from $1.87, in 1936, to $3.57* in 1956. Tnis same rise , in the rate of levy has been imposed on all property, utility and nonutility alike; tierefore, special notice should be given in Figure 5 to the comparison between the assessment ratios on nonutility property and the property of public service corporations. Here the discrepancy, and co.iRequent discrimination, is more obvious.

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116 Ratio of assessed value oo sales value 40 35 30 25 20 15 10 \ utility Assessment Ratio / \ N \ / \ / /\ \ \ \ \ / Ra-oes of / levy on / all / property Nonut ilioy assessment ratios $3.60 Kate of levy per $100 of assessed value 3.20 2.80 2.40 2.00 .60 1.20 .80 .40 1936 1939 1942 x944 1950 1956 Years of assessment studies Figure 5. Cor:ipar_son of assessment ratios and raues of levy on utility and nonutility property, service area of a southwestern Virginia power company, years of assessment studies, 19301956

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117 Average Levies Per $100 of "Full Value " The following two tables, tables 18 aiid I9, have been constructed to show the average rate of levy on "full" / rather tiian assessed values In the c t^es and counties served by a southwestern Virginia power company, and the cities and counties elsewhere in Virginia respectively. The assessed values, as shown by the Virginia Department of Taxation, were divided by the 1956 assessment ratio of each city and county to arrive at the full value. Then the actual taxes levied in each locality, again as provided by the Department of Taxation, were divided by this "full" value to determine the average levy rate, expressed in these tables as a weighted avera^^e rate for cities and counties. Three things are to be noted upon examination of these tables. First, the average rate of levy yer $100 of full value increased almost 50 per cent more on public service corporation property tiian on nonutility real estate, fvova> 195^ to 1958. Tne fact ti:iat taxes on public service corporation property increased more rapidly would not be disturbing if such property iiad been under-taxed before. Such was not tne case, however, as may be seen m Table I8. Second, it is notewortny that the cities, in both 195^* and 1958, had an average levy rate per |100 of full value on nonutilxty real estate In excess of that imposed on public service corporations. This is explained by the fact that the higher populated areas have a greater need for revenues

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118 TABLE 18 AVERAGE RATE OF LEVY PER $100 OF "FULL" VALUE, FOR THE YEARS 195^ AND 1958 Area Served by a Southwestern Virginia Power Company "~~ ~ ~~ Public Service Nonutility Corporation Real Estate Property Counties $ .^5 $ •99 Cities .89 .82 County-city average $ .59 $ .95 1258 Counties $ .51 $1.10 Cities 1.00 .88 County-city average $ .66 $1.05 Increase $ .07 $ .10 Sources : Reports of the Department of Taxation to the Governor of Virg-nia, Fiscal Years Ending June 30, 1955 and 1959.

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119 TABLE 19 AVEKAGE RATE OF LEVY PER i^lOO OF "FULL" VALUE, FOR THE YEARS 195^ AND 1958 Counties and Cities Outside the Area of a Southwestern Virsinia Power Company Public Service Nonutility Corporation Real Estate Property 1954 Counties $ ,65 $ .83 Cities 1,1k .87 County-city average $ ,85 $ ,85 1958 Counties $ | ,97 Cities 1,11 .93 County-city average $ ,89 ^ ,95 Increase $ ,0^4 $ .10 Sources: Reports of the Departnient of Taxation to the Governor of Virginia, Fiscal Years Ending June 30, I955 and 1959.

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120 to support local government while being denied the advantage of having located within their boundaries sizeable investu-ents of plant and equipment of public service corporations. A third factor is that the counties in this area, enjoying an effective tax rate on public service corporations more tlian twice that on nonutility real estate, in 1954, and sensing the need for additional investment on the part of public service corporations, not only maintained the discrepancy between effective rates but also widened it, increasing the effective rate on nonutility real estate but .06^ while increasing the effective rate on public service corporation property almost twice as much, ,11^ per $100 of assessed value. To show that the situation existing in this area is not unique. Table 29 provides similar data for the counties and cities in Virginia outside of tula particular service area. While the average rate of levy per $100 of assessed value rose from .85^ to ,89^ on nonutility property, from 1954 to 1958, it rose from ,855^ to .9555 on utility property. Once again, due credit must be given to the cities, the average levy rate being reduced therein from $l,l4 to $1,11 on nonutility property even though utility effective rates were increased from ,37^ to .93ji. This does not compare favorably with the counties' increase in nonutility rates, from ,65^ to .74^, while increasing utility effective rates more, from .83ji to .970. When

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121 these Increases are i^elghted. It Is seen tliat the effective increase on public service corporations Is more than twice that on nonutillty property owners. Average Levies on Assessed Valuations Table 20 shows the movement of the real estate and public service corporation tax burdens, from 195^ to 19^3, Included in this table are the assessed values, taxes act'oally levied, and the average rate of taxation obtained by dividing actual taxes levied by the assessed values and multiplying the result by 100 to convert the average tax rate to a rate per $100 of assessed value. These data cover the entire state of Virginia although lack of sufficient data bars consideration of local levies imposed by incorporated towns for town purposes; however, it is not believed that such omission will materially affect the analysis or the conclusions derived therefrom due to the relative insignificance of assessed values of property located in the towns. As to ordinary real estate, it should be noted that the total taxes levied thereon, in 195^* amounted to $73,240,000 on assessed values aggregating $2,863,671,000, the average rate of taxation per $100 of assessed value being $2.56. In 1958, the taxes levied on real estate amounted to $105,937,000, the average rate of taxation being $2.68 on assessed values totaling $3*950,018. Thus,

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122 o c\j 0) (0 a; EH -p (1) ca -p •H o 'Jl •H -P C -< o o in ON rH f-l rH m o •» CO CX3 CVI r-l O Oi CQ 0) Q) rH CO «5 -P > 01 (U (U i-l ca CO CQ O CO CO ON CO vo CO OJ o in CO CM o H vo a\ w n •» ITV oo rH in t-i O CU en H CO ON O CO O -P •H CD O •H ta > c u o ca +> •H > rH rH H CO rO (0 « a. CO u o Ok o o CO in o\ H ca H CO CO -P > 01 n O rH ca CO ca © ca < (D u •H > U •> •> n vo cu VO in rH •I cu cvi -«»• Ol in cu a\ CO in CO pH o\ =r n •k •> n CO cn CO CU o^ in H CO •a •H > 0) H CO ca CD © cc: K 0 o •H 03 > c f^ O © fi m +5 CO o u •H O H a '2 ^ 3 o o

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123 although total assessed values increased over $1 billion, from 1954 to 1958, the average levy per each $100 of this assessed value increased only ,12j^. On the other hand, the total taxes levied on public service corporation property, in 195^^ amounted to $12,313,000, the average rate of taxation being $2.74 on assessed values totaling $449,512,000. In I958, the taxes levied on public service corporation property amounted to $18,916,000 on assessed values aggregating $613,092,000, the average rate being $3.06 per $100 of assessed value. This represents an increase in the average rate of taxation on public service corporation property of .31^> or over two and a iialf times the increase in the average rate levied on real estate. V It is also to be noted that in each year the average rate of taxation on public service corporation property iias been greater than the rate on real estate; further, the difference between these two average rates has widened from .iSji, in 1954, to .385!^, in 1953 • There are at least two explanations for these differences. First, it is the practice in certain localities to classify considerable portions of public service corporation property which is usually considered to be real estate as personal property and to subject such property so classified to higher 17 rates of taxation. ' That this practice is spreading is This subject is treated further in Chapter 6.

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124 to some degree evidenced by the inoreasing spread between the average rates. Second, larger investTr)ento of public service corporation property exist, perhaps, in those localities with higher rates of levy (and lower assessment ratios), accounting therefore for part of the disparity • between average rates. This is not to say, however, that the tendency exists for public service corporations to invest m high-rate localities but rather that those localities which are blessed with increasing public service corporation investment, with the attendant state assessment at 40 per cent of full value, have a propensity to raise rates and so increase the relative tax burden on public service corporations. Examination of similar data relative to one public service corporation located in that section of Virginia with notably low assessment ratios and high rates of levy, lends credence to the above explanation. In 1954, the average rate of taxation on real estate in southwest Virginia was 1^2.52 on an assessed valuation of $523,354,000. By I95S. this rate had risen to $2.80 on the increased assessed valuation of $652,607,000. Thus, the increase amounted to 2.^ as compared with the statewide average rate increase of only .IH* reflecting in part the tendency in southwest Virginia for localities to raise the rate of levy rather than adopt a revision in the assessment practice.

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125 ' \ % . Table 21 shows that the average rate of taxation on public service corporations, in 195^, was $2.96 on an assessed valuation of $130,893,000, some MjJ higher than that imposed on real estate, and ,22^ higher than the statewide average rate iwposed on public service corporations. Further, by 1958, this rate had increased to ^3.29 per $100 of assessed value, excluding any taxes levied by tovms for town purposes. Thus, in 1958, the average rate imposed on utilities in southwest Virginia exceeded the rate imposed on real estate by and exceeded the average rate on public service corporations throughout the entire state by .235^. The disparity be. tween the rates imposed on public service corporations serving southwest Virginia and those serving other localities Is enlarged if one considers the fact that the statev.'ide average rate of $3.06, as shown in Table 20, includes southwest Virginia, while if this section is excluded the average rate throughout the rest of the state is only $2,97. Thus it can be concluded that not only are public service corporations generally discriirjinated against but also that this discrimination is substantially more acute in southwest Virginia . Surnroary The degree of inequality in the assessment of various classes of property can be ascertained with a fair degree of accuracy by the technique of determining sales ratios.

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126 H Ol CO Q. B O o O (0 •H bO to c o "a o Cfl O 0} 4^ O 3 -H O o 03 o bO CD CO o; > CO 0) CO 0 ^4 to CI o ft +3 c o o CM CO CO CO LTV o^ 1-1 CO CO CO CO •» •» •> o CO CO CVl CO in H CO w © ro LTV co •H r-i o CO 43 n •I •H H a\ O a\ CO Oi (A03 © o 3 +3 © o •H CQ > G P< O CO -P a -p 03 © CO o © iH H a ra CO u 03 © 3 o © k; ot o lA ta C3 1-* < © CO © -p -H ca > © © H H OS ca © © cs:; 8 •H to !> C U O © tI CO O a u o 04 O CO lA r-i o OJ vo in CVl r-J H o o\ n •» •> CM CO cCO CJ CO a\ ON CVl OJ -«> OJ o n co in vo CVl •» VO CO r-t to © © H CO CO +5 a 4J © o •rt 01 > c u o © -H a © o •H © H iH Q. 03 CO P C3 © 3 CQ 03 CO o o u o 00 ON CVl 01 ro OJ o Oi o VO CVl OO •> n CM CO CO in in ciH vo H 00 -sr •» CO 01 OI o H ^ in O 00 a\ vo CTV © © •• -p T) CO © •;-> •H 03 > © © CO 03 © © cr; (0 c o © -H CQ -P CO o a o 04 O

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127 that is, the relation of the assessment to the selling price. In Virginia, this technique has revealed that sales ratios varied from a low of 6.5 per cent in one county to a high of 81 per cent in one city. Further, an interdistrict comparison of these ratios revealed that all of the exceptionally low-ratio districts are located in the southwestern part of Virginia. This concentration of lowratio districts in one geographical area has the result of Inflicting discriminatory taxation on those public service corporations operating mainly or exclusively in that area* Although assessment ratio studies are primarily of use in making inter-district comparisons, they can "oe of help in bringing to light variations in assessments that occur within assessing districts. Three localities examined in this study were shown to have unequal intra district ratios which lead to discrimination between nonutility property owners as well as between public service companies and other property owners. Of significance, also, in this examination of the assessment practice in Virginia, is the fact that assessment ratios have steadily declined over the years while the rates of levy have steadily risen. Since public utilities have continually been assessed at 40 per cent while the rate of taxation on this assessment has steadily risen, the effect has been to increase the effective rate of taxation on utility property relative to the effective

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128 rate on nonutillty property. Assessment administration and practice in Virginia having been examined for possible discriminations in the taxation of utility property, attention can now be directed toward the actual valuation and assessment; of such public utility property in order to complete the picture. c

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CHAPTER 5 VALUATION, ASSESSMENT AND TAXATION OP PUBLIC SEKVICE CORPORATION PROPERTY In previous chapters attention has been directed toward assessment administration and practice, particularly as there might exist the possibility for inequitable adrainistration of the assessment procedure In Virginia. It was found that nonutllity property and utility property are assessed at varying ratios of "full value" and that because of this practical deficiency public service corporations are presently being discriminated against. It KMB noted, for example, that one utility serves an area In which the average assessment ratio Is almost half that applieii to its property. This study is primarily concerned with discrimination against public utilities as a result of unequal assessment; however, it should be noted that unequal assessments are not the only means vjhereby utilities can be discriminated against. Thus far, this study has considered the lack of equality between the assessment of the full value of utility and nonutility property, with the attendant assumption that "full value" was either known or readily ascertainable. Although "full value" or "fair value" can be determined with reliability where there exists a market for the property in question, such value is not as easily 129

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130 obtained for property for which there is no active market, as is the case for utility property. Accordingly, value for ad valorera tax purposes wust be determined by some other means than the "willing buyer-willing seller" procedure. In this determination of value for ad valorem tax purposes care must be exercised if further discriraination is to be avoided. As one economist points out, "Overvaluation can be fully as discriralnatory as unequalized assessments. "••• Although this aspect of possible discrimInation is not the major concern of this study. It Is of such great Importance that some consideration of reasonable evidences of value seems desirable. No attempt will be made, however, to completely evaluate the various evidences of value as to their discrirainatorj^ possibilities; rather, each shall be briefly considered and the evidence which is used in Virginia will be determined, all with the full realization that adequacy and reasonableness are subject to some question and tliat the possibility for discrimination exists in this area. fo^ iTZci' ^s^ij?^' J^-* "Heproductlon Cost as a Basis for Ad valorem Railroad Taxation," Public Ut ilities Fortnightly (October 26, I961), p.

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131 The 'Ad Valorem System of " " Utility Property ' The advantages of assessing public service corporation property centrally under the "unit rule"^ have been decidedly great, especially when compared with the deficiencies of piecemeal, local assessment. Further, assessing the entire utility as a single unit has the advantage of including the intangible elements of value, especially in those cases where apportionment is necessary between states. The major problem falls into the area of valuation and it seems important at this point to give this area some consideration. Valuations of properties have come to mean different things to different people. Professor Glaeser has broken down the various meanings into the following categories*^ 1. Valuation for taxation. 2. Valuation for public purchase under eminent domain or under charter and special franchise provisions. 3. Valuation in connection with validity of security issues. This rule means that instead of the property of a public utility being valued piece by piece, the company's entire value is appraised as a unit. Some problems are encountered in the case of utilities with property in two or more states; however, some basis for allocation between states can be used, an example of which is relative track mileage as used in the case of railroads. Martin G. Glaeser, Public Utilit ies in American Capitalism (New York: Macmillan Co., 1$5 7 }, p. 273. '2,

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132 4, Valuation for accounting and insurance purposes and for private purchase and sa le , 5. Valuation for rate luaklng purposes, ,s'i. Although this study la prirrarlly concerned with the valuation of utility property for ad valorem tax purposes, the various evidences of value are frequently useful and used to satisfy more than one or all purposes. The valuation of property has received, historically|, . more attention in the assessment of utility property and in the regulation of utility earnings than any other single factor. Although the famous Smyth v. Ames case of I898 was concerned primarily with railroads, the decision was applicable to other kinds of public utility enterprises. At the time the decision was rendered it had little effect on utility taxation or regulation since there were few utilities, little regulation, and only nominal taxations; however, the effects of this decision grew paramount as both taxation and regulation of public utilities increased. In essence, the principle established in this decision was that the public Is entitled to protection against unreasonable rates but that the utility, by the same token. Is entitled to a fair rate of return for its services. According to the United States Supreme Court: The basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under -

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133 legislative sanction must be the fair value of the property being used by It for' the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and atock, the present as compared v^jith the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating =' ; expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters '.s to be regarded in estimating the value of the property. Wliat the company is entitled , to ask is a fair return upon the value of that which it employs for the public con• venience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a :;^^r, ii->r public higiiway than the services rendered by it are reasonably worth. ^ This decision leads to two major questions. First, what is a fair valuation of property, either on which to base the return or to ascertain taxable values? Second, what is a fair rate of return? The problem of what constitutes a fair rate of return is beyond the scope of this study. In this study only the baais for the valuation of public utility properties will be considered. • valuation of Utility Property Among the more prominent methods advocated today are: (1) original cost less depreciation, (2) reproduction ^ Sroyth v. Ames , 169 U.S. U66, 5^6 (1898). (Italics added.)

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13^ ©OBt less depreciation, (3) capitalised Income^ and (4) laarlcet prices of stock and debt. These roethods will be discussed In this order, ..... Original cost less depreciation Initially, original cost was defined as the aggregate Investment in the existing plant and equipment. Since the public utility industry grew by mergers, consolidations, and purchases of local firms, there appeared 9 vast difference between the "first" cost of acquisition and . the cost when taken over by the parent company in one of these consolidations, mergers, or outright purchases. With the revisions of the accounting systems in the early thirties came the method of costing plant and equijwneat at its "initial-use" cost. The first use of this method was made by the Wisconsin Public Service Commission, in 1931* when it required each electric utility, in its > system of accounts, to record all properties, subsequently constructed or purchased, at their cost as of the tine ^ the properties were first used in public service, A Fixed Capital Purchase Adjustment Account was provided to record the difference between the cost to the purchasing utility and the "initial-use" cost, thus excluding this excess cost from the valuation. This method, first •^ Uniform System of Accounts for Class A Electric

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135 proposed in Wisconsin, became generally adopted around 1936. The Federal Power Commission, the Federal Coimnunications Comraisaion, and the National Association of Railroad and Utilities Commissioners all adopted accounting classification systems vMhich required that plant and equipment subsequently acquired be recorded at its "original cost" in the uniform Account No, 100,1, Utility 6 Plant in Service. The definition of original cost which was adopted by the FCC is similar to that adopted by the NARUC and the FPC« In part, the FCC said that original cost is: ... the actual money cost of (or the , / current money value of any consideration r-vi , ' ' other than money exchanged for) property at the time it was first dedicated to the public use, whether by the accounting r. company or by a predecesaory public utility. This general definition meant that any type of utility which acquired plant or equipment which had been previously used in public service must record it at Its cost to the first company to use the facility for public service. Uniform System of Accounts Prescribed for Public Utili^FIes and Licensees , Federal Povjer Commission, dated June 16, 193b, effective Januar^/ 1, 1937; Uniform System of Accounts for Telephone Companies , Federal Comiounications Commission/ dated June 19, 1935* effective January 1, 1936; Uniform System of Accounts , NARUC, November 10, 1936. "^ Uniform Syatein of Accounts for Telephone Companies, Federal Comraunicat'ions Commission,' "dated June 19, 193$, effective January 1, 1936.

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: / 136 Thus it was that, in tooth court decisions and accounting circles, original cost of plant and equipraent to pub' . lie utilities was not defined as "initial cost" until • after the middle iy30's. The generally accepted theory prior to that time was, as stated by Paton and Stevenson, ^ that: ;• ^ . , it is the function of the property accounts to show the actual investment of the owners, not the amount which the investment would have been if the property had been purchased elsewhere." ;, Advantages of original cost leas depreciation . There are certain advantages inherent in the use of the original cost standard of valuation. First, it measures accurately the investors* sacrifice and anticipations, in terras of dollars, at the time of investment. Presumably, funds are obtained to acquire plant and equipment, and these funds are entitled, according to both court decisions and economic custom, to a "fair rate of return," Of course, there is the risk that this return may eventually prove inadequate due to the decline in the value of the dollar; however, that was a risk assumed by bond and stock investors and should be little or no concern of the public. If the Investor, for example, was willing to sacrifice |10,000 for a return of 6 per cent per year, then the original cost of acquisition of properties with the $10,000 should be the only basis for computing a fair rate of return to the investor. If he desired a return greater than 6 per cent, then the investor should not have invested

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.137 In the public utility, especially in the fixed incoioe securities of that utility, 0 ,;!Rius, the chief advantage of the original cost less • depreciation method lies in the fairness to the investor ; who desires a secure return on his investnjent. By virtue of the utility operating for the public benefit, the costs of capital should remain as low as possible, yet still provide adequate compensation for risks involved and for the use of capital. The utilities have found a way to keep this oost low and that is to provide secure returns. Where utility earnings are regulated on this basis ' it follows that the going-concern value, or fair market value for purposes of ad valorem taxation must correspond accordingly. , > = , Other advantages of original cost include the ease in which the original cost theory can be supplied. Since the adoption of accounting records which show "original cost," such adoption having been effected in the middle 1930»8, * it has been relatively easy to maintain good accounting records on acquisitions, constructions, retirements, and permanent additions. Further, depreciation methods have been standardized and improved records maintained which adequately record the expiration of these asset costs. Since depreciation charges are, in the main, allowable in computing the "fair rate of return," accounting records will show from period to period, through additions and . " deductions, the valuation upon which the utility is

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138 entitled to earn a fair return and above which It becoines Inequitable to assess the utility for purposes of property taxation. • • • The advocates of the original coat basis, of which Virginia is an example, argue further that this basis of valuation eliminates any consideration of increases in the prices of labor and materials, a consideration of which would not only be out of proportion to the original investment but also would necessitate accounting records whose cost to maintain would be unreasonably high* They argue further that the use of this basis of valuation prev«nto a rate base which is higher because of increased property values resulting from factors beyond the control or plans of the utility, such as population growth, municipal school planning and street construction, and con sumer living habits. , .' • • : • , . Disadvantages of original cost less depreciation . One of the chief complaints against the original cost less , depreciation basis of ascertaining value has been in the past the problem of determining the original costs. The early public utility enterprises maintained inadequate records and, further, the growth of the public utility industry had taken place through such numerous combinations, sales, mergers, and other financial devices as to obscure in the process the records of the original cost of property when first put into use for public service.

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139 However, on the whole, public utility properties today are not overly old aiid actual cost, even when not readily available, can be estimated accurately.^ ; Although depreciation methods have been standardized today so tliat the aeterminatlon of depreciated original cost values for rate-making purposes is administratively simple, many appraisers of utility property are not convinced that this administrative procedure reasonably depicts actual value of utility property satisfactorily for ad valorem tax purposes. There are two factors to be considered in the computation of the proper deduction from original cost to ascertain value which are difficult to measure. One is the physical deterioration of the property, the measure of which would pro'oably not find much general agreement* The other factor which should be considered, but which is as elusive as the measurement of physical deterioration, is economic obsolescence If general agreement could be reached on the luedBureraent of both physical deterioration and economic obsolescence, original cost less depreciation would be more acceptable as an evidence of value, providing that yet another variable is held constant. Unfortunately, the value of the dollar has neither remained constant nor ^Eli Winston Clemens, Economics and Public Utilities (New York: Apple ton-Century -Crofts, Inc., pp. 162-169.

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3!: have changes In the price level been of such insignificance as to negate consideration of the changes. However, this problem has not been given general consideration directly 1^ regulatory agencies v;hen establishing a rate base and It appears that for this reason there is some ^lustification for largely ignoring such changes in ascertaining values for tax purposes. Reproduction cost leas depreciation Reproduction cost, as so many other terms used In the field of accounting, and particularly In public utility accounting, has been defined in various vmys. One deflni* tion of reproduction cost Is that It is that cost v.'hich it would take to reproduce the property new, with no consideration given toward accumulated depreciation. In view of the fact that accumulated depreciation is not considered and the fact that prices for labor and materials have risen greatly since practically any prior date, this method of property valuation would provide a much higiier base on which to base rates and, if it were followed, on which to base ad valorem taxation. Its practical use as a method of property valuation was halted, however, almost before it started, by a United States Sypreme Court decision, in I9O9, which recognized depreciation

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,«s an existing and real item of consideration. The United •J&tates Supreme Court recognizecl depreciation by saying. In the Knoxville VJater Coinpany casef • A water plant begins to depreciate in :. • value from the inoraent of its use. The •'V-/ company is not bound to see Its property i: gradually waste, without making provision out of earnings for its replacement. It , : ; is entitled to see that from earnings the value of property invested is kept unimpaired, £0 that at the end of any given term of years the original investment . / • remains as it was in the beginning. It \. j. is not only tirie right of the company to : 1; make such a provision but it is its duty • V to its bond and stockholders and in the • case of a public service corporation, at least, its plain duty to the public, 1^ . . , By recognizing depreciation, the United States Supreme Court thereby eliminated the use of reproduction cost new aa a basis of property valuation. On this particular point, the Court said thatt : , : , , V, . ; . , . the cost of reproduction is one way , . ". ' of ascertaining the present value of a V • plant, but that test would lead to obviously incorrect results if the cost of reproduc* tion is not diminished by the deoreciatlon r", which has come from age and use. •'•J»' The ©ore common definition of reproduction cost as a tool in determining fair value Is the one in which the reproduction coat is reduced by depreciation to the present date, The arguraent advanced for the use of this •^ ^noxville v. K noxville Water Company, 212 U.S. 1, 13; 29 S. Ct. 14 B; 33 £d. 371 Ibid.

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lM2 computation, although it does not point out any inherent advantages in using this baae, at least poiats out the discrepancies in using a valuation based on reproduction cost with no consideration of depreciation. If depreciation is properly recognized as an operating expense, the net operating revenue figure will be reduced at least by the amount of the depreciation charges, such amount appearing as an increase in the operating expenses. This depreciation charge does not usually result in a cash fund set aside, but rather will result in an increase in other net plant assets. Therefore, by including the additional investment from depreciation charges along with plant properties which have not been adjusted by an depreciation, the valuation on which taxes and rates are based would be increased erroneously by the amount of the depreciation.' ,One of the main arguments for the use of reproduction cost less phjfsical deterioration and economic obsolescence allowances, at least for rate-making purposes, has been maintenance of purchasing power to investors. It is claimed that, were the price level to rise sharply and construction prices were to follow In the same manner, the Investors in the public utility v^ould suffer a considerable loss of purchasing power. The validity of thta argument is based on equity financing; however, to the extent that firms do trade on their equity, there is a discrepancy in this argument. Consider, for example. Table 22, which shows that the common stooidiolders, alone, are the only

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143 CVJ i 1 c o •H 5 -• 3 CO q o "a CO o o r^ p o a. Q. ^ no 0) 0 I-' tQ 01 fcO o u o o O Q 8 8 •> •» O CM n •> O rH CU o o o o o o o 03 o ra -p CO C9 o o o •I o tco +i "H iH CO £0 O K (i| Q O O « o c in O fU P w o -o O 0) •o o ><; o O CO o H O

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beneficiaries of the reproduction cost basis of property valuation in a period of rising prices. The purchasing power of the bond and preferred stockholders would be considerably less, assuiDxng that tne depreciated reproduction cost basis is indicative of changes in the general price level, and the purchasing power of trie common stockholders would be considerably greater, their dollar income being almost 400 per cent greater. By the same token, a period of falling prices will reduce the purchasing power of tne common stockholders, if noo eliminate it entirely. In the preceding example, for instance, were tne price level to drop substantially, the "fair return" of 6 per cent on reproduction cost might yield Just barely enough to pay the interest charges to bondholders, and might provide no return at all to the common stockholders. The only advantage accruing to bond and preferred stockholders in a period of rising price under the reproduction cost basis of property valuation would be the additional security afforded to the payment of their fixed 13 rates of investment return, •* The basis of the argument for a cost of reproduction basis of public utility property valuation came as a This rate of change will be affected by the relative proportions of debt and equity capital within a given firm, 13 "'Clemens, op, cit., pp. 152-153.

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result of the Smyth v. Ames case in which the United Soates Supreme Court considered numerous factors in arriving at the "fa.-r return." Until this situation was further clarified by later court dec-s^ons, the main prohlem seemed to be whether reproduction cost or original cost should be taken as the starting point in arriving at the fair value on which to base rates and on which to base value for ad valorem tax purposes. Prior to the "recent era," reproduction cost, decreased b;> depreciation and increased by an allowance for working capital and "goingconcern" value, was taken as the fair value for these purposes. This value varied with cirianging conditions and its determination resulted in many costly court cases, unduly prolonged proceedings, and decisions unsatisfactory to both the utilities and the pub lie -representing commissions. The procedure involved in applying the reproduction cost basis usually commences with an inventory of the properties actually used in public serv.ce. Upon establishing the properties to be considered the next step Is to "reproduce" these properties by applying unit prices of material and labor to the component parts, such unit prices having been estimated by some means, the final acceptance of which in the past was often disputed by both the utilities and the commissions. Other controversies

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have risen over the determination of the allowance for workng capital and special allowances for "going-concern" , 14 va lue . . • Determination of value under these conditions often has proved leas than satisfactory. The fii:ial determination would be a compromise, affording little protection for the public or the utility. In view of this controversy, the regulatory commissions and tne courts began, in the inid-1930»s, displaying a preference for a rate base which 15 did not vary with the price level. In 1923* Justice Brandeis, in a dissent ing opinion, said that the rate base, when using an original cost basis of property valuation, ' ... would be ascertained as a fact, not determined as a matter of opinion. It would not fluctuate with the markeu price of labor, or materials, or money. It would not change with hard times or shifting populations. It would not be distorted by the fickle and varying Judgments of appraisers, commissions, or courts. It would, when once made in respect to any utility, be fixed, for all time, subject only to increases to represent additions to plant, after allowance for the depreciation included in the annual operating charges. The wild uncertainties of tl-iQ present method of fixing 1^ / Emery Troxel, Economics of Public Utilities (New York: Rinehart and Company, W/), pp. iiBV-yV2^ ^. ^^ue to the falling prices and depression conditions prevailing in the early and raidthirties, tne utilitj.es themselves probably preferred a ra';e base of original Gobi and thus did not press for reproduction cost before regulatory commissions or in the courts.

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147 the (value) under the so-calied rule of Sm yth V, Ames would be avoided; and likewise the fluctuations which introduce Inco the enterprise unnecessary elements of speculation, create useless expense J and inipose upon tae public a heavy, unnecessary burden. 1" The change from reproduction cost to original cost as the more accepted basis of property valuations has come only after many years of turmoil and confusion. The ciiange is a result partially of better accounting practices necessitated by the chaos of the depression years and also of the desires of regulatory commissions, both federal and state, to have some clear method of controlling, analyzing, and Justifying rates. One eminent professor expressed the general feelings of the mid-1930»s when he said » The attempt to regulate rates by reference to a period c or occasional reappraisal of properties has been tested long enough to confirm the worst fears of its critics. Unless its place is taken by some more promising scheme of , . . control, the days of private ownership under government regulation may be nunibered.^' Although reproduction cost less depreciation may be useful in determining value for rate-making purposes, and l6„ Southwest, Bell Telepho ne Company v. United States, 262 U. i^. 27b, 30b-30V (1923J. ^ c. Bonbright, Valuation of Prop erty (New York: McGraw-Hill Book Company, 193V), Vol. 11, p. II90.

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1U8 raay be useful as an evidence of value for ad valorem tax purposes, its use in either case raust be made with some restraint. As expressed In one study J The assessor's objective is to assess a^ a uniform percentage of value, not of cost. If reproduction cost is a good test of the value of uonutility property and a poor test of the vaiue cf utility property, it is obviously Inequitable to insist triav it be used as a test of value in both areas. io Capitalized income Another method frequently discussed for the determina tion of the value of a utility is the capitalization of operating revenues at some rate which is assumed to be reasonable. As Professor Glaeser points out, "The capital sum so derived is also clearly dependent upon the existing earning capacity, and in addition, upon the assumed capitalization rate."'^^ Thus, to endow this method with creditability necessitates the resolving of two major questions. First, wiiat earnings are to be capitalized? Second, at what rate raust tr.ese earnings be cap_tallzed to most reasonably reflect current values? As pointed out by the Committee on Unit Valuation of the National Associat_on of Tax Adminisi-rators, "Tae "Committee on Unit Valuation, Appraisal of Railroad and Otl;er Public Utility Property for' Ad Va..orem Tax Purposes (Chlcaso: Federation of Tax Aduiinistrators, June, P. 8. ^^Glaeser, o£. cit ., p. 282.

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149 earnings that are to be capitalized, in pure appraisal theory, are the future earnings. Here, however, the question arises as to Just wlriat the future earninss will be. In most cases a review of the past will provide some guide as to the future; however, should only the past year be used? Or should an average of some number of preceding years be used? Or should past activity be adjusted for such things as current expectations and tax methodology? Should operating Income before or after taxes be capitalized? Should gross or net operating income be the amount capitalized? There appears to be no clear agreement in this matter. Dr. James W. Martin, as an illustration of one procedure, suggests that net operating income should be capitalized at 7.0 per cent, net operating income plus taxes should be capitalized at 9.5 . per cent, gross operating revenue (for railroads in Dr. Martin's proposal) should be capitalized at 58.2 per cent, and these three snould be given weights of 3* 2 and • 1 21 5 respectively. The rate of capitalization is subject to similar controversy. In addition to the incomes and rates suggested by Dr, Martin, others nave been suggested, each with equal ^'^Coramittee on Unit Valuation, 0£. clt ., p. 4. ^"^ James W, Martin, "Obsolescence and the Assessment of Public Service Properties," Proceedings of the Fifty -Third Annual Confe rence on Taxation, National Tax Association, l$bO, pp. 414-416.

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150 vigor and conviction. The National Association of Tax Adralnistrators, for example, derived a capitalization rate for electric power companies of M,62 per cent by weighting stock prices according to dividends paid and earnings 22 retained. Another writer obtained a capitalization rate by dividing net income before bond interest by the collec23 tive value of all stocks and bonds. Dr. Martin, in another report made to the National Tax Association, suggested that the rate of capitalization should be adjusted as between large and small companies, and that differences in the market values of securities resulting from dividend 24 policy or from capitalization structures be considered. Much research remains to be done in this area if many people are to be convinced that capitalization of earnings is a reliable evidence of value. As indicated earlier, it is beyond the scope of this study to resolve this problem; however, as one evidence of value this method does warrant some further consideration. 22 Committee on Unit Valuation, op. cit ., p. 5. ^^James C. Kenady, "A Fair Rate for Capitalization of Earnings," Proceedings of tne Forty -Sixth Annual Conference on Taxation , National Tax Association, 191334 PP» ^ib-^ifi^. James W. Martin, "Deriving a Capitalization Rate by Statistical Analysis: A Progress Report," Proceed In^js of the Forty-Sixth Annual Conference on TaxatToh , National Tax Association, I9i33, PP. ^'^3-^31.

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151 Market prices of stock and debt In keeping with the basic accounting equation that assets must equal the sum of liabilities and owners' equity, it is felt by some tnat the sum of tne market prices of stock and debt represents the market value of assets, A report of the National Association of Tax Adminlstrai;ors states that "... it is the only way in which the assessor can objectively give consideration to the ii25 prospective earnings of a corporation. On the other hand. Professor Glaeser points out that the market value of stock may well depend upon the quest for control of the company and that "the summation of the market value of securities is not a measure of the invested capita^, and its use « . . is vitiated ty the fact that its value depends upon the very income tx.e reasonableness of which is being called into question, "^^ Although there may be others, at least three difficulties in this procedure immediately present themselves. First, the "basic accountin*, equation" has never purported to show anything more tiian assets and their sources at cost. To attach to this equation any other meaning, such as evidence of value, could be misleading. Second, the market prices of stocks frequently reflect factors otner 'Committee on Unit Valuation, o£. c it . , p. 7. 'Glaeser, o£. cit ., p. 282,

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152 than anticipated earnings, many of which are not easily susceptible to analysis. Finally, market prices of securities are determined through the sale of a relatively small proportion of the total securities outstanding, and it might be questioned whether this reasonably reflects the value of the property which all securities outstanding represents. There does appear to be, however, more Justification for using this method of determining value for ad valorem tax purposes than for rate-making purposes, and continued study of this method as an evidence of value may result in more general acceptance of It. Assessment of Properties of :, , Public Utilities in Virginla^ T -jo-.r:--'The laws of Virginia governing the assessment of the property of public service corporations for tax purposes are administered by the State Corporation Commission, a constitutional agency of the state having regulatory and administrative powers. This commission not only assesses the properties of utilities but also administers the laws regulating rates, services and financial structure. Public service corporations in Virginia are subjected to a dual system of taxation, the Commission being required to : , ^"^The data presented in this section are based upon personal Interviews with and materials supplied by Mr. Lee B. Younger, Assistant Director, Public Utilities Taxation, Virginia State Corporation Commission. The conclusions drawn similarly represent those of Mr. Younger. Further, there does not appear to be much open dissent ion from these views in Virginia. Date of Interviews: July, i960.

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153 assess and tax the franchises of public utilities for state purposes and to assess their real and tangible personal property, except the rolling stock of public service corporations, for purposes of local ad valorem taxation* / Public utilities are rarely sold, and when sold in Virginia, the same original costs by accounts are entered on the acquiring company's books. The property of a \^ public utility is used to generate revenue and the economic value of such income -producing property depends on how much income the property can produce. Since the State Corporation Commission regulates the income which the property of a public utility can produce, generally speaking about 6 per cent on the original cost less depreciation of its property, the property cannot be worth more than the original cost less depreciation, and represents the maximum value of the property to its owners, ' the stockholders, or to the purchaser of a public service corporation. The property of public utilities Is reported to the CormDission by the companies annually on a reporting form designed to show the geographical distribution of property showing particularly in what city, town or county and school district the property is located. These forms are* further designed so that all property of the utility may be returned by classes as prescribed by the appropriate

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154 section of the Code. For example, the classes of property required by statute to be reported separately for electric utilities are as follows: / : . ... (a) Land and improvementG • , • (b) Generating and substation equipment (c) Transmission and distribution lines . • • : , (d) Underground conduits, conductors and ,' .)'• devices (e) Line transformer a (f) Services (g) Meters (h) Street lighting and signal systems (1) General equipment (j) Material and supplies (k) Merchants capital (1) All other property not enumerated in any of the foregoing heads and whether used in , public service operations or otherwise. In addition to being designed to comply with the Statutes the forms have been designed to conform to the plant accounts set forth in the Uniform System of Accounts for the various utilities which was adopted by the National Association of Railroad and Utilities Commissioners, in 1S36, and prescribed by the Virginia State Corporation Commission, in 1937. This permits a ready comparison between values returned for assessment purposes and the amounts carried at depreciated original cost of the various classes of i property on the books of the company and used in Virginia for rate-making purposes.

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155 V The oomponents of construction cost considered for purposes of ad valorem taxation Include contract work, labor, material and supplies, transportation, special machine and shop service, protections, injuries and damages, privileges and permits, rents, engineering and supervision, general administration, preliminary engineering, insurance, legal costs, taxes, interest during construction and all other expenses and overheads in connection with the addition of plant to the utility. The usual procedure in Virginia in making an appraisal of electric, telephone, gas or other public service corporations' property is to first make a physical inventory of the property and then to conduct a study of depreciation applicable thereto. This procedure has been facilitated by the requirement of the Virginia Commission that the accounts of utilities be set up on original cost in accordance with the Uniform System 23 of Accounts. This requirement, made in 1937* necessitated a, physical inventory of utility property set up by taxing districts. Continuous property records, maintained by the utilities, through additions and retirements each year both as to quantities and costs, provide a perpetual Inventory. Work orders issued by the utility show the tax district in which the work is done and these work orders are the means of keeping the continuous property records up to date. Uniform System of Accounts, NAftUC, 1936.

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156 One of the most important factors considered in deterolning the assessed value of utility property Is depreciation. In this respect, the State Corporation Coraraission disregards the book reserves for depreciation or amortization and computes its own allowable depreciation for the various classes of property. In order to ascertain this, depreciation studies of two groups of public service corporation property are made. First, a study is made of / . the depreciation on individual major items of property such as structures and generating equipment. For the • other group the depreciation is determined as an average figure applied to classes of property such as pole lines, open wire lines, transormers and meters. The depreciation studies consist of studies of company records and consider ation of various depreciation methods such as Iowa tables, age dollar, and inspection of the physical property,,.,. . The major public service corporation properties generally are maintained in a relatively stable condition. From . these Commission studies and its experience over the years in assessing public service corporations, the CowiBlBBion believes that the over-all depreciated value of a major utility will run about 80 per cent of original cost and the average age of most items of property will be approximately ten years. These values so assessed by the State Corporation Comraisslon are not taxed by the state for state purposes; rather, they are certified to the various localities for

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157 local taxation. These local taxing districts, moreover, 60 not assess the other nonutlllty property at its full value but at varying fractions of its full value, as haa been observed in an earlier chapter. Since Virginia law requires the local taxing units to tax property assessed by the State Corporation Coimnission at the same rate as other property in the taxing district, the Coinraission, in order to achieve equalization, has heretofore equalized the value ascertained by it at ^0 per cent of full value. This practice, although it has been shown herein to be . Inadequate, at least Is evidence that the Virginia State Corporation Conraiission is of the opinion that equality in taxation means equality in the burden of taxation ini.' total, not mere equality of applied rates or of assessment, I' Summary In this chapter some discussion of the development of utility taxation and of the assessment practice, especially as it is applicable in Virginia, has been presented. Generally, the most pressing problem has been the determination of value where there is no active market. Unfortunately, there is no handy solution to this problem. As expressed in one report: Value is a relative thing; there is no v.; such thing as "intrinsic value." Value cannot be measured with the assurance of \ accuracy that we measure a pound, an hour, ' , • V or a mile. Two or more assessors, equally competent and diligent, are likely to , ^' • ,

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158 differ in their assessment determlna— tions. Yet the range of disagreement must be relatively small if each of the29 • divergent findings is to merit respect. Among the evidences of value considered were original cost less aepreciation, reproduction cost less deprecla= tion, capitalization of earnings, and market prices of stock and debt. In addition to these evidences of value considered separately there exists the possibility of combining certain of them. One writer, for example, suggests that a reasonable indication of a utility's value would be 25 per cent consideration of capitalized earnings, 25 per cent consideration of market value of stock and debt, and 50 per cent consideration of cost data. For purposes of this study, however, the controversy surrounding the various evidences of value appears unimportant. In Virginia, ad valorem value is ascertained by a consideration of depreciated original cost, and this method is apparently acceptable as reasonable to all parties concerned. Better evidences of value may exists some of which were discussed in this chapter; however. • •'Committee on Unit Valuation, o£, cit ,, p. 9. ^%ean Ellis, "problems in the Use of Stock and Debt and Income Factors in the Assessment of Telephone and Electric Utilities," Proceedings of the Fifty-Third Annual Conference on Taxation, National Tax Association, 19tiO, p. 401. : ' ^ ' '/,

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159 the method which presently exists in Virginia will be cJeenjed acceptable for purposes of this study as long as no ready controversy is apparent. ''.'V There is no lack of controversy, however, in the allocation of assessed values, however determined, to the taxing districts. The classification of utility property Into categories of realty and personaltj^', for example, presents some problem, especially when different rates of taxation are imposed on these classes of propertyii. This controversy is discussed in the following chapter.

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CHAPTER 6 CLASSIFICATION AND TAXATION OP TANGIBLE PERSONAL PROEESTY Property tax theory historically has accepted the tacit presumption that ownership of property Is prima facie evidence of the capacity to pay taxes and, further. Is a fair measure of both the benefits and protection afforded to the owner by government. Thus, the general theory has held that all property, real or personal, should bear a proportionate share of the cost of govern1 went. That most property was homogeneous in nature was a reasonably accurate assumption during the early years of property tax theory and application. The country's eoonoiny was predominantly agrarian and society was relatively classless, there being a fairly equal distribution of wealth and income. However, as the economy developed into the more complex and interrelated segments characterizing today's society, the basic theory on which taxation of property rested veered sharply from the reality of economic facts. There developed strata of heterogeneous property, the result of which was exemption of certain classes from Jens P. Jensen, Property Taxation in the United States (Chicago: University of Chicago Press, 1931J* P. 7» 160

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16X taxation, separate classification of certain property for taxation at different rates, and some substitution of other types of taxation for the property tax itself. Directly as a result of these variable approaches to a scheme of taxation based on property ownership, tangible personal property is today not taxed universally and, where taxed, is subject to varying tax treatment according to the legislative and administrative desires of the state or locality. The extremes in the taxation of tangible personal property are presented by Illinois, where all types of personalty are subject to taxation, and by Delaware, New York and Pennsylvania, where all types of personalty are specifically exempted from ad valorem 2 taxation. Between these extremes are those states which entirely or largely exempt personal property not used In business pursuits or which specifically tax as personal property commercial and industrial Inventories, agricultural implements, domestic animals and other types of personalty. Where there are exemptions from taxation there must necessarily be some inequality between taxpayers In their relative tax burdens. . . i , These legal inequalities leave the door open to economic inequities and might create more problems than . U.S. Bureau of the Census, Taxable Property Values in the United States (1957 Census of Governments, Vol V, 1$59), p. ^. -

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162 ,i ' V specific exemption of certain Items solves. Thus, as the economy continues to develop and becomes more complex, additional exemptions, brought about by economic necessity or political expediency, may well tend to create more problems and perpetuate and multiply such inequities as already exist. A half century ago, when the economy had not yet reached the apex of development, if even today It has, one study of the problems of tangible personal property taxation concluded that such taxation was undesirable and Inequitable " , , , due to the inherent defects of its theory; that even reasonably fair and effective administration is unattainable; and that attempts to strengthen such administration simply accentuate the inequities and unjust operation of the system."^ ,. . . . : It is argued by some that taxation of tangible personal property is possessed of so many evils and inequities that, if It is at all possible to raise revenue in another way, taxation of this class of property should be abolished. Not only is taxation of tangible personal property difficult to administer, so the argument goes, but also It is an unsatlsfactorjr means of measuring either the benefits derived from government or the ability of the taxpayer to -^ Addresses and Proceedings of the Fourth International Conference, resolution adopted by the conference of the International Tax Association, Columbus, Ohio, 1910, p, 25,

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163 pay.^ However, ownership of property, real or tangible, indicates some benefit received and some ability to pay which, if not measurable, are at least existent. Therefore, taxation of all property, real and personal, remains in most states. ..ja . The Relative Position of the Personal groperty Tax "". „.,. ;,,, That many states have effected a trend away from the use of personalty in the general property tax base, or have declined to include this component in the first place, is shown in Table 23. In addition to the three states which impose no tax on personalty, five others place notably low dependence on the taxation of personalty. In Maryland, for example, personal property comprises but 3»1 pe^f cent of the total assessed values subject to taxation. Other , ,, states in which personal property makes up less than 10 per cent of the total assessed value subject to taxation include Massachusetts, New Hampshire, New Mexico and Tennessee. On the other hand, five states have locally assessed personalty constituting one-third or more of the total, . , these states including Georgia, Mississippi, North Carolina, South Carolina and West Virginia. The greatest dependence is made by South Carolina in which personal property comprises 42.5 per cent of the total value subject to taxation. Carl Shoup, et al.. Facing the Tax Problem (New York: Twentieth CenturyTuHa", Inc., I937J, PP. ^11-412,

PAGE 181

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PAGE 182

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165 It is interesting to note the geograph-cal dispersion of the per cents of total value subject to tax which personal property comprises. There -s only one southern state, Kentucky, in which personal property is less than 17.4 per cent, the national average, of all assessed value subject to tax, while such states as California, Illinois, New York and Pennsylvania are examples of those which do fall in this category. To the extent that inequities are inherent xn the imposition of tax upon personal property one might conclude that the more industrialized sections of the country have made greater progress in achieving equity in taxation. Though no ready explanation of this situation is available to defend cogently, it may be of value to note that in the southern states, which include a relatively large per cent of personal property in the assessed value subject to tax, the average percentage of public service corporation property In relation to the total is 10,2 per cent as compared with a nat_onwide average of only 4.9 per cent. Further, the assessed value of farm acreage is l6,0 per cent of the total as compared with a national average of only 13.9 per cent, and the assessed value of industrial property is only 7.1 per cent as compared with a nationwide average of 10.8 per cent. -'U.S. Bureau of the Census, Taxable Property' Values in the United States (1957 Census of Governments, Vol. V, •L959J, p. 22, Table 2.

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166 Real and Personal Property Defined There are today some twenty-six states in which tangible personal property comprises 20 per cent or more of the value subject to taxation, Virginia being one of these states. In those states which have retained the tax, or in wnich heavy reliance upon personal property in the tax base is made, the definition of real property tends to be narrow while the definition of tangible personal property iB more all-inclusive. North Carolina As an example of such definitions the North Carolina law is a case in point. In this state real property is defined as follows; The terms "real property," "real estate," "land," "tract," or "lot" mean and Include not only the land itself, but also all buildings, structures, improvements and permanent fixtures thereon, and all rights and privileges belonging in or in any wise appertaining thereto except where the same may be otherwise denominated by this subciiapter or the Revenue Act, After defining intangible personal property in a similarly narrow fashion, tangible personal property is broadly defined as including "all other property."' In North Section 105-272 (30), General Statutes of North Carolina, '''^Section 105-272 (ll). General Statutes of North Carolina,

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167 Carolina, It should be noted, tangible personal property coraprises some 33.3 per cent of the total assessed value 8 subject to ad valorem taxation. New York , • On the other hand. New York State, which expressly 9 exempts personal property from taxation, atoaches a much broader definition to real property The entire provision of the New York law is worthj' of presenilation* 12. "Real property," "property" or "land" mean and includes (a) Land itself above and under water, including trees and undergrowth ohereon and mines, minerals, quarries and fossils in and under the same, except Wi-nes belonging to the state; (b) Buildings and other articles and structures, substructures and superstructures , erected upon, under or above the land, or . . affixed thereto, including bridges and wharves and piers and the value of tne right to collect wharfajie, cranage or dockage thereon, but shall not include bulk milk tanks or coolers installed upou a farm to hold milk awaiting shipment to market; (o) Surface, underground or elevated railroads, and railroad structures, subs&ructures , and superstructures, tracks and the metal thereon, branches, swi-cches and other fix• tures permitted or authorized to be made, laid or placed ...n, upon, above or under I ' any public or private street or place; See Table 23. Section 300, Real Property Tax Law, Ch. 50-a, C.L., State of New York, provides: "Notwithstanding any provisions to this chapter or of any other general, special or local law to tlie contrary, personal propert;y, whether tangible or intangible, siiall not be liable to ad valorem taxation.

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168 (d) Telephone and telegraph lines, wires. Doles and appux'tenancesi supports and enclosures for electrical conductors and any other appuri-enanceB, upon, above ana under ground; (e) Ma 'ns, pipes and tanks permitted or authorized to be made, laid or placed m, upon, above or under any public or pr-va^e street or place for conducting steam, heat, water, oil, electricity or any property, substance, or product capable of transportation or conveyance therein or that is protected thereby; (f ) Boilers, ventilating apparatus, elevators, plumbing, heating, lighting and power generating apparatus, shafting other t'nan counter-shafting and equipment for the distribution of heat, light, power, gases and liquids, but sliall not include movable machinery or equipment consisting of structure or erections to the operation of whicn machinery is essential, owned by a corporation taxable under article nine-a of the tax law, used for trade or manufacture and not essential for the support of the building, structure, or superstructure, and removable without material injury thereto; (g) Forms of housing adaptable to motivation by a power connected thereto, commonly called "trailers" or "mobile homes, which are or can be used for residential, business, commercial or office purposes, except those (1) located within the boundaries of an assessing unit for less than sixty days or (2) unoccupied and for sale. The value of any trailer or mobile home shall be included in the assessment of the land on which it is located; provided, however, that if either the trailer or mobile home or the land on which it is located is entitled to .any exemption pursuant to article four of this chapter, such trailer or mobile home siiall be separately assessed in the name of the owner thereof;

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l69 (h) Special franchises as defined in subdivision seventeen of this sect ion. •'^ Effects in States Where Personalty Is Hot Subject to 'taxation In New York, v^nere the law spells out its Intent to Include particular items of property as real estate, there can exist little discrimination between taxpayers as a direct result of improper or arbitrary classification of property. Naturally there have been and no doubt will cpntinue to be some borderline situations in which case some inequity may exist; iiowever, many of the evils of arbitrary classification are eliininattd under the scheme of taxation which exempts tangible personal property and which reasonably and adequately defines real property. Effects in States Where Personalit y 18 Taxed ' ' On the other hand, in those states wnere personal property is subject to taxation, many persons and businesses, including in particular public service corporatious, suffer discrimination not only from the fact that such taxatlon exists even wnere classification of properties is reasonable and equitable, but also increasingly so as their properties are arbitrarily classified or as variances m the rates of taxation on real and personal property are Introduced, Ch, 50?irc!L/°^' ^^^^ Property Tax Law, state of New York,

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The mere fact that some segments of taxable values owned by individuals and nonutillty corrpanies escape the tax rolls places an added burden upon the public service corporations whose property is, by virtue of the requirements for reporting to regulatory commissions, a matter of public record. That no property of a public service corporation escapes the tax rolls is assured to the tax qolleotors while it is reasonable to assume, as discussed earlier, that some portion of Individual and nonutillty tangible • personal property escapes taxation entirely either through omission or understated valuations. The Problem of Determining Value of ' Tangible Personal Property The determination of value for taxing purposes is one of the major problems facing local taxing authorities; moreover, it is the failure to determine value accurately and inclusively which places an inequitable burden upon those taxpayers whose property is fully valued and all of which is included in the tax base. Market value, as usually defined by most writers in this area, is the price-aggregate for property obtained from the bargaining of a willing buyer and a willing seller. Unfortunately, this standard i» of little practical value to the taxing authorities where there are no willing buyers or sellers bargaining for property, where there is no normal or active market in which the determination of property values can be made.

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171 This is most generally the case with public service corporation property, a fact which leaves value determination to administrative and judicial Interpretation. For this reason, the assessment goal is more popularly one of uniformity rather than assessment at full market value. Where assessment at market value is an unattainable objective and where uniformity in assessment is not achieved, inequities must exist, there being no other objective way of allocating the tax burden. That neither assessment at full market value nor uniformity of assessments is achieved, as has been shown to be the case In Virginia, appears to be the common complaint In most states and localities. Further, the evidence on which the above conclusion is drawn is most usually obtained from studies of real estate assessments. Assessment procedure and practice as pertaining to tangible personal property can reasonably be Inferred from the real estate studies; however, state and local efforts at equalization have been concentrated on real property, leaving inequities in assessments of personalty untouched. In Virginia, the classification of much public service corporation property as personalty, together with varying rates of taxation on realty and personalty, places an unjust burden on these public service corporations.

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172 States VJhere Realty an(3 Personalty ~" Are Taxed Alike In the administration of a scheme of property taxation in which the same tax rates are applied to both real and tangible personal property, local assessment of properties and rates which vary between taxing districts have been the rule rather than any centralized system of taxation within the state. Further, as has been pointed out, few assessments have ever approached full market value even in those states where so required by their constitution. The practical result has been inequality between the various taxing districts as well as within the taxing district Itself. In such a situation It is likely that assessments are "negotiated" to fit local needs and that favoritism exists. At any rate, the theoretical concept of uniformity and equity has not generally been followed. It ia possible that the result of local classification, assessment and rate of levy would result universally in what a New Jersey Commission described as the case in tliat state some fifteen years ago. It reported that "... there is no discernible pattern in assessment practices as they apply to personal property or for that matter to any property in New Jersey. •^ Second Report of the New J ersey Commission on State Tax Policy , mi. P. 7.

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173 States Wciere Property Is Classified Where property is differentiated by classes, and differ ent rates of taxation are allowed by lavn, such as is the case in Virginia, the state is said to have adopted a "comprehensive classification" system. The underlying theory for classification and rate differentials apparently is a recognition of the heterogeneity of property. It is argued that the various classes of property are possessed of different earning powers and, therefore, should bear a share of the tax burden in some relation to the variable ability to generate income. Perhaps the most reasonable argument is that which attaches fiscal expediency to this scheme. Under any circumstances, however, where property is classified and subjected to varying rates of taxation, it becomes of paramount Importance to adopt some system of proper and equitable classification. The Classification of Public Service Corporation Property in Vir^rlnia' For purposes of this work it is necessary to limit consideration to Virginia's classification system as it particularly affects public service corporations. The inequities arising out of centralized assessment of utility properties as a separate class have already been examined. In this section only the results of local classification into categories of real and personal property are afforded consideration.

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174 Classification by the Virginia State Corporation Commission In Virginia, the State Corporation Commission is the assessing body of public service corporation properties, although the real and tangible personal property of these corporations is specifically reserved to the taxing districts for purposes of local taxation. The assessments of electric utility properties, to illustrate the procedure as it is applied to public service corporations, are 12 classified into the following categories:* 1, Value of land and improvements 2# Value of generating equipment, steam hydro, internal combustion 3» Value of station equipment, transmission and distribution Value of overhead lines, transmission 5. Value of overhead lines, distribution 6. Value of underground conduit, conductors, and devices 7. Value of line transformers 8. Value of services • 9. Value of meters 10, Value of installations and leased property on customers' premises 11. Value of street lighting and signal systems 12, value of general plant equipment 13. Value of material and supplies. 12 Statement Showing the Assessed Value of the Property of Electric Light and Power Corporations , state Corporation Commission of Virginia, 1939.

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175 There Is nothing to indicate, in the above classification system, however, which items are to be considered as real property and which are to be considered as personal property. This question is left to local taxing agencies which apply the appropriate local tax rate against each class of property as it might be classified by the localityj that is, into categories of real and personal property. Basis for classification To answer the question as to the extent property which is attached to land in such a fashion as to be thought of as a part of land is subject to real property taxation, 13 certain tests have been developed in the Virginia courts. First is the test of "annexation" of the property to the realty. Although this test leaves some room for clarification, there is merit in considering annexation to mean much the same thing as "imbedded in," "built upon" or "permanently attached thereto." Second, the test of "adoption" is accorded great weight in the determination of whether property is realty or personalty. Generally speaking, if equipment, for example, is essential to the function for which a building is used, the courts apparently will consider such equipment as realty, or at least Danville Holding C orporation v. Clement, 178 Va 223, 2 3'2, ib 2d m7m (wi).

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' 176 this factor is one of those which must be considered. Finally, intent should be afforded strong consideration. One writer has suggested by means of generality that real property Includes "iraproveinents of such a permanent character as to achieve the attributes or characteristics of real estate, "''^ Unfortunately, no well-defined basis for classification has yet been established by either legislative or judicial action, although the above general guides have been helpful in individual cases. Because of the lack of any well-defined principles In this area and 15 the provisions in Virginia law, local option exists as to the classification of public service corporation property as real or personal property, ' The problem of public service corporations in Virgln'lia' The problem of public service corporations in Virginia Is manifested by two things. First, the State Corporation Commission makes no distinction between real and personal V/illiam H. Sager, "Property Classification for Taxation," Virginia Law Review , Vol, 43, No, 8, December, 1957, p, 13297-'^ 15 It 'The words 'lands,* *land' and 'real estate* are defined to include lands, tenements and hereditaments, and all rights and appurtenances thereto and interests therein, other than a chattel interest," Va. Code Ann,, Sec, 58-758 Supp, 1956, "However, the real estate of public service corporations is not assessed under the general provisions of the statute concerning real estate assessments." Va. Code Ann,, Sec, 58-758, Supp. 1956.

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177 property, classifying all property into the functional categories described earlier. In spite of a provision of Virginia law which provides that the State Corporation Commission report to the localities on the character of property subject to taxation, the Commission has declined to do so, leaving this decision to the localities. If the question as to whether property is real or personal ia a proper question of the property's character, then the State Corporation Commission should make such a determlnatlon under the Virginia law. In fairness to the State Corporation Commission, however, it must be pointed out that its position is not without merit. If the Commission were to effect a mandatory segregation of its assessments into classes of real and personal property, this might result in increased utilization of rate differentials, the effect of vihich would be to promote discrimination in the taxing of public service corporations rather than to alleviate existing inequities. Ihe second factor which accentuates the problems of public service corporations in Virginia is the fact that, ' given the option, there is a natural tendency for local Section 53-612 of the Code of Virginia. 17 'This is the position taken by a staff of legal advisors to private utility interests in Virginia, per memorandum dated May 25, i960.

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i78 assessors to classify all public service corporation property, except land and land improvements, as tangible personal property, or at least to so classify as much utility property as possible. This, of course, is to their distinct advantage in those areas which have adopted a higher rate of taxation on personal property than on real estate. Thus far this device has been concentrated in, though not limited to, the cities due to the pressing needs of cities for increased revenues, the natural result of urban population concentration; however, the potentiality of it "catching on" is great and warrants some additional consideration of its effects. Practice in Virginia All property, both real and personal, is subject to taxation in Virginia. Further, it is the practice in Virginia of some sixteen cities, eight towns and seven counties to charge variable rates on taxable property 18 located in their territory. In all cases, except one, in which the tax rates are different for real and personal property, personalty is taxed at a higher rate. The one exception, the Town of Cedar Bluff, liaa relatively little taxable property at all, thus rendering further consideration of this isolated exception of little importance. Of Local Tax Rates , Tax Year 1959, Bulletin No. 109, The Department or Taxation, Commonwealth of Virginia.

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179 far more importance, however. Is the significance of variable rates generally as presently employed in the remaining tax districts. The fact that there exist in these areas different tax rates on real estate and tangible personal property is not in Itself illegal or inequitable. In fact, due to the inability of local assessors to have complete information of all tangible personal property located in their districts, through omission of items by taxpayers on their . returns, undervaluations by taxpayers, and lack of sufficient technical assistance in local tax administration, it is understandable that a locality might charge a higher rate on tangible personal property to offset to some extent the effects of omission and undervaluation. Further, the Virginia Constitution does not prevent the establishment of separate rates of taxation. Such a procedure, also, does not violate the "uniformity" provisions as all taxpayers within the taxing district would be subject to the same rates of taxation on like property. The inequity exists, however, in those cases in which there is classification of certain utility property, ordinarily and reasonably considered as real estate, as personal property and accordingly subjected to the higher rates. The most common practice in the case of electric light and power companies, for example, is to classify land and improvements on land as real estate while classifying all other property as personalty. This

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180 classification is the case in fourteen of the sixteen Virginia cities having variable ratesj in each of the 19 towns, and in five of the seven counties. Some evidence and discussion as to what should reasonably constitute real property for purposes of taxation has already been presented. However, in those cases where the rates of taxation on real estate and tangible personal property are identical, the classification of property between realty and personalty is largely academic. As more and mors taxing districts adopt a system of variable rates and as the amount of investment in these localities continues to grow, the importance of proper classification of property is greatly magnified. In the preparation of tables 2h and 25, an investigation of the tax levy on both real and personal property of electric light and power companies In Virginia was undertaken for two periods, the tax years of 1949 and 1959* and in those localities only which had variable rates in The City of Bristol has a rate of taxation on tangible personal property which is per $100 of assessed valuation higher tlian imposed on real estate; however, this study has been limited to a consideration of the effects on taxpaying electric light and povier companies only. Bristol is served by the Tennessee Valley Authority. The City of Martinsville, although having a higher rate on tangible personal property, has not employed it in the taxation of electric property located therein, continuing to apply the lower real estate rate. Two counties. Chesterfield and Orange, also have a higher rate on tangible personal property; however, they have classified sufTicient electric property as real estate so as to eliminate any unreasonable levy which might otiierwlse be imposed on such electric property.

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184 existence. In each of the localities considered, the local assessor determined the value of land and improvements on land as real estate and assessed all other property as personalty. • Tables 26, 27, 28 and 29 show the rate of taxation applicable to each class of property for the same two periods. In addition, tables 26 and 28 show the actual classification of electric light and power property, and tables 27 and 28 show a suggested classification which included not only the values of land and improvements on land as real property but also the values of generating equipment, station equipment, transmission lines, distribution lines and underground equipment. It was felt that these items, under the guide of txie principles mentioned heretofore for classification, should properly be so included as real property. Although under certain conditions some of the remaining items logically could be considered as real property, they generally are looked upon as tangible personal property. Therefore, these items, which Include the values of line transformers, services, meters, installations and leased property on customers' premises, street lighting and signal systems, general plant equipment, and material and supplies, were so classed as personal property. Data available for the year 19^*9 show that there were only three cities and three towns with different

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T TABLE 28 ') ACTUAL CIASSIPICATION OF ASSESSED VALUE OF EI£CTRIC LIGHT AND POVJER COMPANIES HI VIRGINIA AND RATES OF TAXATION PER iplOO OP ASSESSED VALUE LOCALITIES EMPLOYING VARxABLE RATES ON REALTY Ai® FEi^QIiALTY, 1959 Tangible Tax , Personal Tax Real Estate Rate Property Rate Cities $23,463,905 $3.50 Alexandria 15,^95,335 !^3.15 Colonial Heights 380 1,20 211,960 2.50 Danville 18,293 1.50 i 335,738 3.50 Falls Church 1,090 ^•^ oil 2,84 184,412 3.09 Hampton 631,251 HI 2,771,193 4.10 Hopewell 22,864 2,45 719,337 3.10 Newport Nevifs 29,868 3.00 2,480,485 3.30 Norton 1,849 4.50 . 148,808 5.50 Portsmouth 29,750 2,50 1,494,396 2.75 Richmond 2,672,859 1.88 9,727,857 2.20 South Norfolk 22,667 2.32 ; 450,662 2.75 Virginia Beach 53,683 2.75 1 372,774 4.75 Williamsburg 2.10 1 310,108 3.75 Winchester 44,274 1.50 ! 515,398 2.25 Towns Abingdon 89,638 1,85 i 196,132 6.00 Boyklns 1.00 A 33,794 1.25 Capron 220 .40 i 10,581 1.00 Cedar Bluff 1.35 1 17,573 1.00 Kilmarnock 128 .20 \ 42,607 *30 Stephens City .60 11,962 .90 Tappaliannock 100 .35 ! 51,609 1.50 Warrenton , 2,589 1.70 1 41,392 1.80 Counties 1,507,261 Arlington 102,032 3.54 4.39 Essex 270 1.75 296,027 3.50 Henrico 57,318 2.00 4,250,006 2.90 Lancaster 868 1.55 i 417,559 2.35 Madison 28,027 2.90 ' 432,752 3.40 pi Sources : Local Tax Rates, Tax Year 1959, Bulletin 109, Department of Taxation, Commonwealth of Virginia, Report of the Department of Taxation, Fiscal Year Ending June 30, 195$, Commonwealth of Virginia, I • r

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188 . TABLE 29 SUGGESTED CIASSIFICATION 0? ASSESSED VALUE OF EIECTRIC LIGHT AND POVIER COMPANIES IN VIKGINIA LOCALITIES EI-IPLOYING VAHIABIE RATES ON REALTY AND EEBSONALTY, 1959 Land and Generating Station Iiapro^enignts Equipment Equipment Cities ' Alexana ria • 15,^95,335 $18,721,246 ^,801,841 Colonial Heights 380 — 13,098 Danville 18,293 — 324,500 Palls Church ' 1,090 Hampton . 631,251 146,338 , ,903,201 Hopewell \. 22,864 — , 263,224 Newport News V 29,868 --576,697 Norton 1,849 . p*9,676 Portsmouth v 29,750 ' 297,856 Richmond £,672,859 2,089,027 1,892,575 South Norfolk 22,667 — 77,382 Virginia Beach 53,683 — 67,797 WilliaraslDurg 33,^66 — . 39,150 Winchester 44,274 97,1^^ Towns ' i SFIHgdon 89,638 --^'i 16,330 Boykins ' — 9,015 Capron 220 — 2,828 Cedar Bluff — — — Kilmarnock 128 Stephens City Tappaiiannock 100 —^j 10,128 war rent on 2,589 , ^^^ j Arlington 102,032 — . 995,118 Essex 270 14,500 . 11»555 Henrico v 57,313 --886,648 Lancaster 868 — -1 . 30,389 Madison ' 28,027 6,450 . 26,963 Sources ; Local 'x'ax Rates, Tax Year 1959, Bulletin 109, Department of Taxation, Commonwealth of Virginia, Report of the Department of Taxation , Fiscal Year Ending June 30, 1959, Commonwealth of Virginia », ,

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139 TABLE 29 (extension) Overhead Lines UnderTotal Total Tang ID le TransDistriground Real Personal mission butlon Equipment Estate Property $ 44,123 $ 452,812 $ 592,398 (^27,107,755 i^l, 651,485 90,739 --104,217 108,123 5,993 — 3^8,786 5,245 13,129 69,054 — 83,273 102,229 81,511 5^0,721 5,430 2,308,454 1,093,990 7,847 187,960 — 481,895 260,306 367,232 601,101 3,150 1,578,098 932,255 6,196 33,130 — 50,851 99,806 413,393 216,085 957,084 667,062 56,168 1,195,600 1,059,241 8,965,470 3,435,246-: 9,684 165,291 16,425 293,^49 179,880 34,015 591 206,086 220,371 — 57,354 49,166 179,136 164,438 2,99^ 44,655 — 189,047 370,625 471 25,419 — 131,858 153,912 7,927 ' — I6,q42 16,852 3,450 — 6,498 4,303 6,881 166 7,047 10,526 — -13,482 — 13,610 29,125 524 3,621 — 4,145 7,817 15,072 — 25,300 26,409 , 16,870 — 19,459 24,522 44,471 800,821 1,228,306 3,170,748 1,438,545 ' 93,830 77,363 — 197 318 98 979 377,390 1,225,752 13,713 2,560,821 1,746,503 225,404 12,200 268,861 149,566 16,155 205,964 — 283,559 177,220

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190 rates of taxation on real and personal property; further, no county had at that time yet resorted to using varying their levy rates. In these localities only land and land improvements had toeen classified as real estate, the remaining functional classifications, as certified by the State Corporation Coraraission, being classified as tangible personal property. This resulted in an improper classification of certain electric properties as tangible personal property which generated but $8,069 additional revenue, $6,955 ot which was obtained from the two electric light and power cora22 panics with taxable property located in Alexandria. This discrimination was wholly the result of classification of certain real estate as personal property. However, the amount vjas,. in 19^9, small enough to overlook, the total net difference between actual taxes and hypothetical taxes, $8,069, representing only a small percentage of the total tax burden. , It is ?il30 Dtrnif icant to note that classification of cer' tain electric properties as personal property, usually considered real estate in most localities, was more pronounced and had greater effect in the cities than In the towns so employing this device. Urbanization and the increased demands so imposed upon city government accounted for the search, and apparent solution, for additional revenues in '"^The companies so affected were the Virginia Electric and Power Company and the Potomac Electric Power Company,

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191 these localities. The counties had not yet been as hard pressed for such additional revenue, nor had the towns, although a few had already commenced the practice. In the ensuing decade, however, and as demands for governmental services exceeded the wherewithal to pay for them, more and more localities, as indicated in Table 25, adopted this technique of classifying utility property in the large as personal property on which there was imposed a higher rate of taxation. By 1959* the number of cities imposing different rates of taxation on realty and personalty had grown from three to fourteen, while the number of towns so doing had grown from three to eight. Further, five counties had adopted this practice, by 1959* where none had been using it, in 19J^9. Again, the classification of the major part of an electric light and power company's property as personal property resulted in an Inequitable tax burden on these companies when compared with the taxes which would have been levied had this property been classified with reasonable regard to its nature. This reclassification of such property is shown in tables 27 and 29. It should be noted that the excess of actual taxes paid, in 1959* by the electric light and power companies in Virginia, over those computed by proper classification of property amounted to $202,4^5, an increase in this particular discrimination of some 2,409 per cent since

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'I ^ 192 1949. This is partially accounted for by the increase in the number of localities employing this device; however, as is shown in Table 30, there has also been a more effective utilization of this method by those localities which had already adopted it. ' ' ' Table 30 shows the differences between the rate of taxation imposed on real estate and that imposed on tangible personal property in each of the counties, cities and towns which, in 1959, imposed varying rates. Not only does this table show the increase in the number of localities using variable rates, from six in 19^9, to twenty-seven in 1959* but also it shows that the average difference between these rates, ,364 per $100 of assessed value, in 19^9, had risen to .88^ by 1959* ' Although the calculations presented in these tables show the existence of this particular inequity to electric light and power companies they do not show the total effect of the "rate of class discrimination" on the property of all public service corporations. Further, these calculations fail to disclose the intent of other cities, towns or counties to employ such a device in the future* As an example of the possible inequity to all public service corporations, if the "rate of class discrimination" were to be applied to the assessed values

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193 i TABLE 30 . "rate of class disc riminat ion" trend sellcted years, 19^9-59 1949 1952 rrr. 1953 1955 iq56 1957 1958 1??9 Cities .25 $ ^ .75 $ Alexandria .40 $ .25 $ .25 % .75 ' .35 Colonial Heights .25 .25 .GO 1.30 1.30 Danville .25 1.40 1,40 1.40 X.40 i.p5 Falls Chui'ch 1.65 1.65 .25 .25 .25 .25 .25 HaraDton 1.65 1.55 1.50 1.45 1.35 Hone'iJiiGll ' A*w , .65 .65 .65 .65 .65 .65 .65 .65 NevjDort News .40 .15 .15 .25 .25 .30 Norton 1.00 1.00 1.00 1.00 Poi'tsKiouth «MII> .25 .25 Richmond .30 .32 .32 .32 .32 South Norfolk «»<> .50 .25 .25 .35 .^3 .43 Virginia Beach — 2.37 2.37 2.37 1.75 2,00 2.00 Williamsburg WW .25 .25 .10 1.35 1.05 .75 .75 .75 .75 .75 Towns ... i Abingdon 2.40 4.15 4.15 Boy kins .25 .25 .25 .25 .25 .25 .25 Capron .60 .60 .60 .60 .60 .60 .60 Cedar Bluff (.35) Kiliuarnock .15 .15 .10 Stephens City .30 .30 .30 .30 .30 .30 .30 Tappaliannock .75 .75 .75 .75 1.15 1.15 1.15 Warrenton .10 .10 .10 .10 .10 .10 .10 Counties Arlington •29 .56 1.21 .99 1.05 .85 .85 Essex 1.75 1.75 1.75 Henrico .70 .90 90 ,90 Lancaster 1.20 .80 .80 .80 Madl&on .50 .50 •50 .50 Nuaber of localities using variable rates 6 10 13 13 22 25 26 27 Average rate $ .36 . \ .88 Sources; Local Tax Rates , Bulletins 83, 89, 9I, 95, 97, 99, 101 and I09, Department of Taxation, Commonwealth of Virginia. ®The excess, or spread, of the tax rate on personalty over the rate on realty.

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19k of all public service corporation properties, in 1958, the additional tax burden imposed on these utilities would have amounted to $5*^39*208. ' ' • • • • • The Personal Property Tax Solution as Proposed W Utilities There is considerable support, especially among the public service corporations, giveti x.o the argument that all utll ty property should be classified as real estate. This argument \;akes -ts roots in a study made by the > Virginia State Corporation Commission, under Judge iipea, around 1927 . As a result of this study the Commission came of the opinion that the "average ratio for Virgin..a of • > assessed value to actual value of property owried by individuals and ordinary business corporations is 40 per cent or greater," It has been questioned that much value could have been attached in that study to a consideration of assessment ratios on tangible personal property; therefore, the "40 per cent rule" must iiave been based, either 23 "^Derived by applying the existing average "rate of class discr miiiatlon" of ,88^ per $100 of assessed value (see Table 29), against the assessed values of all public service corporation property as reported by the Virginia Department of Taxation for tiie tax year, 1958, 24 Letter of September 17, 1927, from Judge Epes to M, L. Stanley, Vice-President of the Seaboard Airline Railway Co., quoted in a brief of counsel oa beiialf of intervenor Appalachian Power Company in City of Rlchrnocjd y. Commonwealth of Virginia, Ex Re., & C and ooaers (cita tion, p~, 10) .

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in large part or in total, upon an examination of real estate assessments. Accordingly, since public service corporation property; assessments are based upon a rule derived from real estate ratios, the public service c rporations should be taxed at those rates applicable to real estate, and not at those rates imposed on tangible personal property. Not as a part of the argument itself but as a result of its implementation is the fact that taxat on at the lower real estate rates would partially offset over-assessmeut of public serv ce corporation property which obtains from the imposition of the 40 per cent rule to all utility property while nonutility personal property is generally assessed at a much lower ratio to full value, if it is assessed at all. To the argument that all public service corporation property should be classified as real estate for purposes of taxation, it may be responded that such an assumption is not true, Just in the same way tiiat it has herein been argued that classification of certain public servxce corporation real property as tangible personal property is , an improper classification. A more desirable solution would be, it seems, to correct the exist ng error rather than to offset its effects with another and equally glaring error. The opponents of the personal property tax have confined themselves to a portrayal of its practical shortcomings and have offered weak solutions. No one has as

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yet attempted to explore the deeper reasons why the personal property tax is unsuited to the present generation. The purpose of the following section, then, is to consider the practical defec&s of the personal properv^ tax as a part of the general property tax. Practical Defects of the Personal Froperly Tax The practical defects of the personal property tax may be treated under five headings* lack of unlfornii.ty in assessment, lack of universality, incentive to dishonesty, regressivity, and double taxation. Lack of unifortnity Much has already been said in an earlier cnapter concerning the lack of uniformity in the assessment practice in Virginia, and of the practical effect on public service corporations. In the present chapter some attempt has been made to show the injustices arising where, by classification of certain utility property as personalty, public service corporations are subjected to a separate and distinct type of lack of uniformity. As has been indicated, in most states constituional or statutory provisions require assessment of property at its "fair casii value" and in all states it is expected that the valuation snail everywhere be made at a uniform rate. In Virginia, and presumably in most states, property is rarely assessed at the same ratio to full value or is it taxed at the same rate in any two continguous counties. As between

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localities such assessment practice leads to undervaluations which give a fallacious view of the public resources; as between individuals, and corporations. It results in injustices. The first constitutiouai injunction, that of unifonaivy of taxation, is frequently violated. An escape from these evils has been sought in the creation of boards of equalization. The equalization procedure in Virginia iias >een iraperfectly successful for it has been impossible for each assessment to be given the comprehensive scrutiny equalization would require. Further, even if staff and resources were available for proper equalization it is doubtful that the desired goal could be reached. As aptly expressed some seventy years ago, the competition "between counties to reduce assessments has not ceased and in all probability will not, as long as assessors are elected, or selfishness be a passion in the human breast. "^^ Further, equalization proceedings in Virginia are initiated by the taxpayer and it is doubtful that many taxpayers know when they are inequitably assessed, much less possess the ability to present their position to a board of equalization. ^^ Report of the California State Board of Equalization, iab5 and Ibbb, p. 4,

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198 Lack of universality There has been some failure In the efforts to tax all forms of property, in particular personal property, except where its existence and availability for taxation r*as been facilitated by statute. Personal property does not generally bear its Just proportion of the tax burden; moreover, it is mainly in those localities where its extent and importance are the greatest that its assessment is the least. The taxation of personal property frequently is in inverse ratio to its quandtyj the more it increases, the less it pays. The reason seems clear: so far as it is intangible, personal property escapes the scrutiny of the most vigilant assessor; so far as it is tangible, it can be purposely exempted or undervalued. The following data, relative to Virginia, substantiates these statements. The total value of real estate in Virginia increased from $1,872,862,498, in 19^9, to $4, l66,5l8,8oG, in I959, 26 an increase of 122,5 per cent. During this same period of time, the total value of personal property Increased from $451,683,093 to $951,022,313, an increase of only 110,6 per cent. The total value of real estate in the City of Richmond, a highly urbanized area. Increased from $369,470,765, in 1949, to $719,050,280, in 1959, an increase of 94,6 per cent, although the total value of personal The data in this paragraph were obtained from the Report of the Department of Taxation to the Governor of Vireilnia for tiie fiscal years ending June 30, 1950 and June 30, i960.

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199 property increased only 79.6 per cent during this same period of time, froin $59,^28,795 to $106,763,7!;0. The relative ciianses taking place in the City of Richmond appear more significant when compared with similar ctianges taking place in one of the rural localities. For example, in Washington County the total value of real estate increased 22.7 per cent, from $5,929,890, in 19^9, to $7,275,550, in 1959, although the total value of personal property increased 94,7 per cent during this period, from $987,395 to $1,922,035. These figures become more significant when it is remembered that in today's society the value of personal property exceeds that of real estate, as understood by the taxing power. Personal property includes the entire and increasing annual production of agriculture and industry, the mass of modern wealth devoted mainly to consumption. Available data indicate that the more differentiated the industry and the more predominant the personalty, the less does the latter contribute; until, as in Virginia, realty pays 79.8 per cent and personalty but 20.2 per cent of the total property tax; and in Virginia's largest city, Richmond, realty paid 83,4 per cent and personalty 27 only 16,6 per cent. On the other hand, in Shenandoah ^'i^ Taxable Property Values in the United States, 1957 Census of Governments, Bureau of the Census, U.S. Department of Commerce, Vol, V, Table 21, pp. 125-127,

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200 County, a relatively rural locality where one would expect little wealth in the form of personal property, realty comprised 52.6 per cent of assessed values sut»ject to tax while personalty comprised 47.4 per cent. Incentive to dishonesty Another feature of the tax on personal property is that many attempts to enforce tne taxation of this class of property by more rigid methods result in evasion and deception. As has been indicated, in personal property tax returns, where taxpayers are required to fill out under oath details of every item of their property, the inducements to perjury are increased. Tiie imposition of the personal property tax frequently is restricted to those who are not informed of the means of evasion, or, knowing the means, are restricted by a sense of honor from resorting to them. This fact was realized by a Cleveland Chamber of Commerce tax committee many years ago when it reported that: , . , the existing system is productive of the gravest injustice; under its sanction, grievous wrongs are inflicted upon those least able to bear them; these laws are made the cover and excuse for the ^.rossest oppression and injustice; above all and beyond all, they produce in the community a widespread demoralization; they induce perjury; they invite ^^Ibid.

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201 concealment. The present system is a school of evasion and dishonesty. The attempt to enforce these laws is utterly idle.^S Although the final report of the state tax study commission for West Virginia, in i960, contains no indication of an awareness of the problem presented in this chapter, an earlier report concluded that "the payment of the tax on personalty is almost as voluntary and ia considered pretty much in the same light as donations to the „30 neighborhood church or Sunday-school." Thus, it 18 concluded that there are discriminations in the personal property tax, particularly when one class of taypayer, the public service corporation, is faced with enforced disclosure of all of its property. Regress ivity Taxes are progressive when their increase Is more than proportionate to tne increase in the value of the property or the income taxed, or when the rate itself increases with the increase in the value of the property. Taxes are regressive when the effective rate increases as the value of the property or the Income decreases. The general property tax in its practical effects is often regressive, and is even more so when the tax on personal 29 Report of the Special Committee on Taxation , Cleveland Ciiamber or commerce, iByij, p, 10. — 30 Preliminary Report of the Tax Commission, State of West Vi rginia, p. 10.

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202 property Is levied generally on those who already stand on the tax assessor's books as liable to the tax on realty. Two illustrations of this point serve in defense of this assertion. First, public service corporations, by virtue of the requirements for reporting their property as imposed by the Virginia State Corporation Commission, are effectively limited as to the amount of persot^ial property which may be withheld from the tax assessor's rolls. Second, many localities offer their citizenry the privilege of reporting their personal property as a flat percentage of their real property, ostensibly to avoid the complica31 tions and annoyances of preparing a list of personalty,'' Double taxation Double taxation is of various kinds; however, there is one form which is particularly applicable to the property tax, namely that of debt exemption. It is maintained that, in determining the values subject to taxation, an allowance should be made for all indebtedness, whetner mortgage debt on real property or general liability on personal property. Persons should be taxed on what they own and not on what they owe, for to tax both borrower and lender is double taxation. -' Roanoke City provides an example. Here a taxpayer may either list his personal property or arbitrarily assume its value for tax purposes to 10 per cent of the value of his real estate.

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203 The taxation of personal property stems from the desire to make the general property tax equable by including not only the real property but also other forms of . property. The attempt is intelligible and even laudable for it represents the manifestation of the ideas of equity and universality of taxation. Personal property must not escape; therefore, it must be included in the designation of general property and taxed along with real property. Although the attempt is laudable it is also futile. Personalty will evade the most inquisitorial assessor; consequently, the general property tax resolves itself ' ' . into a real property tax. Historically, the property tax has oeen a collective tax imposed upon the landowner; however, as soon as society oecarae more complex and property v^as split up into various kinds and in many hands, the single property tax became more Inequitable and less valuable, for the attempt to include under one tax the gains flowing from widely different pursuits and the attempt to reduce the multiform to the uniform has ended in the exemption of many new forms of property and a consequent overburdening of the old. The next step in history was to recognize the practical Inadequacies of reducing heterogeneous properties to a common denominator and to adjust the theories of taxation to the economic facts. Thus, as property is divided into its various elements, governments have proceeded to impose new taxes.

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20l| not on the property but on the separate sources of this new wealth. It is for this reason that some governments have initiated taxes on Income, on sales, and on franchises, all of which are attempts to achieve the equity in taxation which disappeared when taxable property became more than juat real property, . . In this chapter the effects of the personal property tax as administered In Virginia, especially on public service corporations, have been discussed. Based upon these data, it appears that the administration of the personal property tax has resulted in some discrimination, A review of tne general theory of the personal property tax reveals that not only is there some discrimination of utilities because of questionable classification, but also that the tax on personal property Is universally possessed of certain deficiencies. Although there are certain defects in this scheme of taxation, as there are in the whole scheme of ti;eneral property taxation, there are at the same time the advantages of relative ease of collection and fulfillment of the needs of local government. These factors, plus political considerations, make the complete abolition of the property tax on the local level extremely doubtful; however, reforms in the taxing process can make the ad valorem tax system more palatable and more equitable. There is evidence now of the evolution of modern tax commissions encouraging and assisting an Improved

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205 it assessment practice at the county and local level. This trend has, at least in the larger urban centers, improved real estate valuation practices for assessment purposes. In one of the cities In Virginia, for example, the treasurer has stated that he feels "... Virginia needs some definite reform in its assessing and taxing practices. The present situation is one in which certain localities, in addition to raising their own revenues for local purposes, are also paying the taxes of other less responsible localities through the media of both state assessments and utility rates. "^^ This same local official vnent on to advise tiiat a " , . major step in the right direction would be a more realistic assessment of local property, at least upward to the same level at which our public service corporations are assessed.""^ Thus, to many who believe that the property tax is here to stay but who realize the need for reforms, the problem of assessments is paramount. These persons seek to achieve the optimum result where each assessment, above all, will be uniform. Although the property tax has remained as the principal source of revenue to the local governments, it has undergone evolution. Further, there Johnny H. Johnson, Treasurer, City of Roanoke, Virginia, address delivered to the Local Government Officials* Conference at the University of Virginia, Charlottesville, Virginia, August 30, i960, ^^Ibid.

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206 is some indication that this change has not been in the unit taxed, but rather in the assessment practice. To the extent that the assessment practice continues to be improved to a point of equity and unifonriity, many of the objections to this system of taxation will be overcome. However, as imperfect as the existing system of taxation might be, and as ideal as the recommendations for change might be, practical obstacles are encountered in any attempt at reform. As expressed by one writer: ... in few fields are economic principles more distorted by the realities of practical politics than in the field of taxation. Any equitable readjustment of a tax system will be opposed by the political groups profiting from the existing system. Politicians from a rural area containing a concentration of utility property will oppose redistribution of tax receipts on any but a property situs basis, , , , In taxation, as in regulation, as in public ownership, as in all government, • abstract principles of policy give way. to practical considerations of politics. 3^ Having examined some of the problems Involved In the taxation of public service corporations, and realizing the practical limitations of any radical reform, this study can now turn to possible reasonable alternatives to achieving greater equity in utility ad valorem taxation. The following chapters will consider possible alternatives which maintain elements of the ad valorem tax system. Clemens, op, clt ,, p, 5^7.

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207 under the notion that "an old tax is a good one," while Introducing measures which might lead toward lessening the discrimination of puhllc utilities under the ad valorem tax system as it exists in Virginia today.

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CHAPTEH 7 REFORMS IN THE TAXATION OP PUBLIC SERVICE CORPORA^xIONS, PART I In previous chapters the lack of uniformity which obtains from widely varying assessment ratios in the various localities and some of the practical defects of the ad valorem tax system were discussed. In Virginia, though property tax assessments for public service corporations are made by the State Corporation Commission annually at 40 per cent of "fair market value," assessments on real estate of non-public service corporations and local taxpayers are made differently in the various counties and cities of the state. It is thus desirable to seek some plan which will bring about uniformity in taxation between centrally assessed public service property and property locally assessed and taxed. A further major problem in connection with ad valorem taxation stems from the multiplicity and relatively small size of the local taxing districts. Such homogeneity as these local taxing districts once possessed becomes diminished as large industrial plants and public service corporations locate their plants therein. The investment of such large amounts of capital, under the present system, greatly enriches the tax base in these localities, although the 208

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209 plant workers themselves often locate in other localltlee, bringing the tourden of education and other puhlic services with them. Thus, the differences between taxable resources and sovernmental costs create considerable revenue difficulties. The problem is further compounded when it is realized that the tax burden, to the extent t'nat it falls on the consumer, may well rest on a locality which is neither that in which the utility's property is located nor that in which the utility's employees reside. Aside from the complete elimination of the ad valorem tax system and a substitution therefor of a tax based entirely on productivity, the route of reform can take three directions. First, is a greater equalization in the assessment practice. To the extent that this is impossible or impractical, the second broad method of achieving needed reform takes the assessed value of centrally assessed property, namely tiiat of the public service corporations, and reallocates such assessed values back to the localities for taxation on some basis or bases which may be deemed more equitable than situs. Tl^ third alternative involves centralized assessment with centralized taxation, the revenues so realized to be redistributed to the localities on some equitable basis which considers productivity as well as situs.

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210 Elimination of the Present Ad Valorem > !l?ax System on fuDllc utilities There are two possibilities In this respect. First, if it la accepted that the public service industry is already close, by way of current taxes on Income and the franchise tax, to being taxed mainly on productivity, and if It is felt that equity can be better achieved by taxing such corporations entirely on the basis of productivity, then a departure from ad valorem taxation in favor of local taxes on revenues would not be untenable. The second possibility Involves removal of public service corporation property from the local tax roles, transferring the taxation of this class of property to the state. Both of these possibilities will be given brief consideration. Local taxation on the basis of productivity This method would impose a flat rate of taxation on the operating income of the public service corporation, and the revenues so obtained by this means of taxation would be distributed to the various localities on the basis of their relative contribution to the operating revenues of the company. This overcomes the Inequity which exists when the expenditures made by a company to render service to the consumers in locality A in tax revenue redound almost exclusively to the benefit of locality B. It does not, hovMever, make allowance for the increased governmental costs of locality A as a result of the location of the utility's

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211 property and etnployees, to the extent they reside in locality A, This cost may or may not have any relation to the revenues generated within that locality; in any case, this method ignores that conBideration. Table 31 illustrates how this method would operate. In 1959, the total taxes paid to city and county governments by one public service corporation studied amounted to $2,523,160, The total operating revenues generated by these localities amounted in ttiat year to $40,68^^,802. This Indicates an effective rate of taxation of approximately 6,2 per cent. Since the goal in this study is to examine more equitable means of distributing the tax burden rather than a reduction per se of utility taxes, the 6,2 per cent rate of taxation can be retained. Thus, it is only the distribution of the ^2,523,160 which would be affected by this method. Russell County, in which substantial generating equipment is located, received 23 per cent of the company's total taxes paid to cities and counties although it contributed only 3.2 per cent of total operating revenues. At the other extreme, Roanoke City generated 13.8 per cent of the total operating revenues while receiving only 4,8 per cent of the total taxes. To the extent that the incidence of taxation has been shifted to the consumer of electric power, the citizens of those localities which do not generate a substantial portion of the company's revenues

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212 H CO a 9 o VO O H lA H (0 n-l -P C (U -P o 04 C H H (0 CO o CQ iH a> eo O -H •H +> -P Q iH •P C © P O 04 3q 01^ 0) © o friKO 3 a rH -P •» c C CO la o © cv] 0) O LTV X F4 •« (0 ©Oi E-« Oi-&> o © to Cvl •o o © PiCO ©VD > © ^» K © O 10^ C3^ ! •H rH eo O o ^ O CVJ CVJVO rH iTvinco^co CO 'vO oj H J^ ^~vo •»•»•»•»<»•> J* ONCOCOrH t~ VO iH COCU W <-i Oi I I I I i I I i i t I i I I I I I i mcOH iTkH ir\ OCD C\ri CVl O •» •» n n n CVlJOCVl CO rH iH rH t>Ol H J»COC0I>-t>-*.0 t-VO 00 CO OJ CVJ VO o ovo o tvO-:3-v£>vO CVl CO b-COrH COCVl^ CVl CO [O^^ COrH coinvo u'^^-cv^ o foaxsrcDco • «•••• COHfXJrH CO H O rH ca H ©H X C rH CO ca rH § W "D © .Q C F4 ^ j:3 -H o O O -P |;^ G C !h CO CTvojcorH lino ivoooo I iHvg • icrx rH CVl H CO I CVl 00 I O lAVO » I O 00 I • iTk ISrH I CO t-I coco CO I I -=r m < i •=»" 0\ CO H COt-CVI t*PO covo CVl 00 o\ I I I « if\ I « CO « I • cvjja; I I mo i I I I IQ I « CO I t I coco I IVO^ I I I I I 00 I I t*I I t CO CO » 1 • CVl cocvi CVl coco iAt-00 o cvj rH !s.j*co o r^vo q fOcOrH incooo CU o cocojif t-vo t-iAO ^-o^ oo^ cOLfvcoD^co o*^ coltvco cno Svo rOa\ CVl OMACTv VO COrH d-cvi cocoovoi r-t^^-Lr\ coint^vD^.:^' inoj COrH CVJ CO rH rH CO H (7v H CO'vO CVl ^ O OV^ cvico t>-rHvoo coo incu vomcorH rH rH rH t-cvi o^vo cvl CVl o inw-=r.^r ovrH cocMncvj 00 inoco^ ino omorHcvjcoovo oMnm CVJ CVI^ rH::! CVJ CVl rH rH^r © © © O •P O -P -O S O 'O 0«iH C O. © H B «9 fsOrH rH C © H ^> O c o n c bO © -o E ?4 (0 O to fli P4 c C rH 10 3 <0 ca © a o A G >4 ©

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213 C3 ino 1 O r-i 0) coco Qsr 1 CO C8 O -H ov=r o m 1 a\ •H +> -p •>•»•» •> t>C G H W HH M © -H CO ri •P CO O O O Q 04 sA rH (Q •H •P •p o 04 0) O -H p 4J CO (8 O O o no r-t (D •> 3 X lACO p (0 crvcvi O E-i H LT* ^ CM 0) to CO PQ CQ K (0 © o CO rH COO ocu o m F< OOi i-l CO OJ O 'O o 000 P 3 -P • ^ G C8^ o © ^co 'J> > ©VO © c tn © O © o-=r I4 -c ca © •H •H (0 o .3 I CX) r-l I ONVO I COCO I voco I OOCO I IS"^ •» n oj m I I I I VO t CO:* I » OJ I » I I I I r-t I COON I i Co i t I I I I O • fOC«I I CO I I H Q ro ctOH in CJVXJ COPOO rH O fO^-t-^^ ^ Lr\cr\H c*-iHod cvi o m ^ OJ in^oavo b-vo -0 coco lA^ OJ H VOOJ-:^CO t>--coojco^ OJ 01 Xi © c H P a o o 03 © P c o IP c o C OJ > CO CO © H o © +> x: c o +> c car4-PcQSa)'p-p©,C© iH-P-pHeocao >»N tool ©aj-H3O3OEe8<0'H © P C5> o n VO CO i-H O •» VO CO O VO CO OJ •» 01 O CO OJ in n OJ +9O o • o o fH CO -P O •a •p CO P4 c © 0} © <1> ^ (0 O o o G o •H -P H 09 O a O o -a «> H © "a F4 O 0) •H -O c o o. Q. < © (17 ?0 CO o o © a B O o a o u M a o ON tn H (0 © 5 rH -P o

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23A are being subsidized at the expense of the remainder of the company's customers. Table 31 also shows that if the total taxes paid by the company, in 1959, were to be distributed to the local ities solely on the basis of revenues generated, each city served and over two-thirds of the thirty-one counties would have received more tax revenue. Of the ten counties whose revenue would decline, the losses of two counties would account for over 85 per cent of gain to all the counties and cities combined. Further, some portion of the loss in revenues which would be sustained by the remaining eight counties under this method of allocat ing taxes to localities is accounted for by the imposition of higher levy rates on classified personal property of the power company. If that inequity were corrected, the potential losses in revenues as shown in Table 2^* would be considerably less and, in fact, could result in gains to some of those localities calculated to show a loss. The revenues obtained by the public service corporation illustrated derive from one n«in source, the sale of electric power. All of the cities served by this company, and twenty-one of the thirty -one counties, purchased over 81 per cent of the power generated, while participating in only $922,958 of tax revenue paid by this company out of a total of $2,523, 160, or but a little over 36 per cent»

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215 This method of allocating taxes to the localities on the basis of revenues generated therein, though overcoming the defect of taxation on the basis of situs, does not appear to be the best solution. It presupposes that taxation on the basis of revenues is equitable and that taxation on the basis of situs Is not. Situs taxation has been seen to have its inequities 5 however, it does not follow that relative revenue allocation is equitable. For example, one county may have within its boundaries certain manufacturing concerns which consume huge quantities of electric power. The plants may require few employees or their employees may actually reside in . other taxing districts, thus reducing the need for many government services in the locality in which the plants are located. Granting that locality a large share of the tax revenue simply because of the consumption of electric power is as unsatisfactory as the present ad valorem method. Taxation of public service corporations reserved for the state Under this method, the state would completely depart from the ad valorem system and would impose instead a tax on the income of public service corporations. The revenue so obtained would then go to the state treasury and there would be no allocation to the individual taxing districts, either of assessed values subject to local taxation or of the income taxes collected centrally. The loss of

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216 this revenue would spell disaster to certain counties and other taxing districts unless some other provisions are made. Two provisions are suggested under such a scheme. State responsibility for instructional salaries . It has been estimated that the cost of instructional salaries in Virginia, for fiscal year 1962, would amount to approximately $81 million at both the highest uniform scale of salaries and with the largest increase in teacher positions which could conceivably come about, At the present time, state supplements to the localities come nowhere near paying th9 full cost of instructional salaries which are neither uniform throughout the state nor competitive with other states. In order to achieve the desired improvement in Virginians educational program it is felt by many that both general increases in the rate of compensation for teachers and more uniformity In these rates is necessary. Further, this goal can be obtained, it is believed, by means of state financial support. If the responsibility for instructional salaries, then, is transferred to the state government while at the same time both segregating public service corporation taxes to the state and also discontinuing all state supplements for school purposes to the localities whether or not such Virginia Department of Education, staff studies conducted in i960.

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217 supplements had been earmarked for teacher salaries, the loss In revenue would be only minor to the various localities. Due to the lack of sufficient comparative data, only the effect upon counties, in 1959* was considered; however, most changes in factual data since that year have been largely proportionate and would not affect relative comparisons to any great extent. Further, there is reason to believe that an analysis of the effects upon cities would yield similar results, although it is probable that the loss in revenues would be relatively less in comparison with the reduction in school costs than is found in the ; county analysis. A comparison of state supplements for school purposes 2 in Virginia with the instructional salary burden and the 3 taxes paid by public service corporations reveals that the loss in net revenues, occasioned by eliminating local taxation of utility concerns and all state supplements together with the assumption by the state of the instructional salary burden, would accrue to only twenty-six of the ninety-eight counties in Virginia, and in roost of these twenty-six counties the loss would not be large. The factthat these computations were based on an elimination of all Auditor's Report of Pubiio Accounts, Comparative Cost of Local Government, Year Ending June 30, 1959* ConoBonwealth of Virginia, ^Report of the Virginia Department of Taxation, 1959*

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218 state supplements for school purposes should also be considered. If state supplements were reduced by the amount specifically designated for instructional salaries, the number of counties showing a net loss and the amount of net loss both would be considerably reduced. It was noted in making this analysis that of the twentysix counties showing a net loss, twenty-two of them have assessment ratios less than the statewide average for all counties of 22.3 per cent, and twenty -four of them derive from local sources a percentage of total revenue vuhich is lower than the statewide average of 5^.55 per cent. This Indicates that inadequate local effort is being made by the citizens in those counties which would be adversely affected by such a proposal. This is illustrated by an examination of the condition which has developed in Russell County, Virginia, the one which would have suffered the greatest loss by implementation of this plan in 1959* $^27,955. Table 32 shows the trend in local effort made in Russell County, from 1936 to 1956, under an assumed investment of $50 million, in 1936. Had the taxing authorities in Russell County maintained a constant local effort over the years, keeping the assessment ratio at 29.^ per cent, as well as maintaining the rate of levy at |3«60 per $100 of assessed value, and also reflected net appreciation of 100 per cent, the tax levy, for 1956, would have amounted to | 1,058, 400, or $790,650 more than the 1956 tax levy shown in Table 3 . Projecting this same computation to 1958, and allowing for

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220 an increase in the price level recognized by local assessors of only 33 1/3 per cent instead of 100 per ceno, assessed value would have amounted to $19,600,000 and the tax levy $705,600, r $437,850 more than the levy shown as computed in Table 32. Moreover, the assumed investment of $50 million is unrealistic, there being an even greater probability of growth since 1936, although this is not reflected in assessed values due to zhe sharp decline in the assessment ratio. By exerting more local effort, theu, counties such as Russell County could have funds made available wh-ch would offset any loss which might accrue as a result of this plan. Though this plan would relieve the state government of a substantial cost in the form of local supplements, it would place upon the state the added burden of instructional salaries. This burden probably could not be borne with only i;he addition of public service corporat:.on taxes to the state treasury. State sales tax . Though the sales tax, as a percentage of income, falls more heavily on persons with small incomes, imposes aeav;y compliance and administrat j.on costs, is politically unpopular, and is generally considered a nuisance to everyone concerned with its pa;yment and collection, it nas proven to be highly adequate in yield, stability and certainty. All of the states surrounding or near Virginia make use of the sales tax and were able to generate substantial revenues therefrom, as shown in Table 33.

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221 TABI£ 33 COMPARATIVE SALES TAXES FOR STATES SURROUNDING VIRGINIA, i960 State Rate Yield Maryland $44,226,000 Ohio 222,018,657 20"^. OQ"^. i4o South Carolina 53,960,214 Tennessee 91,575,457 West Virginia 31,170,022 Source: Wesi, Study Corrimisslon, i960. Table VII, Virginia Taxes, Charleston, Wes pp. 66-67, Report of the State Tax t Virginia, November, The Virginia Department of Taxation has estimated that a 3 per cent sales and use tax would, in fiscal year 1962, generate some $97 million, or $l6 million more than the projected requirements for instruct ioridl salaries. With a sales and use tax tied directly or indirectly to an improvement in the educational system in Virginia, the state could afford to relieve the localities of this responsibility, in turn, the localities could afford to relinquish both public service corporation taxes and state supplements previously designated for schools purposes.

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222 However, it would be exceedingly difficult to inaugurate Buch a plan. First, the counties whicn would suffer boo»« net loss in revenue are predominantly agrarian, and not only would it seem reasonable to assurne a benign state attluude toward the real or imaginary farm problem i-ut also it should oe noted that the rural areas presently have control of the Virginia legislature. Second, the proposal depends upon the assumption bj the state of the cost of ins cr actional salaries and, concurrently, the irapos...tioti of a sales and use tax. Just as many people are reluctant to accept federal aid for schools for fear of federal control, so will many state citizens be reluctant to accept state aid in this form, for fear of control from Richmond, Finally, a sales and use tax is politically unpopular enough, and if tied to public education improvement in a state undergoing a sociological upheaval, would be even more unpopular. In tiie absence of the sales and other taxes, the political situation demands consideration of alternative actions to achieve more fairness in taxation. Keeping the Ad Valorem System of Taxation It has been observed that state taxation of public service corporations without local participation in the proceeds might be politically unpopular and, consequently, difficult to achieve. Further, it has been observed that taxation on the basis of productivity alone has its limitations, although a desire to achieve equity in taxation seems

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223 to dictate a departure from tne existing system of ad valorem taxation. However, since equity in taxation has been proven to be, in the words of one authority, "an elusive raisuress, whoDi perhaps it is only worth the while of philosopners to pursue ardently and politicians to watch warily, perhaps 5 greater erapnasis should be placed on an ideal of fairness. To this end it seems alternatively possible to improve the existing SiStetn, Three uroad areas in this report are to be herein considered. The first is pernaps, tne more practical and involves some means of achievin^A greater equalization in the present assessment practices. Considered second is the possibility of centralized assessment of public service corporations and allocation of assessed values to the various taxing districts on a more equitable basis than the present method of situs. Finally, following the recommendations of a Virginia State Chamber of Commerce report of 1945, in which it was stated that centralization, while desirable, "... must be accompanied by well-designed techniques for sharing centrally collected taxes w-th the smaller government units . . ." consideration will be R. M, haig, "Taxation," Encyclopedia of the Social Sciences, Vol, XIV, p. 5^0. -"At tempts to define equity in terms of equality of sacrifice or of least aggregate sacrifice on the part of all taxpatera have been given up as unworkable. See Haig 0£, cit., p. 539. ^ Opportunities for the Improvement of the Virginia State lax Structure , Report of the Committee on '.Laxation and Government of tne Virginia State Chamber of Commerce, 19^5, p. 25.

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224 afforded the notion of centralized assessment and taxation of public service corporations, with reallocation of funds so collected back to the various localities on some equitable basis. Greater equalization in tae assessment practice There are two basic methods of equalizing the assessments on public service corporation property with those on nonutility property. One is to lower the assessment ratio on utility property to that on nonutility property,*^ This is the easier method to apply adrainlatratively, and the one usually follovMed by the courts when they grant relief to a particular taxpayer. However, the sounder method is to raise the assessment ratio on nonutility property, toward the goal of assessing all property, including public service corporation property, at full value. This is a time-, consurning process which may require reappraisals of all property. Reducing the assessment ratio on public service corporation property . Reducing the assessraeno ratio on public service corporation property to some more equitable ratio can take three possible directions. First, the central assessment ratio imposed could be the same as exists in each county and city in which the utility property is located, 7 23 H J^''"bDi^ti^ ^;^^^°""° ^ VJestern Railroad Co. v. Neeld,

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22p Second, the utility assessment ratio could be that average assessment ratio which prevails in a particular utility's operating area. Third, the asseBsment ratio could be the average assessment ratio prevailing throughout the entire state, which is presently considerably below the MO per cent ratio as now applied to public service corporation property. Local ratios . A logical method, and in fairness to the consumers of the services of a particular utility, is the assessment of that utility's property in the same ratio as nonutility property locally assessed. Table 3^ illustrates the effect on one public service corporation of such a procedure. The total amount of taxes which would have been paid, in 1959, under such a plan would have been $881,214, or $1,641,948 less than actually were paid. Such a plan has tijree essential defects. First, it does not equalize the burden of taxation betv^een the consumers of electricity as served by the utility in question, althougj:i It does penalize those citizens residing in localities with low assessr^ent ratios. Second, it does not equalize the tax burden of all consumers of electric power within the state, since the assessment ratios may be entirely different between the various sections of the state. Third, it does not equalize the burden between the various public service corporations operating in the state, especially to the extent that such taxes cannot be shifted and must be borne by the company.

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226 CO >* r-i tH GO a (B 3 -a K -P 'r* (0 U C3 iH «< Ot 3 Vt !«; 0 0(0 S iH 1 t-i ^ U 0) OS >a| »P O P «H O f-l 3 -H 0) 04 o •H iH +> CO CO 5 04 CI •H -P •H 09 O o h4 vo ^ j^inoo H CO ifvro o\ ^ •> % •» OCO -ONH 01 O •»•»•»•* n CVJ^ CM CO H rH t-(M iH CMAO roin vo mcr\0 ONH co• ••••• cnSO (M H CVI OJ HV.OVO H t-- in t«-J3^ U5 00 -(Ovo cn^\oco o to a\ vooo oJ o ln^-o ojco^-sr ^ cy\H moo H o OMnoi t^ovovo CO vxjc— ra=rcvi ONOOinCO OO OM^-fHiAtH iH rH CU t*inH CO^ CO-* OJ CO ra=r ONOO H rooj OJ coco int~-GO o oi >h t^ifvo o h^o o co cocorH incoco CM o rooo^ t-vo t«-mo c^o>a\ cn^ roincot-co ovo coiAco onOS-v^co COCA OJOMnON VOCOiHt-OJ COCOO^OJO Hicvj oorHojro r-i ON -.ooj moicou)^ m covo t--^oovD rococo ro^-:3OMnv£> moo ovo coco CO o moi mm f-i-i o\iH COO o uvr o o ON iH m.=r OJ moivo c-co m cooi^oivo ««t •t'k^n "v^ •» ^ * sf O COV^CTNH i)0 ON VOOl C7Nt}oOt*-CO i-H i-l o o o mvo oooomoooomoooooo CO t-moovo o miH o cocoo moco cTvmuD cococu oi-^-:? cool co^ co^o co-<^ mi>vo O (M 0\VO ovo mOJ rHH t>-i-4 0O--I OJ ON OCO vo cococu Ol b-mcvico m om^ONvo 1-401 ^"HCVJCO Ol^ OJCO miHrHJTCO tH H OJ COCOOXCOCOvO-^ COO ONONH^ mO CO OJ =t covo CO^ J^O CO iH O H C--0O coco iH CO H H Ol iH iH I-l OJ CM Ol «-» 04 >-« >H H r-J H mmo mo moo mmoo o moo mco commo coj:^mvo-;r mcMcovo^ h aN:;r m^co oooco r4vO H -30 mvo HCO OVOVO (M 0Cf\ C5N ONCO CO t>-oo I t^co 00 ON I b-o\o b-vo m^aih mcooNi>-mcot^ON comco 0OC3NCOCO o rH CO oimvob-cCOOmoO COCOrHCOVO 00-:3-VO^t>oj f-l H Ol fH m CM >-i COOO (M CO oaN •H P C o •p -P "O a u B CO O «Hi G H 2 CS4 Q.'O 08 CD H S CO G x:rH o ^ G 0) iH G C H
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228 Operating area ratios . Another variation would be to assess the property of a public service corporation at the average assessment ratio on nonutllity real estate in the utility's entire operating area. Table 35 illustrates this procedure. It is noticea that the difference in tax which would be paid amounts to $1,059,645, or approximately a 40 per cent reduction in the taxes actually paid in 1959* This has the advantage of equalizing the burden within an operating area; however, it does not equalize such burden between either the remaining consumers of the utility's service throughout the state, or does it equalize the burden beti^jeen the public service corporations themselves. It is notable that the two counties which have the bulk of this company's operating property located tnerein, Russell and Giles counties, would stand to lose a total of $463,735 in revenues, or 43,8 per cent of all revenue lost to the counties, while all of the cities, predominantly , urban areas and the largest consumers of electric power, would stand to lose but $94,166 In revenue, or less than 9 per cent of the total loss. Statewide assessment ratios . A more simple method would be for the State Corporation Commission to change the assess ment ratio on nonutllity real estate, about 31.5 per cent in 1956, the year of the latest study of these ratios available. This method would leave intact the present system of taxing public service corporations and would only Involve convincing the State Corporation Commission that the current

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230 O P (8 0) (0 (D ^<*-t U to iH o g -o CO -P (0 c go© < i o o a b0&4 > C O O h 0) O -H © -P O -P > en H 3 0) O H +> -rt C3 .Cj P > bOCO •H (t; w a ® • 0) '3: o CO 0} U) (0 0) C «H to -H OJ o 0 a > o i 03 >sP •p •H iH H -P . . O P4 Hvo t-cr>cvico OCX) rOfOH H vocvj^ cu rocvi in rH coo COCOO H OC0t>-O-sr::icu CO t-oovo f-«vS\o \r\-=jr covo o 00 COV.O ia(ja>h c-«h'.o cu o in in -69CO-a>iH a\i-ivovo cu H ONCvi rocosr ^o^cvi CO CO u^o o o mo o f-ico tnn o voco o O o^oacoco fHOD o c>-o • ••••••••••« cocvi cocu oocvi cu tn^ j=r 00 ^ j:r cucovD incooco ro-sr o o\',£) cu COCOva O cu OOO COrH CO-:3iTvlA OMncocu cF\vovovo mvo coco o\ -=r o^ CU o CO i>-vd cu cu h ^ O rH t-cOt«-iH H(X> CUVO VD rHJdCU OOCU OVO OCOOO HvO CU H CU iH r-i 0) Qj — O r3 Q lACOincO 00 VD cu 00^ OMACO n n % n ^ mvo 1-1 o C-VO COb-^ ITV ITV CO COCO CO lA OO Oca C4C0 cocu cu inincu cocu h cu ta +> •H c -eats o o •HVOVOJir <-l COrH oo t-ICO iHVO >-i O ITVLTV moo cncomco mco mncu^rooo cu m a o o CO > H ^ H .H (0 iH •rlCQCQO
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231 40 per cent equalization factor Is Inadequate and that it should be reduced to the average statewide assessment ratio of 31.5 per cent. Though this method achieves equality in the taxation between public service corporations, it does little to alleviate the inequitlep existing between public service corporations and other property owners. Table 36 shows that the net loss in revenues to the cities and counties served by one utility, were the assessment equalized at 31. 5 per cent instead of at 40 per cent, would amount to only $536,057, of which $488,420 would be applicable to the counties and $47,637 applicable to the cities. Compared to the total revenues from all sources which were received by those counties served by the utility examined, amounting to $5^*298,518, in 1959*^ this would represent a loss in revenues of less than 1 per cent. On the other hand, the savings in taxes which would accrue to this company would have been over 21 per cent. Thus it can be seen that with only minor sacrifice on the part of the localities, some measure of equity presently missing could be achieved in this way. Raising the assessment ratio on nonutility property . In equalizing the assessments on public service corporation property down to local assessment ratios, an average service area ratio and a statewide average ratio have been Report of the Auditor of Public Accounts, Commonwealth of Virginia, Year Ended June 30, i960.

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234 discussed as possible ways to achieve greater equity in utility taxation. The method which equates the assessment ratio of the public service corporations with ratios applicable to local taxpayers in each taxing district would not only result in a substantial reduction in revenues but also would result in higher taxes on utility property . in some localities than in others, although such property is a part of a unitary business. Before considering the alternative of raising local assessment ratios, two factors introductory to this proposal will be considered briefly; namely, a review of the deterioration of the average state assessment ratio and a review of the inadequacies of local efforts. ^ Deterioration of the average state assessment ratio . Assessment ratios increased gradually in Virginia, from 1927 until 1936, primarily as a result of the Depression which drove actual sales values of properties downward. However, as the economy recovered and inflation pushed real estate sales values higher, average assessment ratios deteriorated consistently, until a low of 30-0 per cent was reached, in I95O. Since 1950 there has been relatively little change in average assessment ratios. Table 37 tabulates this trend. Table 38 shows the declining trend in assessment ratios of counties and cities for the years 19^2, 1950 and 1956. For example, in 19^2, seventy-two out of one hundred counties were in Group 1, with assessment ratios in excess

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235 TABLE 37 AVERAGE RATIOS OF ASSESSED ACTUAL SALE VALUE OF REAL ESTATE. COUNTIES AND CITIES, SELECTED YEARS COFMONVjEALTH OF VIRGINIA, 1936 TO 195o Year Weighted County Averages Weighted City Averages Weighted State Averages 1936 42.2 78.8 56.7 1939 38.6 77.6 52.8 19^2 35.4 70,5 48.8 19^4 30.2 58,7 41,1 1950 22.0 42.8 30,0 1956 22.3 45.9 31.5 Sources : 1936, 1939 and 1942 data from "Changes In Real iistate Assessment Ratios," by John H. Russell, The CotnmonMealth , August, 1945* Table 1, p. 12. 1944 da ..a from A Stliay' of Property Values in Virginia With Coiaroents on the Assess ment Thereof , by William H. Staul'fer, RlchiDond, Virginia, 1946. 1950 and 1956 data from Virginia Department of Taxation assessment ratio studies.

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TABIE 38 GROUPING OF LOCALITIES Bi RATIOS OP ASSESSED VALUE TO SALES VALUE, COMMON^'.'EALTH OF VIRGINIA, 19^2, 1950 AND 1956 Counties" Group 1 Group 2 Group Group Totals ABsessnent Ratio 33^ and above 2^ through 305^ 13^6 through 205^ ^ through 10) 19M2 195Q 1956 7 100 5! 98 4 28 57 98 Cities Group Group Group Group 3356 and above 235^ through 3Q5^ 1356 through ^ through ICS^ 83 17 6 5 22 t Totals 28 32 Sources ; 1936, I939 and 19^2 data from "Changes in RBSl Estate Assessment Ratios, by John H. Russell, The Coanion wealth , August, 19^5, Table 1, p. 12. 194it 6aW from A study of Property Values in Virginia With CoTOnents on thieTlssesBPient Thereof , by VJilliarn H. staufl'er, Richmond, Virginia, l9^b, 1^50 and 1956 data from Virginia Department of Taxation assessment ratio studies.

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237 of 31 per cent; however. In 1956, only four of ninetyeight counties were in this category. It is also significant that the seventy-two counties in Group 1, in 19^2, were dispersed largely into Group 2, with assessment ratios between 21 per cent and 30 per cent, by 1950, and that these same counties, in the main, fell to Group 3, with assessment ratios between 11 per cent and 20 per cent, by 1955. Table 38 further shows that the cities have maintained a better record of sustained assessment ratios than the counties, Vfhile the number of counties in Group 1 declined from 72 per cent, in 19^2, to 4.1 per cent, in 1956, the number of cities so grouped fell from 96 per cent to 69 per cent over this same period. The preceding data illustrate that statewide equalization of public service corporation property at 40 per cent, though reflecting the actual statewide average assessment 9 ratio at one time, fails to achieve uniformity of taxation today because of the deterioration in assessment ratios over the years, particularly in the counties. This is evidenced by the fact that the assessment of the public service corporation property over the past thirty-five years has remained constant at a 40 per cent of value level, while the assessntent ratio level for nonutllity property has decreased from an average of 4o per cent to an average of only 31.5 per cent. In 1927.

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238 Inadequacies of local effort . This reduction in the assessment ratio of nonutility property to a 31. 5 per cent level, which resulted in comparatively lower revenues from ad valorem taxes, has resulted in greater reliance by these localities on federal and state supplements to meet the costs of local government. For example, the low ratio counties, those whose assessment ratios fall into the 1 per cent through 10 per cent category, generated from local sources only 38. 71 per cent of their total revenues, while the relatively high ratio counties, with assessment ratios in excess of 31 per cent, obtained 70.49 per cent of their total revenues locally. This relationship of county assessment ratios to percentage of total revenues from local sources is set forth in Table 39. Similar information as that appearing in Table 39 is not readily available for the cities without examination of unpublished city records. However, in view of their relatively higher and more uniform assessment ratios, it is reasonable to assume that, as is the case in the high ratio counties, substantial local effort is presently being made and fair revenues in general are being obtained from ad valorem taxes. To the extent that the counties are not raising adequate revenues from local tax sources, federal and state supplements have become necessary to meet school and other

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239 TABLE 39 REUTIONSHIP OP C0UN1Y ASSJiSS^EN'^ RATIOS TO PEBCSNl'AGS OF TOTAL RSV3IJUES DERIVED FROM LOCAL SOURCES"^" COMMOI^WiiALTH OF VIRGIiNiA, YEAR ENDED JUl'iE 30, I960 Per Cent of Total Revenues Derived from Local Sources Group 1 Assessment ratios 31S^ and above Four counties 70.^9 Group 2 Assessment ratios 23S^ through 305^ Twenty -eight counties Group 3 Assessment ratios 11$ through 205^ Fifty-seven counties Group 4 Assessment ratios iilne counties through XQJft 50.67 45.09 38.71 Source ; Report of tae Auditor of Public Accounts, Cocimonviealth cf V-.rgin_a, Year Ended June 30, I960. See Appendix B for more detailed data.

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240 desired governmental expenditure requirements. The "Gray Commission," cornroeuting on this aspect of comparatively lower local properi.y taxes, staced that: This indicates vhat what is actually taking place is in substantial measure a suhstitutiOii of the taxing and revenue raising responsibility of the localities, Th-S in turn means that as zhe situs of the responsibility for raising school funds farther and farther removed from the situs of responsibility for spending school funds, it becomes less possible to resist tbe importunities of pressure and special groups demanding: large increases. • • This same Commission report pointed out the absence of local effort in providing for necessary school funds by comparing the per cent of school funds from local taxes and appropriations with true taxable wealth in each 12 of the counties,"^ This means of measuring local effort illustrated zhe variations which are found in Virginia, Basically, it is the assessment ratio which determines the amount of taxes so collected and, tnus, which measures local effort. The "Gray CommisBion" in its report in this connection pointed out the unfairness of such a sitij^tion, stating that it is not . . • fa:.r to the localities making reasonable or unusual effort for the support of public schools to distribute •^ Report of the Commission on State and Local Revenues and Expend i;.ures . Commonwealth of Virp;inia, 1^4^. pp. ^^ Ibid ., p. 66, Table 24,

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state equalization funds to localities which do no^ make an effort commensurate with their capabilliiies. To distribute State equalization funds without requiring a minimum effort would be an open invitation to some localities to decrease their own contributions, and this at the expense of localities which do make a reasonable effort. Having concluded that local effort varied widely througiiout the state, the Commission further inquired if, in distributing state equalization funds, the state should require each locality to achieve an established minimum level of local effort. Adhering to their measurement of local effort, the equivalent true tax rate per $100 of true taxable wealth for schools, it was recommended: , • . that a locality be required to contribute to the support of schools a sum equivalent to a true tax rate of 80 cents per $100 of locally taxable wealth in order to participate in the equalization fund. No locality would participate in the equaliza. tion fund until it shall \iave raised from local sources an amount of revenue for school operation and maintenance (excluding capital outlay and debt service) equivalent to the amount of revenue whicn would be derived from a rate of 80 cents per $100 on the full value of locally taxable wealth as deter-.^ mined by the State Department of Taxation, A recent committee report of the Virginia State Department of Education also took notice of tne lack of local effort in levying reasonaule ad valorem taxes. It lb id « , p. 66, (italics supplied.) Ibid,, p. 70.

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2U2 reported that "attempts to equalize expenditures per child without regard to local effort are unrealistic and. In iil5 some instances, result in compounding existing inequities* The committee went on to recommend that "the latest true values, as determined by the State Department of Taxation, „l6 be used in determining local effort, ... The proposal to raise local assessment ratios . To ' , eliminate the discrimination that exists between taxpayers because of the differences in assessment ratios and tax rates, there is needed, as the "Gray Commission" suggests i . . a change in local assessment practice in various localities in which there are gross underassessments and high tax rates. If these localities were to abandon this deplorable practice and substitute therefor a more reasonable ratio of assessed value to actual value, witn corresponding adjustments in tax rates, this would operate to increase the average statewide ratio, , , , The effect of tiiis would be to lesser; materially tne inequities now existing, and while some inequalities would remain, even these inequalities would be small as compared to these now existing. 17 Following the suggestion of the "Gray Commission" cited above, one proposal is to raise the level of locally. assessed property to a statewide ratio of 4o per cent, the same level at which utility property is currently being 16 -^Committee Report of the State Department of Education, as reported in the Richmond Tiires Dispatch , Richmond, Virginia, September 3, 19bl. ^^Ibid, 17 ' State and Local Revenues and Expenditures , op , cit,, p. 2i}. — — _ . _^

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2k3 assessed. Tiiis proposal lias several distinct advantages. First, a general increase in the property tax base vjould be effected which would provide for future needs of local government. Second^ the increase in assessment ratios to a uniform level may not necessarily result in Increased ,^ taxes on local \.axpaiers, since the tax rate can be adjusted. If tax rates are maintained as they are, however, new revenues to the localities would be obtained automatically. For example, if nonutility taxpayers were assessed on tne oasis of 4o per cent, the present assessed values in all of the counties would be increased approximately $1,385,000,000, which in turn would increase local revenues 18 by approximately i^65,51^,000 annually. As applied to cities, assessed values would be increased $192,700,000 in the aggregate, producing additional revei-ues in the amount 19 of $5,907,000 annually. A third advantage is that the existing inequities resulting from discriminatory assessment practices would be corrected. As evidence trtat sucia a proposal would inure to the benefit of the counties, cities and the entire state, attention should be directed to the neighboring state of West Virginia. Historically, county boards of education in West Virginia had kept local effort as low as possible and. See Appendix C for supporting data, 'ibid.

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244 therefore, were able to receive nore state aid for education. Assessment ratios in the various counties deteriorated rapidly from 1932, when the property tax accounted for 57.6 per cent of all state and local revenues, until 2C 1957, when this percentase had declined to 25,4 per cenr. In 1955, the West Virginia legislature passed enabling legislation, which required tliat the County Assessors, under the direction of the State Tax Commissioner, bring the level of assessment of nonutillty property in all counties from not less than 35 per cent, beginning with the fiscal year 1956-57, to not less than 50 per cent of the appraised value of such property by fiscal year 1958-59. Failure of a particular county to use an assessment ratio of less than 50 per cent results in that county losing a proportionate part of its full allocation 21 of state aid for schools. The application of the 1955 reassessment law in W«*t Virslnia has achieved an unusually high degree of success. In 1955, the first effective year of the corrective leglalatlon, the statewide assessment ratio was 41.09 per cent. In i960, five years after the plan had been in effect, the West Vircinia Taxes , Pinal Report of State Tax Study Commission, cuarieston. West Virginia, November, i960, p. 36. 21 Senate Bill No, 3* First Extraordinary Session (May 9 13, 1955), Legislature of West Virginia.

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245 statewide ratio l^d risen to 52.4? per cent, an increase of 27.7 per cenz}'^ By this measure, uest Virginia haa improved assessment ratios generally and lias thereby achieved greater uniformity in taxation and an improvement of the entire property tax structure. A similar plan to raise the assessment level to a minimum of 40 per cent could be adopted in Vir^iinla, immediate implementation of such a requirement misht work hardship on certain localities currently operating under an assessment ratio far reir^oved from the MO per cent level deemed desirable in this proposal. Table 40 presents, therefore, a schedule of minimum assessment levels so proposed as t;o achieve the desired level over a period of five years, allowing time for each locality to mai.e a gradual adjustment in radios. If the first date of implementation of this plan were January 1, I963, the minimum level of assessments would be established at 15 per cent of full value for tiiat year and would be raised 5 per cent each year until the desired minimum of 4o per cent is realized. ... , It should be furtr^er proposed that to the extent a locality fails to meet the minimum assessment ratio level established for each year, participation in state supplements to which the locality would otherwise be entitled 22 est Virginia Taxes, op . cit ., p. 36.

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246 TABIE UO Required Minimuin Year Assessment Ratio 1963 ^ 1964 «e 1965 ^ 1966 u 1967 U 1968 5o voiild be lltnited to the same percentage which the local asseGsment ratio Is to the required minimum . For example, assuTnc that In I967, at which time the required minimum would be 35 per cent. County A's assessment ratio is found to be only 30 per cent. If the amount of state aid to which this county would otherwise be entitled were $700,000 for the year, its failure to comply would limit Its participation in the state assistance to 30/35ths of $700,000, or :5600,000. In order not to unduly penalize certain localities during this period of adjustment the penalty provisions would be limited In the following manner. For I963, the first year of implementation, each locality would be guaranteed 100 per cent of the aid received in I962. Thus, the penalty provisions would not apply during this first year. However, for 1964, each locality would be ^ijuaranteed only 90 per cent of the state assistance received in I963,

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247 Table ^1 sets forth the limitations on the penalty proviBions as herein proposed, ,*!• ill '• LIMITATIONS ON PENALTY PROVISIONS Required Mlnimuin Guarar/uee or tne Prior Year Assessment Ratio Year's State Supplement 1963 15 100^ 1964 ' 20 90 1965 25 80 1966 30 70 1967 35 Discontinued 1963 40 Disconx-inued Although there is presently no legal authority for the Virginia State i'ax Coomissioner to equalize assessments of nonutillty property, both real and personal, as between counties and cities, his office is presently making fair market value appraisals of real estate when requested by local governing bodies. The State Tax Department has available a staff of appraisers who are actively engaged in their work throughout the state. Under present law, however, the goveriiing bodies in counties and cities are not required to accept the State Tax Department's findings of fair market value. In order to achieve uniformity and equalization under this proposal, it would be necessary that the State Tax Commissioner be directed by statute to raise local assessments to a statutory minimum level of not less than the 40 per cent statwide ratio based on his appraisals.

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248 Under the above proposal it is contemplated that each locality continue to levy that rate of tax on property located within Its boundaries which it deems necessary to meet the costs of local government. However, within each taxing district the rate of tax imposed on real and personal property should be uniform. There is nothing inherently peculiar about personal property which requires that it be subject to a different rate of taxation than that imposed on realty. Further, n«ny inequities could be completely eliminated by both the assessment and taxation of all types of property uniformly within each locality. Although its equity is apparent, the legality of such a proposal is subject to some question. The state has the power to classify property and is also empowered to regulate the rate of taxation within local jurisdictions as a proper exercise of the power of state 23 sovereignty; however, it is not so clear in regard to its power to require uniform rates of taxation on both ^•eal and personal property within each taxing district. To the extent that the constitutional requirements are not violated, and to the extent that the further 2^ / / Williamson v. State of New Jersey. 130 U.S. I89 (1889); ^lrslnla and Tennessee H .l-t. Co. v, Washington Counts:, 71 Va, 4'/! ( 18 7 8); S.V.R.k, (Jo, v. Sup er TTsors of Clark County , 78 Va. 269 {1884).

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249 constitutional barring of any law irapairlns the obllsatlon of contracts is not violated, uniform rates on real and personal property, within each taxing district, appear both reasonable and desirable. Surmnary In this chapter four alternative solutions were examined in respect to the correction of the present system of taxation, especially as it affects Virginia's public service corporations. First, there was introduced the possibility of local taxation of utilities on the basis of productivity. Considered second, at the other extreme, was state taxation of public service corporations with no local participation in the revenues so derived. As mentioned, this alternative would necessitate, in order to make it politically palatable, additional reforms and changes, such as state assumption of instructional salary responsibility and possibly even the Imposition of a state sales and use tax. Finally, some attention was directed toward greater equalization in the assessment practice as a possible alternative. This alternative took two directions. First, the assessment ratio on public service corporation Section 58 of the Constitution of Virginia so provides. Thus, where the taxation of property is the source of funds for the contractual repayment of principal and payment of interest is impaired by the restriction of rates of levy, this const Ituticnal provision may be violated.

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250 property could be lovjered to some level corresponding to local aesessment ratios, whether this be to the level prevailing in each locality considered separately, to the level of one company's service area averaj-e ratio, or to a statewide average assessment ratio. The second possibility discussed was the plan to raise all nonutility property assessments throughout the state to the same level at which public service corporation property is currently being assessed. In terras of equity to all concerned, this latter possibility appears to be possessed of considerably more merit; however, as presented in the following chapter, there exist other alternatives worthy of examination.

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CHAPTER 8 REFORMS IN THE TAXATION OP PUBLIC SERVICE ' CORPORATIONS, PA HI II A separate chapter has been reserved for consideration of two final alternatives because of their unusual departure from the present inethod of taxing public service corporations. The first of these alternatives involves centralized assessment of utility property with certification of assessed values subject to local taxation made to the various localities on some basis which considers factors in addition to situs. The second alternative suggests both centralized assessment and taxation of public service corporations, the revenues derived being then allocated back to the various localities again on some basis which considers factors in addition to situs. Although these can be considered as separate and distinct alternatives, the allocation to the various localities on some new basis, whether it is the allocation of assessed values for local taxation or the allocation of centrally collected taxes, is basically similar and can thus be considered together. Before considering the basis for allocation, whether assessed values or centrally collected taxes, attention can first be directed toward 251

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the question of what rate of levy the central government should impose if it were to both assess at.d levy taxes on the public service corporations, 1 The Central Tax Levy Ra'oe Need for uniformity The equalisMition process fails to accomplish its objective if public service corporation property assessments are first "equalized" at 40 per ceut of "markev value" and then subjected to nonuniform local rates of levy. At the presen'i: time, to take an eXurerae example, the elecoric utility serving the City of Richmond pays $1,88 for each $100 of assessed value of real estate located within the city limits, although another electric utility which serves the Town of Abingdon would have to pay $8*13 for each $100 of assessed value of similar property of identical full value. Further, there exists a lack of uniformity in the rate of taxation of like property owned by the same public service corporation but located in different taxing districts. Moreover, zhe identical piece of property is frequently subjected to varying rates of taxation by different taxing authorities within tne same taxing district. For example, utility real propert;^ located In the Town of Abingdon is subject to a county levy of See Appendix D for discussion of the special problems arising In connection with towns which are not autonomous fiscal entities and whicn do not uniformly levy a tax on property.

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253 $6,25 per $100 of assessed valuation and also a town levy 2 rate of $1.85. There is also a lack of uniforroitir in taxation within the sawe laagisterial district. Again, the Town of Abingdon is a case in point. Washington County, in which the Town of Abingdon is located, imposes a levy rate of $6,25 on property located within the town, and a rate of $9.05 on property located elsewiiere in the same magisterial district:. Table H2 illustrates some of the extremes in levy rates which exist in Virginia. The levy rate The rates of taxation presently existing In Virginia lack uniformity. This gives rise to the problem of what rate the central government of the state should impose in order to achieve both equity and uniformity while maintaining, after allocation, fiscal stability wlthm the various taxing districts. Similar to the various ways assessment ratios could be reduced on public service corporation property to better correspond to local conditions, there are three alternatives in establisning a central rate of taxation. Use of local rates of levy Under this alternative, the state would impose the same race of levy on the centrally assessed valuation of 2 Some utility property is classed as personalty, subject to a $6.00 rate.

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254 TABLE 42 LEVY RATES ON ELECTRIC UTILITY SUBSTATION, SELECTED TAXING DISTRICTS IN VIRGINIA, 1959 Taxing District Cour-ty a ad District Levy Rate Tovjn Levy Rate City Levy Rate Total L»evy Rate Town of Abingdon, Washington County $6.00 $12.25 Abingdon District, Washington County 9.05 ^ 9.05 Town of Saltsville, Smyth County 3.40 1.50 4,90 City of Richmond $1.88 1,88 Source : 1959 Tax Rates, Virginia Department of Taxation. Bulletin 103. public service corporation property as exists in the locality in which the property is located. This would have no bearing on the allocation device for centrally collected taxes so obtained. Although the amounts the localities . , would receive as state allocation would depend entirely on the basis devised for allocation, the taxes contributed by the utilities would remain subject to varying local rates, the lack of uniformity in which has already been discussed, Averase operating system rates of levy Under this method, the average rate of levy on nonutility real estate within the operating area of a particular utility would be computed and applied to the

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255 centrally assessed value of the public service corporation's property. This alternative would achieve a greater degree of equity between the utility and nonutility property owners; however, to any extent that assessed valuations are determined by statewide assessment ratio studies, it fails to achieve the required uniformity between public service corporations of the same class, and would continue to sanction the lack of uniformity in assessment ratios which presently exists. Statewide average rate of levy This method would involve the computation of the average rate of levy on real estate in the entire state, including both counties and cities. It would yield a rate which has the advantage of statewide uniformity, flexibility and consistency with the method of assessment. In those areas generally known as low assessment-high rate areas, such as southwest Virginia, the statewide average levy rate would be considerably less than the average of rates currently in effect. The computation of such a rate is presented in Table ^3. It should be noted that this rate could change each year; but, for purposes of illustration, it is not material which year is selected for this computation. Once the average rate is determined, it is then applied to the assessed values, centrally ascertained, to determine the total amount of centrally collected taxes.

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256 TABIE ii3 AVERAGE RATE OF I£VY ON REAL ESTATE, COUNTY AND CITIES, VIRGINIA, 1958 Assessed Values of Taxes Levied Average Rate of Real Estate Subject on Taxation Per $100 " to Local Taxation Real Estate Assessed Value Cities ;^2, 176, 83^,125 $52,207,764 $2.40 Counties 1,773,183,798 53,729,217 3.03 Aggregate $3,950,017,923 $105,936,981 $2.68 Source : 1958 Tax Rates, Virginia Department of Taxation, "bulletin 102. The Allocation of Central Levies Allocation of centrally levied and collected taxes will be considered first. Once the basic allocation process is established, then consideration can be given to the alternative, that of allocating back to the localities centrally assessed values. The current problem, admittedly the more paramount and least susceptible to a simple solution, involves the procedures whereby the centrally collected tax levy on all public service corporation property is allocated back to the various taxing districts. Although It is presumed that in theory the proposal which Is herein developed would be applicable to all public service corporations, technical and regulatory differences between the various types of public utilities may require some adjustment in procedures from those employed

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257 In the present suggested application to electric light and power companies. In effecting the allocation of centrally levied taxes to the cities, counties and towns, it would be necessary to engage in a separate computation for each operating company. To group them all together and allocate a total statewide tax collection to the localities would not only be difficult to do but also would introduce inequities, if not on the public service corporations themselves, at least upon the participating localities. Thus, this analysis is concerned with the levying and allocation of property taxes by the central agency upon the property of one representative electric power company. As has been pointed out, it is current practice in Virginia to assess public service corporation property at Mo per cent of its "value," such assessment being made by the State Corporation Commission. "Value" is defined generally as original cost less an arbitrary allowance for depreciation of approximately 20 per cent. Whether or not this method of determining full value is realistic is of no consequence in this analysis, although other methods, as previously discussed, may be more meaningful. The "40 per cent rule" is thus subject to some question; however, this method is currently in effect and its adoption in this analysis is necessitated by the facts of reality. The operation of this analysis, further, ,

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258 would not be affected by an assessment of any other percentage, others of which may be preferable to the one in practice. Once the assessment has been made, the average statewide rate of levy can be applied, the result of such computation being the tax bill presented to the public service corporation in question. In the case of the utility being herein examined, the assessed value of its property, in 1959, was $72,772,9^3. Applying the computed statewide average rate of levy to this assessed value, a tax bill of $1,950,315 would have resulted. The bill so computed is $572,845 less than the amount of taxes actually 3 paid by this company in 1959; however, this results from the fact that the average rate of levy Is generally higher in the area served by the company under observation than it is in other sections of the state, and thus higher than the statewide average levy rate. That this would have resulted in an excessive loss of revenues to the localities within this company's service area had this proposal been in effect, in 1959, is of little import. All that the cities and counties would have had to do Is lower their rates and raise their assessment ratios, which, as has been observed earlier, are inordinantly low. 1-n *o^rS^'?Jr^^^''®^'^.^*^ ^^^^ Company, in 1959, amounted to 523*100, exclusive of taxes on Merchants' Capital,

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259 The next step is to allocate the funds collected, in this illustration the $1,950,315 levy on one company's property, to the cities and counties located within the service area. To this end, there are several relevant bases for making such an allocation, a few of v^hich are now to be considered as possibilities for adoption. Situs of investment basis This basis would consider the dollar investment in each of the localities and the tax levy would be allocated accordingly. The present tax system operates essentially in this fashion, the only difference being that the individual taxing districts impose the levy directly upon the property so located within their taxing area rather than depend upon a state allocation made on the same basis. To so allocate the central levy on this basis alone would be an improvement only in the sense that; a uniform rate of levy was being employed. It would not, however, resolve the inequities which exist between public service corporations and nonutility property owners, or between uhe various taxing districts. Table i|4 illustrates the effect such an allocation basis would have on the localities served by this particular utility. As would be expected, the loss in revenues to the various taxing districts would have been roughly in the same ratio as the reduction in total company ad valorem taxes, except to the extent that individual local

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260 t3a ta 3 01) O CD jCp ^ H Oi 03 c o C3 o w < O •P c o CO ^ 0) 0) IP 3 04 G iH O CO E > IP 0) 0) c H I I I CTkOJ I I I I rHlf\ I I i I ^ I I ON I CO cvj H o -IT ^ a\ O 00 OA H OJ o •» n n •« % CU^ CVI CO H ro^ covD b-H icwo a\=t •« -cy» \S\=T lAVO in cocvi ir\«-i CO CM ^ H C WO > (0 C fH CO CO CQ CO p o a « o c CO o I I 00 I I I i I I II I I I I CV) I I t I I t I I CVi i I I I I O I I * I i I i CVJ i • I I III III! com » CO inco w i (f^r^^ I oi cot~o i cy\rH I ascnrfycn i OOOO rH CO CO ON incvi a\vo H iH t^^GO in I inroHro I OXC^ONVO CO CO rH r-l 04 H cooj OJ COCO inc-co o cvi h t^mco o r-ivo o oocoH incooo OJ O roco^r t^MO t— mo t~c7\ co.=r coincot-QO ovo coinco ONOt>-vo COON ri OI oi a\ir\a\ COH OI CO n •» •» % VO COH t-OJ t-iC?> VO OJ oo coa\oi inoi covo in o t-o incot^in.^ mo oj hj^-oo mco mt>o H OJ OJ mo OI cotH H a\a\r-i oncoco^ on CO OJ o^ o coc^o fH m ooj'X)aN ONH OJ ^ •! ^ * •» O rH C— O «H.=r t— H O OOH H rO r4 m COr o| t^t^ H rH J^01 corH o t^oj o co^ ONvococo m-:^b-mrH CO oNov^ i>-c-vo mcomm^ ono o cohvo •=r o o mmco mo ^-ono mco o h h ovsr 01 01 H 01 OI ^03 OVOVO 01 Hj^-VO ONj3-(X) ONCy ONCOOl ON t—m^cx) r-i OI mt~.sr hj^* t-ONO t^-ONvo m co::rj3-HOOO.^ rovo^ oj oi onh como om mo-qmco.:jcoovo cOfOH OJ mH moN COOJ cO CO coco m^ OJ m coo'vOon cotHJTVOr-l mrH Hvo CVl 5 E 0) O P CO OOM P U C StH <3> J4 +s -p TJ 3 eg tOH f-4 •HgcdtOf^ OCGOtH PEJ^EO'^aPcO'H^QO ,G a-o CO p o o E >^ HSa(D<-IO33c0C0 mcovD tH m H r-i c o (0 G 3 O . ^ww^ •H ^ ;>» > C a> (0 O O 3 (8 «-* F< -H 1-1 rH -H

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261 0) 3 C -P c o o H CO U (0 (0 s4 E-« (a* •o (0 -P G > « C •rt Q) c o 03 a> O 13 (0 O (I? EH r-i H ^ eC O 0} 0) 3 H P «J ? > 0) E 'O iP (U CQ 09 O 03 ;> 4) c ta H ra < I i I a\ I I I I I i t i I i I VD I I I I I i I i I I I CO I j:^ i I I I I I i (M a\ -6^ 00 ojvo roroo h o cot-t-^^ cj oco cnso incnH b-rHco cvi o m H H (M O lAO^q-OO iH H CArH o r-i h-j^co t-cn'Oco jfv^ ooo 03 OJ i>-fO{>-o cvj oi t-o t-a\m c7\co o a\\o ON^sO <-i\o mo CM OJ o inmcvvT co a 0) 3 H c o o ^rHincMfNCTvOrocTvoo coco W 0J'.£) !>-t>-CU Oi O .T\OOCJ\OVO ifv=r o irvvo ^oo^o coiA H iH mroco iH CVI i-i CM ' CVJ cvjvo ONO o\oi-=r cTvroiTvrH oi ir\co vo oo^ CO no o H ro oa a\iH o-^oo co^vDvo t^inoj-st OJ H o 00 o invo ^ o OI oj ^ H rOt-rOOvOI t-rH iTVCVl r^ rOOJOiHHHiH H OI o c fcO o 03 c (0 > J« rH ^ •H M OQ P4 +3 C o 1 -p H _ O CD 4J x: 3 . . . — ajGojp-Po^::© oa)(a-H3o3oBc9oo'r-4s>k •p 00 in ro CO r^ irv o vo CO OI in OI in H CO o m o o • o o H CO OJ OJ O

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262 rates of levy departed from the statewide average rate. Although the tax savings which would accrue to this company by application of a statewide average levy rate would have been approximately 20 per cent, only a few counties would show a loss in revenue substantially greater than 20 per cent. For example, losses in excess of 50 per cent v^ould be felt by only four counties, Dickenson, Grayson, Scott and Washington, each one of which has low local asaesawent ratios and higher than average local rates of levy. As indicated, this method achieves a greater degree of equity only to tiie extent that all public service corporations in the state would be assessed and taxed uniformly. The allocation process, however, does not appear substantially more equitable as between the taxed utilities and other property owners. There is nothing in this method to encourage increased local assessment ratios and thus greater local effort toward meeting the costs of local government. The low ratio counties would continue to assess local property at considerably less than 40 per cent, depending upon higher rates of levy, caused by decreasing local assessment ratios and rising levy rates in some localities, ivould result in an increased tax bill to some utilities already enjoying a more equitable tax treatment by virtue of being located in localities making greater local effort. Thus, new

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Inequities might conceivably arise from the adoption of this method of allocation. Revenues generated basis It is proposed, under this method, that a centrally administered property tax levy should be allocated to the various localities on the basis of the percentage of total revenue a particular operating utility derived therefrom. Table 45 shows the results of the allocation of one company's taxes on such a basis. 'iihe areas which produce the greatest revenue to a utility are generally the more heavily populated and are more highly industrialized; thus, these localities are in greater need of revenue to finance the generally heavier cost of local government. In this method the consumers benefit directly in proportion to their consumption of electricity, or other service rendered by th« utility. Further, such a method might vuell provide an incentive to the various localities to attract new industry and make the locality more attractive to potential citizens, ihus, as a locality's use of utility services expands, its participation in ad valorem taxes on the public service corporations providing such services also increases. Also, this proposal eliminates inequity which arises from the location of utility property in areas with high rates of levy and assessment ratios less than the 40 per cent applied to public service corporation property.

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264 rs c > G •H 03 H 0) 'O O « (9 << B 04 •o p c o T^ C9 O -o OS c o p cj C o. c i s o o o 6 :i inMD^ COlTVOO ^ rH CVI i-I^O LTV •«•»•> n •> « I I I i I I I I i I I I I I i i I I cvj rH cr» OCO ONr-iOJ O •\ •» •» •» (H (H t— CVI O OMACOVO CO i>-cy CVJ in-o\inCU>^ CM rHVO 0\O^^ oar-i coin>^o lAt-cy o CO in::r CO co • •••«* COtHCO rH ro H O CVI »£> O 00 I>O VD 00 <; j2 T< o o > C3 o +» in^CU f O I 03 • -sr I CO I H I o • CU in I coco I in^ O O I CU t-tI in<-ico « "S * •» OOCU CVI coco vAt-CO OCU rH t^lAOO O r-t\0 O CU cocoH incoco CU o cooo^ n-'^ t-ino ^-c7\o^ . ^ ONOC—vOCO tX) CO o^cu o incu covo in po^ coinrot-co ovo cOL'^co COON cuoMncJN voco«~»t»-c iHCU COrHCUrO rHCTk VO < 'vO r-i ovoao inrH o inrH t-.:T t*-'^ o mcu CU •:aocucoo^vocuoo^vorvJ^-^-cocoocoo OCO J^iHCU-:r j;l-J3-C0CD COOO^CO CUVO t—ON inOAONCO OC0CUfO'>" HCXDOCOCO -o\ONv£) iHj*vd crvcj\ voh-incuo^b-incuo a\a\^oo cnco t*lnr^ inoj coQ5 t~ovovo ^ c^cr\rocu ^-cu o CO inoNcuco cocoint-J'^o tr-Q^^<^ iHiHOVO VOv£> C!\Cn OOOVOOOO * ^ * •« n ^ •» r-1 f-ir-* rH r-i rH r-i O -P S 3^ S O O o -1^ Q. ffl i-i O S ta ^ rH fcOrH (H C (OrH S5 )m4 *rf •H -P _ 5 a ^ Q.'a « -1^ 6 6 0HEQ.Qli-i03dwwi-i-'-'f-if-iw-«-iH c o w „ . Ef«K5CJ o:3ajH (0 CJ J4 -H rH rH

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•a s c +» c o o -to 9 ;> c iH H ffi CO 3 Q) -o o cs CO frt ftl (0 c o 'O H -P O 03 0) O O -H X H -P «J H a =< ^4 O P a 3 CO as s:: U O. O C . o fli -CO I % •» o rH I VXD •» co CACVI CO r-i I VO VO focoo r-* o (ni>t-:*^ 01 CO fovo ir\cT\r-i t^iHoo oj o Lr\ Oi ifW CO VO t-vo OJ H ^ H lA H ^C0VOCD;;r CT\ C3\ CO CO Cn bCM OOOLTlrHCUrrrOrHOlODWH =r 5 co ltvO ro a\if\oj (no cu H OJ rH mirw • ••••••«•••• >-* (TOt>-rooioo^ OJ OJ H a> LTvinvo OAcovovo -• m P (nCO i-iVOj;T invO pHVOvO r-i o\ •^vo cocooojojcorooo ^-co 'DO^HVOVOOVOVOO^OCO ajiT -o r-i roco coco tnt^o cvi on 3 •>•>•» n <« *« G rHOJr-4 COrMrt P^ c f eg > OJ m o 05 c OJ O r-i r-i (U P W P 17} O c o p c -ri :3 H P P fH 0<1)(B"H3 ^w .^. 0) x: N to 09 G9 (U p

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266 Table ^5 also shows that approximately 80 per cent of the total loss In revenues to cities and counties, both as a result of allocating utility taxes on the basis of company operating revenues generated and as a result of using a statewide average rate of levy lower than the individual rates found in this company's operating area, would be borne by two counties, Giles and Russell, On the other hand, the largest relative gains viould accrue to the more urban areas. The cities, for example, v-jould realize an increase In total revenues from $224,220 to $567,561, or of oVer I50 per cent. There is one drawback to this method, however. Although there is some general relationship between a utility's operating revenues and the need for government services, the relationship is not always perfect. The location of several large industrial plants in one locality, for example, may give rise to the consumption of huge quantities of electric power and, thus, enable the locality to participate heavily in the allocation of ad valorem taxes on the electric power company. However, the employees of these plants may reside in another ' taxing district, imposing on that district the costs of governmental services. Population basis In order to overcome the difficulties and Inequities of allocating centrally collected ad valorem taxes on

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. „ V 267 public service corporations on the basis of investment or company operating revenues generated, it can be argued that these taxes should be allocated on the basis of population since this better measures the need for government services. Although this is probably true, there are several difficulties in such a method., First, although people avail themselves of government services more or less proportionately it does not follow that they consume utility services in the same manner. This particular objection, however, can be overcome. Though income differentials permit a larger consumption of utility services, electric power for example. It is not expected that the actual consumption of these services varies significantly between Income groups. Further, although one family consumes more electricity for heating and cooking, another uses more gas for these purposes. A second objection lies in the fact that there is some overlapping of utility companies within one taxing district. Where two power companies serve different sections of the same county, for example, the use of the population basis for allocation of taxes would allow that locality to participate up to twice the extent to which it would otherwise be entitled. To overcome this objection, and as a substitute to the population basis, an allocation method cased on watt-hour meters could be adopted.

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268 Watt-hour meters basis In the case of electric power companies this method could be used to allocate centrally collected ad valorem taxes. It has two major advantages in addition to shifting the benefits of ad valorem taxation of public service corporations from those localities in which utility property is located to those localities in which the utility's customers are located. First, this method minimizes the disadvantages mentioned in connection with allocation on the basis of revenue generated within the localities. The watt-hour meter represents one customer, whether it be a small or large customer. Thus, a locality in which an industrial plant is located would receive credit in the allocation process for onlj' the plant itself and would not reap further benefits unless the family units employed by the industrial plant were also located within the locality. The second advantage of this method is that it considers each utillty»s customers rather than population as a whole. Thus, in those localities served by more than one public service corporation of the same type, benefits would accrue only to the extent each utility so operated Within the locality. This particular advantage is so great that the basis of population factor for allocation will no longer be considered. Table 46 shows the effects of this method of allocation. Once again, two counties stand out as the largest

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269 3 C O > c •H c CO ^ CO OS (0 p o c ® o +5 H «J P s o ni o o G O O 0) P P 09 0) 3S I ^ lA I CVI LTV •> n COCM CO 4ft' I 01 I o n H I V3 iH I O CVI I cocu CVJ LTVCOrHirVr-lin CM H CT\ OCO ONH n •> •* i-l fH t— CM r-i CO oco cr\o t-vo tncncvico CO o\ H in O cr> CM cu o cO cTviH O oco • ••••• 03 ^ H o H ovo ca^ H CT\'vO 0^ CJ\ •» •» •» CVICO CO r-l CO 5 o rH to H CO H m flj o O -P <^^ © o c § O iH C-OO CO incy-=3" CVJ l> CO I ^ ro I vo ro\X3 CM ' CM I ^ I CM •« CO I coco^ I CMVOvo I ^ I ^ •» in • I I tot t cr\ I in « m I I I iH I I I CM •» CO I in I crv • CVI CO • ^ I I CO » COCM CM COCO inc*-co o CMH t--inco o rHvo oocOi-i incoco CM o coco^ c>-vo c>-ino i> co^ comco^-co o <^coinco o\oE^ coo\ cviOMno-A vocoHt>-cM cococn «HCM COrHCMCO HON VO CM in CM CO in COCOCJVfHcg 0\0 0\v^ N-COCMCOVOif o o HCO COOVD t>-C0 COsr CO O OCX)^ rHVO CM \o rA t^r-iocn o\ovovo CM ina\vo in COvr> ^VO ONVO CM^^COO OCO in hj* ^hcmco j*-v5 ^co t-^^ 00 CO CM cj crv tH a>cM cm ovo cm coco v£> m^r ,9?^0 JACJ CTvCM O oco COCJMnCM CO J\fO VO CO O OJcO^^OCMCMCM^mOvO^CO CM CM HjaCMCO CMf-» COCM cI inb-tnvo iH t^rH inrH OVT t^t>-^ o^ o t>-^ t-lS-VO O t*HCOCM OVO f-f cOtinco i-icocoo crx^mvoin cmvocj •««vn«> %a« a«>t atatat t-» in inHcoo ^ inco ootnm © •H C 3 O © Oi © © ><; o •p -P "O E O "D o c QiXJ C5 a « iH •p §g o c p s rH G" © § 03 C S5 C H Pcj-Hja ObO©'a(B^ © ^ a j^th >»> c POOSF
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§ C «» •» <» H m c-m tCM * .: »^ cr\cr>oj-=r c-o\o cn^o tr-co o t>-m voco c—cvj cr^tovo hvomd m^ covo OJ oco cnvo mo^^^ t>-Hco oj o m i-l m t~CM>-cvi cTvrocoj3'co mrocomt^ rocomcj>H mmvo h cy^ coco co vo\£) iH rH mo\mco-vo o rHvo (oco mcu mcvi h m^ o o H •» •> n i eg •H c o >»fc3 J^ P G C Q) O o ® C ^ iH -rt 0) . O'H03Qo+JrH«gOfeN0JCQ-P 03 (9 -P O t^

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271 losers of ad valorem tax revenue. These two counties, Giles and Russell, possessed only 5,24^1 per cent of the utility's total watt-hour meters, indicating that the . number of custoniers in these localities is relatively small , The loss in revenue to these two counties vjould be enormous; hoviever, it should be noted that the actual taxes paid vijere on the basis of investment alone. Further, this illustration has used a statewide average rate of levy which is less than that currently imposed in these counties. Pole-line miles basis The current Investroent-sltus basis of ad valorem taxation of public service corporations, particularly electric power companies, allows substantial tax revenues to accrue to those localities through which the utility's services pass, without regard to the benefits derived therefrom by the consumers of the utility's services or to the needs for government services stemming therefrom. Frequently, electric transmission lines cross roiagh terrain in sparsely settled areas, necessitating a greater Investment in such lines. As a result, those localities reap tax benefits which would not abound to them otherwise. On the other hand, the consumers of electric power in other localities are paying, through their rates, taxes which more equitably should accrue to the locality in which the government services are provided. This method

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272 of allocation allows consideration to both transmission and distribution miles of line, regardless of cost, depriving some localities of revenue from transmission investments in mountainous terrains and transferring benefits to those localities with larger distribution line miles, presumably the same ones which produce more company operating revenue, and in which more consumers reside, and in whioh the need for gover anient services is greater. Table 47 shows the effect of this method of allocation. It is noted, again, that two counties account for approximately 80 per cent of thetotal loss in revenues to the localities. This Is due to the fact that generating facilities are located in these counties, rather than extensive transmission and distribution facilities. Combination of bases Each of the preceding bases of allocation of centrally collected ad valorem levies on public service corporations has something which can be said favorably of it. Further, each of the methods is possessed of some unfavorable characteristics vjhen applied as the only basis of allocation. However, it is possible that a formula combining each of these methods might prove to be satisfactory. Some benefit should accrue to those localities which have attracted investment; thus, the

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273 6Hg B C3 03 O CO CO 4 L-» a» 3) P (0 8 (0 o O 03 C3 0 Hi lH a: o o (D O H O 1 M I I I I I I I 1 t I I I I I I I I I t>^-=r"vO CM cvi rooj o o (yu;r lAUAiH cvi % •» ^ •» -) o CO 1 O incOrH Lf^r^ ltv CM <-i a\ cvi^ cu CO t-l CM CO OM^ONONCO O <-i ITV ON fOCO'^ 00 «k •» % •« ^ a\ .H o H (O (OCOtO^ o cy o\aD o o) U3 ON^ Ow^OO • *••«« H CM LfN ^00 iH CM 0) H 4-> 53 ^ CO ^ G N x: to O P ^ d CD O C a o rHvo b-cococo (O 1 ^ o o « oo coti VOt>ODVOrHOO lOCO^-I ONCVJ O I rH O CVIVDOJL'^ coo H CO (M >Hco voiHfH^ cycM if» CO I I I I I I I O I I 1 Ci I 1 I CO lllillir-IIIICUIII<:T (ocM oj COO ino-co o cvi t-mco o <~i oocOr^ mcoco cu O coco ^at—vo t-mo co^ COLncOC^nO ovo (OiTvcO gno COON f0^^c^i CO MD COrH t<-cvi rH Cr\ VO CM CO CO mcM :*CO ONOVO coo CM-=r CM O COH f-O CO-:* LTViniTV^VO 0 03^ O inCM t>-CM a\r-i H CM mmt-o lAfH coco COO in ^ o CM'sO CACOCOOD ow covo COrH VT) t^ in r-izT CO ON asm t--'\0 ^ cooncm caoni hcx) cnoo o c-incMco coois-u'^ocOrHcocfN CMOOcDcn o^cooocOr^J:TO^a\cJ^<• ••••••••••••*•« H CO ^rHHj;r CMin coco t>-CM O J*VD^ C-O-GO COVD^T O COCX) O O lA ino rH CO rHv£) ^-co rH^co^ oj:r ovo in-H coinvo ^-^-a^^ oj rot^co COVO lAO VOf-CMCMCM CM rH CM in oocococo coo vo c*comCQ 0) .-I 4J a o p -p OJ 5^ O B CD -P o «n c Q) x: CTD (0 P O CJ 0« CU iH O <5 <59 Oy-i G ^ >^ . ^ ^ ^ ^u M -.^ r-l r-l IQ c5 ^^ s c« r4 ok < < f£» pq 35 fQ pQ ooo « &«e:*iSo 3 l-i faOr-ir-l CO -H J3 O CO (0 (3 to Q) "O CO CO O O .3 U -1 rH rH c CO CO 0)

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27M •o c ri c o o ^9 O C3 CO C > (0 o ri o •J 03 CO ca o o -1 T3 C 0) j -P H CO )j e tQ CO -H n •««\«» COOOHOMTV -3or>J* 4* I invo I t-lTv i ^ Q\ o o H CO a\-iHca cu o urv rovo ^ oi trur co vjd t^vo OJ ^ i-i in H oo m-CUCO rHCO IfVCO ^ O C\OJ t~-^->-»0-0^0 COCXJVOCOVO fnrHOCOCVJCJvOHW lAW lAOVO CM>-(M CrkOJ^'O crvcrvt~o\o%CM t— o -VD O H r-l t— CO C— O Ch O O CO CT\ ONCO a>CO ChVjD fO C— ^ r-i VO «•••••••««««••••« GO t>-C--OM>-OCO CVJ*vOvi) ot-o a\ci t-co rH 00 cu in'O 03 00 t-co o> h ^1? E o to , 3 c o Oi O Q) CO .--I (0 ;> X >H o CO ei 0) iH O GJ (D ca O C o p CO M a> o q; CVJ in rH CO o in o o • o o r-i VO • CO in CO 00 H 03 iH CO O

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275 situs method should be considered. However, revenues genera-^ed within a locality afford some indication that those who pay the fees for utility services, and thus provide t.ie funds for the payment of ad valorem taxes, are not necessarily the same ones who benefit from such taxation. Accordingly, some consideration of revenues generated Is in order. It was observed, however, thai; the consumpcion of utility services Is not necessarily a good measure of the need for local government services; therefore, consideration of some consumption unit, such as the watt-hour meter, was found desirable. Finally, heavy investment in transmission facilities, resulting frequently in little or no burden upon the resources of the various localities, would permio certain counties to participate unduly in allocated ad valorem taxes. To partially overcome this objection a consiaera\;ion of pole-line miles, including both transmission and distribution facillTiies, was introduced. From the foregoing discussion, it would appear that no one factor used alone would give a fair allocation of centrally collected public service corporation ad valorem taxes to any one locality In which a company 5 operates. Therefore, it is suggested that a composite 5 This apparently is the conclusion of the U.S. Supreme Court in re-ard to interstate allocation of railroad values. See RCTUey v. Chicago and Northweste rn By. Co., 293

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276 of a number of factors may compensate for the weaknesses of any one factor. Hoviever, In arriving at an allocation system which is fair to both the utilities and the various taxing districts, certain criteria must be given consideration. First, the composite formula chosen must meet the test of legality. Court cases, in the allocation of interstate railroad values, are not particularly helpful in answering the question of legality of intrastate allocation. Although no rules have been laid down by the courts, apparently any method of allocation will meet the test of legality as long as gross discrimination 6 is absent. Second, the concept of equity dictates that the composite method selected, even though it might meet the test of legality, toe possessed with reasonableness. This, of course, is the reason for selecting a composite rather than continuing with the present system based on one factor alone, Finally, consideration should also be given to the convenience and accuracy with which the required data can be obtained from the public service corporations. As was observed in the discussion of the various factors herein considered, each factor has certain "I'he net result of the cases is that any fair method of apportionment will be sustained. ..." see Adams County V. northern Pacific Ry. Co .. II5 P, 2d 768, tH2

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277 weaknesses. It seems reasonable, therefore, to construct an allocation formula in which one factor reasonably compensates for tae inadequacies of the others. Since allocation is essentially an arbitrary process, the question arises as to what type of factors should be included in the composite. To this end, the following table (Table ^8) lists the factors suggested in a number of composites for the interstate allocation of railroad values , TABLE ^8 ALLOCATION FACTORS— COMPOSITES POH IllTERSTATE ALLOCATION OP RAlLiiOAD VALUES Composite A All-track mileage Reproduction cost Carand locomotive-miles Traffic units Gross receipts Composite B All-track mileage Average: road mileage and reproduction cost Carand locomotive -miles Traffic units Gross receipts Composite C All-track mileage Average: road mileage and reproduction cost Carand locomotive-miles Traffic units Gross receipts Average: tons of originating and terminating traffic Taxation of Public Service Corporations in Virginia, report or the i-uoiic service ^'ax iitudy Committee, Comraonwealth of Virginia, Noverabex', 19^7, Table 9, p. 60.

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278 It Is observed In Table i»8 and from an analysis of additional composites suggested in the committee report Q Just cited, that each composite includes not only one or more property factors but also one or more operating or business factors. Following this idea, the composite to be illustrated in this thesis, for the allocation of centrally collected taxes imposed on one public service corporation as an example, includes the following factors: investment -situs, company revenues generated, watt-hour meters and pole-line miles. For ease in computation equal weights have been assigned to each factor. Plan A — no adjustment for local effort . Under this plan each of the four abovementioned factors is numerically added for each of the various taxing districts. This total is then divided by the number of factors to obtain an arithmetic mean for each locality, totaling to 100 per cent for all of the counties and cities. Thus, each locality would receive full benefit in the composite for each of the various factors, regardless of the local effort being made in that locality. The results of this plan are illustrated in the following three tables. Table 49 shows the computation of the composite for each of the counties and cities served by one electric power Ibid., pp. 58-59.

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279 ON IS n o (0 O -P a o o B ca > O |i«<< lo — p c f-l Q) p O (:i H « Ok -P C Q) +9 IP F4 C Oi O <5> 0) CU O co i-i rH incvivo CX) t-co^ cvi o lACO CUCOCD OJ row r-IH OJ f^r cororo-sr OI a\co oco O OI o\o o lTv O OI t>-^ O 0o cnH o oco • *•••• CO ^ ;o^^ coiH coinvo LTvt-oj o ooiTwrcoco • ••••• _ OMXv^r invo CD COi-4 COHCO ^ coinoi o a\ 5 ri bO-H 0) P4 > OJ H ^ C r« ffl O +> Vl C P C H C ^ -O m ^co oi^ coroo coiavo o oi oco oi min coH o ONcno o oi OJ roinoi QJ «-« o q -o 00 O oco ONt^VO OVOOiHjTCOOONiHOI Oi 01 f-lfO iH^ OI' ca^-ol inrot^-MD OJ roo>oi o\oico o\t-i hoo h o\ C0!>-0 b-COH G^0^OV3 ONODCO t^Q OI \r\ mo o inc^co roo^ h mvo oi oo^ o • •••••••••••••••• cnco r-icn^^ vovo o\t^ irvoo on ri ri ri H OJ cooo Q t-inoico (0< OI O oco CO ON coo ( • rOO\OI ONONHCX) ri b-lTvO rOf-l rOOMA >co rist a\o OI b-OI r-4ro irHi-<:=r oiirv com ^-ol::9 cooo Ol 01 ONH ONOl 01 vovo 01 COOOVO liV^" OXVO O ONQJ ONOl Q OOO mOMTvQl CO ON CO vOC0001c3^::r0010JOJ.=r lAOvO^ CO CM Ol OICO OJH COOIOI t^oj o^vo OJ 04 o inoi^-sr onh cooma CO lAOO&jqlAO O LAO r-1 OICO Ov^ OMA Ol 01:* Ol OJ H 01 COrHO f-Ol O CO^ ONVOCOCO LTUT b-lA CO oNOvo ^-.^-vo iacoiauvt o\o o coh O O lAUVO lAO b-a\0 LfNOO O H H ON Ol 01 H Ol -p c _ O H o -p P -P -o » S . UBO a a ai 01 ::$ooEF4(9002i(aH(g Od^SaoiWririt-if^tiU

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280 1:1 CO o O -P Q, O B (0 4»i c (0 o o u H 0) O4 5 0) I H O 1< +1 s o oa o •H © •P a 03 v I o P 0) 0) (0 S &4 3 o > O 9 p c i P u oi O c c— H o tAiH o ONHvo ivroint^o • ••••••••••••• HH H rS tOi-H H SSr4 0JCO CVJ Cf^MJ r-lCO irv>H\0 C5VX> t-COVO t-rOCTviHOM-HVOV^ ovS OJ t>AO O t-rH rH^VD t>-CO t^(TkO (T> • ••••••••••••• o o coo m'.Tkmb-oo OMnm rOO OMTVO CO (n-=T CO i-l O H iH ::3ovzairvrH OJ 0^3b-H CVI mo o\rH • ••••••••••••* ^ro CVJ ^vooJco^iA^ m CVI a\iao^\o cy irwD o co Gr»H CVI a\a\a\cxysr coo ro»^oo mo co m^ a>mcvj ~t-cvj CVI o j\coa\ovo o ^ ^ o mvD CO o\o 00 u^ • ••*••>••• r-i mCOOO H CVJ H CVI I CVJ 5 c (0 ;> iH O H -H 03 O O fl) -P P4 -p (0 c n -P -P +3 rH ffl 03 O CO -H 3 o :s o o c IP >» bO O C h -P 03 S C C iH 0 0)003 _ . H 0) P 0) 8 C >s N ca B <0 (0 0) P 3! o o • o o r-i o o • o o o o o o • o o rH 8 o o o o • o o r-i 01 r-i a •p o EH 03 0) 03 0> H H rH rH a a a c$ Eh Eh Eh EH Q> 0) (0 0) 0) 03 03 (0 CO (/) 03 03

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281 company. A comparison of the composite factor with the investment factor shows that the two counties and one city, Giles and Russell counties and Roanoke City, with the greatest proportion of this company's investment located therein continue to reap the greatest benefits under the composite method. Roanoke City shows a substantial gain, influenced primarily by its larger proportion of revenues generated and watt-hour meters. Giles and Russell counties, on the other hand, show a significant decline in their relative participation, reflecting the unfavorable influence of all the factors other than investment. The extent to which the use of the composite allocation factor would result in changes in tax revenues to the localities Is shown in tables 50 and 51 • Table 30 uses the contrived composite allocation factor to allocate one utility's 1959 taxes if these taxes had been computed by means of centralized assessment at 4o per cent of full value and a tax levy of $1,950,315 reflecting a statewide average rate of levy. Although the total tax bill of this company would have been reduced from $2,523,160 to $1,950,315* resulting in a like reduction in tax revenues accruing to the various cities and counties, it is significant to note that the composite allocation factor used, which considers bases other than investmentsitus, results in gains in tax revenue to five of the six cities and twenty-two of the thirty -one counties. The

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282 > a •ri r: o a 11 O CO CO a; 111 O a H S P ft a +> g n X o (xj « o o p H 01 i-i O aSCO r-i O O Oif •> "y <» o in^ in ro in tvo I I I I IV0 I I i I i ON I I t I u'NroH LnH in oco cy\H oj o »^ t*(H j3* 0\V0 013 o in^ en cvJOTvoco mco * ^ •»•»•» •» rH H O CO iH H inw^ C7V tO-H •H ><; ^ "H O O > <0 O +5 C Gi-1 C ^4 OJ COCJOIOD I Q! CO I VO I CD I (V->t— in OXCTv OlOD^Iv^lini^OCVJfH cvj a\ c-o in CO H > 01 I • CO I H « O • in I vo O CVJ cooj q ocD int-co o oj m ^-u^co o cocoH mcooD CVJ o cfico.=r !>-vo t— m cn^ coincot—cD ovo romoo o> (no\ cJOMncTk vorOr-i^-cvi 00 Hcvi poiHcvico H cr» vocM m vo b-ONCvjvo^^r H cjNcoinint^vo «h h vo inro^ CF\H iHjit cr\H cvi cocMno CVirO ^ rHCVIOJ^vOt-CrvOl^ COH vq o^ vococoo Hoocut-in vo Hro injtco J???J25>?J}Py S'wooLncvjcvj ho CO o oco cnt~vjo ovo o h^co o o\ CVJ CVJ r-Jca cvih co CQ (I) 3 Q o +> -P -P TD S s o 0) O !iH cu-o p o -a p .a 0) CO P s •• C C 0 r-J g -H ;a o o o n u ^ 3 oj ca CS o 01 c to 0)
PAGE 301

c 0) > S a> O (0 (9 a; £^ft« •a O +i <0 -I -P o p 09 O -P B m O Pc,< p I ONcozr UAO t-o\cj\moNt~vD H m mmvoco t-C—vD rHCVJ H t-t~ ffl • • • • * 3 t~cvi:3cvi c 01 3 H O -H C o a u u o c .p ei t-H (OCJN CA^ CVJ tcomo a^ • • • > ' to 03 O P rH CO g-H 3 O flLi a« pi: o o l^-mco o\co t~ o>vo o covo • •«•«« • o\cvj-=r-^co OJ 8 u p Q) -P OJ +3 a o CO c/3 CO 03 ' p 3: (0 P o

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284 § c o to c -r-t O a 03 P >^ O 05 t3 < t4 0« c O rH CO -P o o o < -i U sj: o o p u to o O 4J o. o o ri< irvH o\ovQ o CUiH H (OCOVX) •> n 1 •« •> •» H \0 O « I t t i I I I I I I I I t I I I I mcoH ir\H if> OCC CT\H CJ O •»•»•>•» •» CU^ W CO H 1-4 coc-i roinoj tcvjt— =r H inco i-l 00 fH H iACV|V£> La a\ ;> ej o -p <*4 a H CO covo moo o I tuvr • mt>-o t— iH OCOt^rH -if cool CO ON I I I I I t t GO i I I VO t I I I I I i t I t CM i I I I i I i I I i i I I CVI i I i ^ I I i •» VO rooj cvi cnoo lOt-co o cj h t-if>co o cocoH moo 00 CVI o cood^ c—vo t>-ir\ coo^ rHOI CVI oNinoN rOH OJ CO VO OOH t-OJ «-« ON VO CVI 00 fOi>-o o ri ow Q H ururviH oi-sr J* ^ H tnCVl::3-vO coo O COX3 rH Ol lAlTV O ON O inCTNCQ IfNO aD|>-H ON^^ rH O CVI m fOfOOJ o t«-CVIJT ON •» •> ^ % r^cOr^ in O vO^ H CO ON ^00 cvi^ cocoo coinvoo CVI oco CVI COH O CNCOO O OJ Ol COinCVI CVI iH o CO O OCO ONt-vjO OVOOHja-COOON OJ CVJ firO ni^T OliH CO o p 0) ,Q O H o •p -P ID IS O ci-i a 0) B i bOiH r-i C 0) rH (0 ;a O s O CO c ea c -H C C rH H is: >»> G ^

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285 13 a c ft c o o in c > fed O (9 (0 O H CO -P O O X G) P CO o O -P a o Q} (8 o I ^01 rSOi t*-t^ I « i-tiTVO I COO^ I ^-^:Mrvlnco^i cj ivococo ivoco 1 rovo HVD cjvo I o I ^-lr^^• oj h n n •» t^cj crvo t-vo VD o I CO I CO I CO n in H n CO I CO I I I I vo CO •k •« n rocNCJ oco cov^ moNrH t-rHco cu o in in r-i in »-i fH O -VO ON^ OJ D-c>-roino o\ o o !>-incoCT\co cTNHco a\o\a\vo i>CJ\VO O COVO 3 ^-CVl^ OJ c Ol ::r^ crtoi^^ CO Ol Jp c o o H (0 G S ^ o oco t^ii ra !>> o -H a c i P» U P CI ^1 -! J CO (8 C G r-l +> .:j> H 5^ O O O CO -H 3 c r-i r-1 H i-l I O -P ^ 3 ca +3 ca o P CJ CO P •H (0 ^ .G -p 5^ r-« 01 •> : in OI «l in O fH •» CO Ol in OJ o vo rH «> ro Ol in •» 01 o

PAGE 304

286 loss In revenue which would have been sustained by the reinalnins city and counties Is compounded by both the lower rate of tax levy and also the use of tlie composite allocation factor. Even If the statewide average rate of tax levy, which on the whole Is shown to be lower than the local rates prevailing in the cities and counties served by this company. Is not used and the actual taxes paid by the company allocated on the basis of the composite allocation factor, a substantially similar result would be obtained, as shown in Table 51. The utility's tax bill would remain constant at $2,523,160; hov^ever, each of the cities would have shown a gain In tax revenue, as would tv^enty-f Ive of the thirty-one counties. Once again, the burden of revenue loss would be borne by those localities which are presently enjoying advantages directly ensuing from the location of utility Investment therein. Plan B--ad Justed for local effort . The above method would allow each locality to fully participate in the allocation process although providing little or no incentive to the localities to improve their own assessment practices. In fact, it may vjell have the opposite effect. The localities suffering losses in revenue may retaliate, for example, by further reducing the local assessment ratio and increasing the local rate of levy. These changes could be effected In such a way as to cause no change in the tax

PAGE 305

287 burden on nonutillty property owners within the locality^ however, to the extent that their levy rates are included in the statewide average, and to the extent that they push the stateviide average upward, the total tax bill of the public service corporations would be increased. One possible way of preventing this would be to include some consideration of local effort in the computation of the composite allocation factor. Table 52 shows the computation of the composite alio cation factor giving consideration to local effort. First, the total composite per cents for each locality were computed, being the sura of each locality's relative pex-centage of investment, company operating revenues generated, company watt-hour meters, and company poleline miles. Second, the assessment ratio for each city and county was listed as a percentage of 40 per cent, the assessment ratio imposed on public service corporation property. This percentage was then applied against the total composite per cents to obtain a total composite per .cent for each locality adjusted for local effort. Where a locality's local assessment ratio was already 40 per cent or greater, no adjustment was made; however, to the extent other localities are penalized by this method, the cities and counties making substantial local effort would tend to participate to a greater degree in the allocation process. This is illustrated in tables ^3 and ^4 ,

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23S i < ^ »4 ^A << HI O Wl •p o 02 O -P O P cj a o S CO "^a O ps, -D 0 < o P CO O to -P O 3 O -O O b p o C Xi © ^ P S 0) c 09 P4 0) ta o CQ ^ 02 fi O .cu • • f • • • rOH H iH o (M tn o iTkO o o in <••»•• o ino o o CO O fO O O CO CO ONOO^rr CVI o tr\<."0 -oco c-Ln=r oooi-i^^oo t-r-t -1 CVJ rHOl OJCVI rHCVJ COU^H Ci-OJ^ fOC?VJ:aHCOO-OCOCVIOCU ONHH 9^ S cvj (om^vo^ cy\r-i oi a\copscu cvi oco o t>-cvj ino o cocofo^ a\o h incj\ • ••••••••••••««•« CM CM o CO cvj cu cu in in o CM ocoaoco inoj • ••••••••••«««,, o inco o rot-^-ooco h h rom^^ oj (0-rOrH G\o\cn^ cncooo t-o CM m roo o trvt-co oio^ h ci Ovoi? o • •**•••••••••*•-•« moo HOOVX)^ ^OVO CJNt^ incO C3N r-i p-i rH H CVJ oH 5 -p o G O P O G C
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Q) -O P -o _ Pi «) ha o -p a o E (0 < o o P iH flj -P O O H O CD P C © o 0) P4 a o o p O (I> -P 0 a* G tn C7\ COVO Ol • •••••••««•«•• « p» p (3 a .a iH P P rH >Nintap ,PL«aia«D£ir2;c/3oa&0!:s3! 1^' in rH o o CO rH o cH G G O-H •H -P OS 'O K (S (0 o o CQ P -H p -p U CO CO P4 a -p -a c O b3o> coo >4 oa -H o > p rH C O •t (S 0) -P o o rH -P -o rH ca « ©(BO 3 O C a -p ^ n c -p ^> p p CO 43 (9 00 to G 03 OS © CO © o © a ©mo H ON rH P * W)S C TJ © rH O © 01 Ft 0-3 P fti (0 ^ O O an CO o -p ^ o +>
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290 CO ^1 c C O c cs x: o CO 01 t3 03 £^ CM C O ns o o H -P O i-i . t— cj\u> m in I crsrH H o It «» •» ^ » c^ \oco CO u'\ -I CVJ I ir\ : I I • I in 1 I ' « o H 03 !4 O O -P cu o a 03 I I I oj o ^ -=r OA ooo cy o •»•>•%•> •> CJ ^ CVJ CO rH i— 1 U^CO CO oo^ H •t « n n •> OJ CO _ CO OJ^ H H OJ r! Q) CVl H r-1 H H GO H -a o -H O O O -l-J G 54 '3 tU I VO t-CV» I v£>VO f I ' Q COVO o -J ^oiroizriocucy J3ro ^00 cvt CO c\J CVl CVJ I ,-1 » I o « I 00 1 CVl • 1 i-H to 1 I 00 I i in fo -I in cVi ^ico o vD CO L'no3 o^ CO ON CJ C5MX\ j^ vD ro '-^ J— CVJ co rHOJ CO =H CVl 01 HON M3CVJ lA 00 CO ONtnoNH c^H t-:^ iniAinHvo Tnincn t-c-coco ONcocu Hro in^ o^^cy^ONmcovo o .-ICO mr-i cM^ coco cvi-=r vo ^-L'^cJO t>-oo cTvcocD^ cvi ovo ovtO H O^^CU^ COH^ CNVO O ^iOO «*••••«'•*• H CVl t-lW CMCVl HCJ CO 0) o o u G) k o o S a. «3j << -a Pi o -a 'O CO •rl ^ O JsJ Q. ?^ o S P< 3 a cj o •H to ' £3 u G Q -a CO ^4 " O -

PAGE 309

291 •a c •H P c o o in c a: 3 o -a J K . .-1 u CO 0) H CM a o O so o 0) Oi o aj o > u Q. o a; e CO > o &, <: a; »£)co d in I CO I I j:!-^ coo I a\ I I OJ CO.^vO H CVJ it o : 1 OAV£) O .HV£> •1 ^ •» 1 I 1 I o% 1 cri.=rcovo^ . 1 i : O I ifVOCOVO in n •» *\ •> o cooo in^ CTi CO (OOI --H ON O C^>X)CD t~-CV] ON 01'^ rH vDVO COVO rOO\0J OCO COVO LTvCTk^ 1 t^-HOO OJ O UTk t— ^^^<^=^ mcovo oj 00.-1 cjvo r-i mo voco cy irvfH^ CVJ crvcjo cooj mcvivo mcvi a\mo mca Lao cvi ir\«.D Of^o cno? b-oo cu^ cocvi-a* coirvT c^-OMncoincu h rH cu L^^cvJ^ rH^o lACTNOJ^ incvi h tn r-ICO O (O in CVJ 0) • • • • 2 la -H CVJ cvi •-1 i-> s o o COOO CVl I « CU ltwjd cu iTMn CO t>00^.0 V£) o ca ca f-i :3jr< cj O t5 « S JI4 a o O H CO CD vo vo to m3 cu oco VO cocr\0^ • • « • « CO t>in H cu 01 H cu CO > r-l 4J H H Q) H tH ha 01 CO O O . J ^ 3 1 0) J ca a ,j > in •5/> o >^ CO CO cu rH o H •» 00 cu in n (M in r-4 CO •« o in c;\ «» rH o o * o o rH rH « o CH

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292 ir" 5; IH W !ii U3 o as o O CO (0 B ft« 3 ca *3 o o =1; 3 ca o o P a. o 2 CO O — 1 CO OOvOOO^ ON H cvivo incoin JdlAOJ -t CO CJ CO t • t I I : t I I I I I 1 I I •h n OJ cu cn ON o n cu t-COCVJVOCO u-v -1 04 cu >HV5 00 ^ O CD CVJ ^ ~t H COO rH CAcOvO rHVOCO 01 • *»••• cvi 01 ^ CO 5 l-l HI ^ ?^ ^aj X .c: -.H o J > a o (iH <:: £3 o >»a a o fcJiQ O .-i a 04 a; moCO t~ I OMTl-l t~ I I oj I I I •» *» OJ o J3CO O^CvJ CM 0->C30 UA^-CXJ O OJ r-i t^ur^oo o 00 CO -i JD c\j o cooo ^ t-'^o t-irv 00^ -^ ^utnvjd la {J\ la t-^r co o cj\ rocvj CO X) iAt-o\cnLrvoooo t^j^-co lACO -iOOOOrH O'-i-sf^O t»r-i^ c— Hcovo lAin covo U^CVl CO b-CD ;;^C0 CO j:*OJ O VO C3% o o O ii: m ::i a a o C3 C 03 O (3 a G rH CO X o 3 as

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293

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294 Table 53, based upon a tax bill of $1,950^315* in 1959* reflecting the use of a statewide average rate of levy, shews the extent to which losses would have been incurred by cities and counties with inordinantly low assessment ratios. It should be noted that the losses shown are intensified by the fact that the total tax bill of the company would have been substantially,less than that had local rates been applied. Of the total losses in revenues, 92,3 per cent would have been borne by those localities with an assessment ratio less than 12 per cent of full value, while 93 per cent of all gains to the cities and counties would have accrued to those localities with assessments over 20 per cent of full value. Table 54 shows the allocation of actual taxes paid. In 1959, by the company, using the composite allocation factor adjusted for local effort. This eliminates the consideration of losses due to the use of a statewide average rate of levy lower than that prevailing in the localities served by this company. Once again, it is noted that of the total losses in revenues suffered by certain localities, which are exactly offset by gains in others, 100 per cent would have been borne by localities with assessment ratios less than 14 per cent, while cities and counties with assessment ratios over 20 per cent would participate in 82.5 per cent of the total gains. This would seem to indicate tiiat Plan B is possessed of a certain advantage over Plan A, particularly m that

PAGE 313

295 it would encourage the localities to increase their assessment ratios and wake a more pronounced local effort. However, the penalties and rewards tnay not be in themselves sufficient to result in the action necessary to achieve the improved local effort. Perhaps legislative action would be necessary to reach that objective, without subjecting the allocation of utility taxes to unnecessary complication. Table 55 Illustrates how ineffectual the adjustment for local effort might be. The bulk of the rewards for improving local assessment ratios would accrue to the cities where currently the assessment rat_os are already close to or in excess of Mo per cent. Th-S device, then, would not further encourage these localities; this Is also true, although to a more limited extent, in the case of all cities and counties which would show such gains. The average assessment ratio for all cities and counties which would be rewarded for improving their assessment ratios up toward kO per cent is already over 28 per cent. Where this plan would do the roost good is in the localities which would be penalized. The average assessment ratio for these localities is approximately 12 per cent; therefore, they would receive some inducement to improve their assessment practice. However, it should be noted that the average loss, or penalty, per locality would amount to only $25,529 and, excluding the penalty which would fall on Russell County, an extreme, th©

PAGE 314

296 in in CO 5" p. 0! 3 a c O iH CO P o o 4J a c O rH -i ffl -P 3 OJ 4-> o o a < O I CO I I I I I I I I I I tn I I i I CM ^ I CVI =-» CM o\ •> ^ ^ n H OkVO in^H CO 00 H CO H CM rOH t-coin^ ^^\o o b-in t^COCMVOcO coinro{>-o o inrH CM CM rHVO CO ^ O'St o ln^-ln CO H COu'ACM tCM ONO^VO * <» •« ^ n % CM t>--^ -f incx) CM iH COH CM rH CM fi H & > 3 09 T} 0) r-i ^ a y^ ^ X ^ -.-I O J > CO o p ^ a C rH C P^ -O CO CO CO >'sOI CO kilQ o S 2: as 0) t~Ln I o coincM I • QJ « CO • CM-sr » a\H^ I I v£> I t— I fwVO I rHVO^ O I I CM I CM I int— rH ^ a\ o ^ CM in CM 13 I in o CM I I I I t I I a\\o I o I mm 1 I I i I I I I t^-H I VO I OOCM « I I t t I I I coa\ I o I t*I •« t « ON rH rH VO CM o ocojaCM a\t— oomco ^-o\o H t^mvo-sr mcTvmrH t-^ coo t-o> cocM ooco mtON o\mOT CO b-it CO mCO rHCOOOrH HjJt-rH C0<0 mm covx) COb-O O H OV:* O H mm vjojt a\ 03 H 0) •H -P O H K O u P "O CO u B O 0 M 01 0) s ^ G QJrH .-i ,Q O ^ CUU O B ^ :3 CO CO (0 c o GO G C bO > > CD O O 3 !h H rH • .^ rH G CO

PAGE 315

297 a P c o o ® 04 C9 P o o ro O H r ) m p 3 oa CO P o O O K oH I o c>-^ intacoo I t--co aMr\.H H co n n n n n o moD cow H cvj CJ (OlACOlA iiiiHiiniooiiiiiti I I • ivoioiini I I » 11 I iiiiroicui(0«ii»iii •» •» ^ o> ro ^ , moo w o ONOMTvinsQ OMno int^-w o irviH o^ONcocvj int-co oj^cvivo ir\o^ 00 01 00 O b-V£)C0J3CyvOOlAOOt"-^ lAO 4f osawoao f-voj?" ctvUJ t*-o\a\rovo ^ oivo inoi irvfHco oncm roinvo corHvo ph o CVJ roco o o t^co iH coh t^H b-ir\^^ ^-C0 lAO CM H CVJVO CVI H co^ cvi H roo ro^vo ir\vo cvi (OvovjOoo -»cr\N-iAO cr>o (OrH int>-coco roint-o\ H rH H CM H rH O iH < <» p o o 09 0) .^ Q C O 5 rH CO 3 «H 00 in O vo rH •> CO CVI in CVl •a* d H O -H o 5 c oa o f>s p4 p to CO G C rH ^ 0) O 0) c > «-» iH — 1 Q) iH fH to CO O Q) P 3 p to a 01 p -p (U ,c prHajtao>»Nco 3 O 3 O £ CO to c o to P o rH •1 ro CVJ urv CVJ m rH s O tain 0) o H rH ja ^ CO to 0) 0) COM CO Xi

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298 average loss of potential revenue would amount to but $21,203. Considering the relatively large size of city and county budgets, this penalty, although annoying, would in all probability be insufficient to give rise to any substantial overhaul of the assessment practice. Centralized Assesstaent and Allocation foj^ Local Ta:K3t-rorr There probably would be some question as to the acceptability of a scheme of taxation on public service corporation property as has been presented in the preceding section. Utility property is currently being assessed by the Virginia State Corporation Commission and the assessed values so obtained are allocated back to the localities on the iMisls of situs. Therefore^ there is precedent for this sport of central participation. To • subject the public service corporation property to centralized taxation as well, relieving the cities and counties of this function, although achieving a (greater degree of equity, would probably be distasteful to the various localities, Just as increased centralization of federal governmental activities is repugnant to some people. . Further, there can be raised some question of constitutionality. The Virginia Constitution, as do most state constitutions, provides for uniform taxation among the various classes of property. To centrally assess and tax public service corporations would be paramount to

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299 achieving uniformity in taxation among one class of taxpayer, rather than between all classes of property. Although the goal of such a scheme is to effect a more equitable tax climate. It may well require a constitutional amendment to be implemented. For these reasons, it is necessary to offer some alternative to centralized taxation which currently falls within the Constitution and which might be less objection able to the localities who fear the accumulation of power "in Richmond." As has been noted, there is precedent for centralized assessment of utility property and allocation to the localities of the assessed values so obtained. The same principles which were discussed in relation to the allocation of centrally collected levies can be equally applicable to the allocation of assessed vtlues centrally ascertained. A composite allocation factor, similar to the ones computed in tables 49 and 52, could be applied in the allocation of assessed values to the cities and counties, while allowing these localities to continue to Impose local rates of levy on the allocated assessed values. The composite allocation may or may not be adjusted to reflect local effort; however, it would seem desirable to encourage, or even require, the localities to Increase local assessment ratios in this case. In the case of centralized assessment and taxation, improved local effort is desirable; however, low assessment ratios coupled with high tax rates would be offset

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300 to some extent by the consideration of localities with high assessment ratios and low tax rates in the computation of the statewide average rate of taxation to be imposed on the assessed values of public service corporation property. Where the localities are left to their oxMn devices, even the use of a composite allocation factor in allocating assessed values to the cities and counties would fail in purpose in that it would so encourage these localities to lower their assessment ratios still lower and to raise their levy rates still higher. For reasons stated previously, it appears doubtful that an adjustment of the composite allocation factor to reflect local assessment ratios would prove a sufficient inducement to the localities to improve their assessment practices. Accordingly, a stronger and perhaps statutory device must be devised requiring the localities to raise their assessment ratios to some minimum level, such as the 40 per cent ratio currently imposed on utility property, at the risk of losing some portion of state aid to education, to cite one example. Summary The fact that a public service corporation, as an economic unit, frequently serves more than one city or county differentiates it somewhat from the nonutillty property owner and taxpayer. This is not to imply that the public service corporations should bear a more or less

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301 onerous share of the total tax burden; rather, it means that to assure that they bear an equitable share of the tax burden it may be necessary to examine more closely the existing methods of taxation and to search for other ways in which this goal may be achieved. One way, with some variations thereof, has been discussed in this chapter. In general, the method considers allocation to the various taxing districts of either centrally determined assessed values or centrally collected taxes imposed on utility property. The major innovation lies in the allocation process. For the reasons cited, allocation on the basis of situs alone leaves much to be desired; therefore, other means of allocation were considered, including company revenues generated, population, vjatt-hour meters, pole-line miles and a combination of bases. It was noted that each factor has inherent weaknesses standing alone, but that a composite formula selected for allocation purposes might compensate for the weaknesses of each separate factor. The allocation procedures discussed In this thesis are included for Illustrative purposes only, and may be subjected to modification In actual practice. Further, equal weight was afforded each factor although, for political or other purposes, certain factors, such as investment, may just as easily be given greater weight. It is felt, however, that probably no reasonable substitute

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302 would give materially different results. It is strongly believed on the basis of this investigation that some -i composite allocation factor which gives consideration to factors in addition to investment should replace the present method.

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CliAPTER 9 SUMAlty MU) COMJLUSIONS The purpose of this study has been to examine the ad valorem tax system in the Commonwealth of Virginia as to the possible discriminatory effects on public service corporations. Five general questions were investigated. First, is there any discrimination in the assessment administration and practice in Virginia? Second, if so, to what extent have the public service corporations suffered as a result of the assessment administration and practice? Third, auxiliary to the main theme of this study, are there other possibilities for discrlraination of public service corporations because of the fact that the value of utility property is not readily ascertainable? Fourth, if the problem of determining value of utility property can be disregarded, is there the possibility of further discrimination of utilities through the classification of their property as realty or personalty? Fifth, do any reasonable alternatives present themselves as corrections of existing discriminations? 303

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Sutainary Introduction The statistical device used to measure asseaaroent Inequality, the "coefficient of dispersion" or "coefficient of deviation," revealed that in certain areas in Virginia unusually high assessment inequalities prevailed. Using a coefficient of dispersion of 20 per cent as the standard for nieasurin^^ assessment inequality. It !«» found further that Virginia is one of three states with an index greater than 40 per cent. This indicated that there was an assessment problem in Virginia worthy of further consldera-cion. Development of the property tax First considered was the historical development of property taxation generally. Including the problems inherent in the taxation of Interstate commerce whlob In .. . , . , , many cases evolved around the taxation of property versus the taxation of income. After considering property taxation in this light, attention was directed to the constitutional provisions and the present system of property taxation in Virginia as it has developed. Just how important property taxation has been was then considered and it was observed that property taxation continues to play a most important role. Throughout the United States the property tax as a percentage of total state and local revenue declined in

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305 irnportance, from 78 per cent, in 1927, to 45 per cent, in 1957. This reflects the withdrawal by many states from the property tax field and "che substitution therefore of tax systems which are more productive, including the sales and income tax systems. The property tax is still the major source of local government revenue, accounting for ' over 85 per cent of all local government tax revenue • nationally. Because of the Importance of ad valorem taxes to the various local governinents, both nationally and in Virginia, assessment administration and practice remains equally significant. Assessment administration Assessment administration is concerned with two basic problems. First, property subject to taxation must be located and placed on the tax rolls. Second, a reasonable valuation of such property must be made. It was noted that both of these problems are frequently complicated by the fact that not only are valuations difficult to make for all types of property but also the assessing office is frequently limited as to staff and operating funds. As a result both of these internal limitations of the assessing function and of the fact that not all property within a given locality is assessed by the same office, unequal assessments within taxing districts and between taxing districts may give rise to discrimination in ad valorem taxation. If assessments which are not equal

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^o6 result m inequities, then the alternative of uniform assessments must be followed to insure a greater degree of equity. In making uniform assessments, however, it was noted that certain problems remain. Should all assessments be made at "full value" or uniformly at some fraction of full value? The general conclusion v.-as reached that from the point of view of uniformity it probably makes no difference; however, from the point of view of the fiscal powers and policies of local government, as well as of the best interests of property owners, assessments closer to full value seem more desirable. The assessment practice in Virginia ~ First, some examination of the various assessment practices in Virginia revealed a variation in assessment ratios between the cities and counties. The coefficient of dispersion for the cities was found to be 25.8 per cent,**" indicating relative unifomnity in assessment therein at a median level of 36. 0 per cent which, although not meeting the constitutional requirement of 100 per cent, compared favorably with the state assessment of public service corporation property at ko per cent of full value. The median assessment for the counties, however, x-tas almost half that of the cities, 18. 3 per cent, and ranged to Computed from data shown in Chapter 4, Table 9.

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307 a low of 6.5 per cent in one county. Assured that sotne problem existed in Virginia, the next step was to examine the effects of the lack of uniformity on Virginia's public service corporations. . ., . Data relative to one public service corporation and the area which it served was considered as illustrative of the problem existing in Virginia. First, it was found that assessing this company at 40 per cent of its fair ; value resulted in a tax burden of a lia If -million dollars over what it would have been had the statewide weighted 2 average assessment ratio of 31*5 per cent been used. Since the company examined serves only a portion of the state, the possible effect of assessing the company's property at the assessment ratio prevailing, on the average, in the company's operating service area was next considered. Using the same average rate of taxation _ ^ which actually prevailed, in 1959, it was found that the use of file systemwide average assessment ratio would have resulted in a tax savings to the company of over om' ; i 3 million dollars. Finally, it was observed that had the company been assessed, in 1959> at the average assessment ratios prevailing in the cities and counties considered separately Instead of at the state-administered 40 per^ / ' ' '' — — — — f., ^See Chapter U, Table 10. ^See Chapter 4, Table 11. / ' ,

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308 cent level, the company would have saved almost 60 per cent of the actual taxes paid. It was also noted of the assessment practice In Virginia that not only are assessment ratios generally lower than that imposed on public service corporations property but also there existed considerable variation in the assessment ratio within localities. It was concluded from these data that the present assessment practice in Virginia subjects certain public service corporations to two kinds of discrimination. First, there is discrimination in the assessing of utility property at a ratio of full value higher than that which is imposed on nonutility property throughout the state. Second, an additional layer of discrimination exists as between public service corporations to the extent that one company may bear a larger proportion of the tax burden in a lowassessment service area than another utility operating in an area making a greater local effort to meet the costs of government through increased assessment ratios. Additional data considered revealed that not only does a problem of discrimination currently exist but also that there has been a noticeable trend toward increasing discrimination over the years. In the service area of one public service corporation, for example, the average See Chapter Table 12.

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309 assesstnent ratio declined from m.l per cent, in 1936, to 18.9 per cent. In 1956, while the assessment ratio applied 5 to utility property has remained constant at 40 per cent.^ Further, the average nominal rates of tax levy, which are applied equally to both utility and nonutility property assessed values, showed a significant increase during this same period of time, rising from $1.87 per |100 of assessed value to $3.57 per |100 of assessed value. The discrimination pointed out by these data takes two directions. First, as has been discussed, the public service corporations themselves are discriminated against. Second, and perhaps of greater importance, the consumers of the utility's services, particularly when the consume such services in a locality other than that in which the services are manufactured, must bear the burden of the cost of a local government which provides them few, if any, government services. Finally, dividing the total taxes levied on both utility property and nonutility real estate by the assessed values of these properties, for the years 195^ and 1958, the average effective tax rate per $100 of assessed valuation was determined. It v^as noticed that this rate, aa applicable to nonutility real estate, rose from $2,56 to 'See Chapter 4, Table 34, 'Ibid.

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310 $2,68, an increase of only 4.7 per cent. During the same period of time, however, the average effective rate of taxation on utility property rose from $2,74 to |3«o6». ,., ,• an increase of 11.7 per cent, or more than double the ; , increase on nonutility real estate. It was noted, further that there are two apparent reasons for this discrepancy. First, certain counties, in which substantial utility . property is located, tax personal property at a rate higher than that imposed on real estate. VJhere certain utility property Is classified as personalty, the comparison of the average effective tax rate on nonutility real , estate must necessarily reveal differences. Second, more utility property of the company examined was located in localities with low assessment ratios and high rates of levy than in localities with high assessment ratios and low rates of levy, , ; . . v,..ii , ),,,, ... Valuation, assessment and taxati on of public service corporation "property Although the major purpose of this study was to examine the assessment practice in Virginia for possible discriminations, it was noted that this is not the only way in which discriminations can be effected. To this point assessment at some percentage of "full value" has been thtt object of inquiry without consideration of the corollary problem of just what constitutes "full value." Among the evidences of value considered for public service corporation property were original cost less

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depreciation, depreciated replacement cost, capitalization of earnings, and market prices of stock and debt. For each evidence of value there is not only much which can be said in support of its use but also there is disagreement. Proponents of original cost (less depreciation) argue that much utility property has been acquired . in recent years and, therefore, its cost represents a reasonable indication of market value. Opponents argue, among other things, that this method represents a summation, of asset values vihich do not represent the value of all operating property taken as a whole unless intangible values are included. Reproduction cost, similarly a summation type of valuation, appears to be a useful . . method of valuation only vihen regulatory commissions consider reproduction cost in determining the base on . which to set rates. Indicative of the controversy surrounding the use of capitalized earnings as an evidence of value are the questions of income to be capitdLized and rate of capitalization. Although no general agreement has been reached as to actual procedure, it is generally concluded that this evidence is worthy of consideration and that further study of its problems may well result in a more useful evidence of value. Considering market values of stock and debt as an evidence of value has been subject to even more criticism, mainly for three reasons. First, it is argued that

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312 the tnarket value of securities does not necessarily ,, represent the market value of the assets for which these securities represent sources. Second^ a relatively small percentage of the total securities outstanding are actually traded; therefore. It Is argued that those securities actually traded are not necessarily representative of the value of securities not traded. Third, the objection is made that the market value of securities . ^ depends on the income allowed by the same regulatory , agency which is making the assessment of ad valorem value. In spite of these objections, however, there appears to be some merit in considering market value of stock and debt as an evidence of value. As expressed in one reports „.. Anticipated future earnings discounted , , , . to their present worth are theoretically superior to stock and bond values, but ,j the appraiser Is not necessarily a better prophet than those who stake their money on their predictions of future earnings by buying and selling railroad securities and, even if the appraiser were an excellent Judge of earning prospects, stock and bond values would have the advantage of being objective and would merit the support of those who believe that a little objectivity Is worth a great deal of accuracy.' ; h ; At the present time, however, the problem of de terrain' Ing value of public service corporation property is a moot question in Virginia, Ad valorem values are determined in ' Carrier Taxation , p. 109. Cited in Committee on Unit Valuation, Appraisal of Railroad and Other Public ytlllty Property for Ad Valorem Tax Purposes (Chicago: t'ederallon of Tax Administrators, i9b^J, p. 47,

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313 this state by reducing original cost by approximately 20 per cent for depreciation^ thd depreciation allowance being determined by state studies irrespective of book reserves. Although as an evidence of value the Virginia method may be subject to question, it is not a major Issue in Virginia at this time. Classification and taxation of . . tangible personal propeFEy < \ =v ' . ' « Of some significance is the fact that not all states seek to tax personal property. Among the reasons found and examined, the difficulty of finding personal property stands out. That states generally are placing little emphasis on the taxation of personal property is evidenced by the fact that such property comprised only 17,4 per cent of the total tax base as recently as 1956, No clear definition of real estate as opposed to personal property readily presents Itself, statutory distinctions being made by some states. Judicial distinctions being made in others. In Virginia, no distinction is made, either by the Constitution or by the State Corporation Commission which is responsible for the assessment and classification of public service corporation property. Because the State Corporation Commission does not distinguish betvueen the two, certain problems arise 8 See Chapter 6, Table 23.

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3lM in connection with utility property when certain localities so distinguish. The problera Is intensified, further, when localities impose different rates of taxation upon personalty and realty. The fact that the State Corporation Conanission "equalizes" the assessment on utility property at a 40 per cent level determined by a study of real estate assessment ratios seeras to have no effect on some localities which persist in classify ins certain utility : ^ property as personalty and, thus, subject to a higher : rate of taxation. It was further observed that certain localities not only disregard the above but also go further to classify as personalty certain utility property which, according to distinctions generally accepted, would be classified as real estate. The growing practice of arbitrarily classifying certain utility property as personalty lias resulted in a "rate of class discrimination" of ,88^ per $100 of assessed value, in 1959j up from .36j5, in 19^9* and indicating that there is a trend toward increasing arbitrary classification of utility : : 9 property as personalty. Reforms in the taxation of public service corporations Aside from the complete elimination of the ad valorem tax system, the route of reform can take three directions. See Chapter 6, Table 27.

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315 First, efforts can be made to achieve greater equalization in the present assessment practice. Second, there is the possibility of centralized assessment and taxation, with a reallocation of funds so collected by the state to the various localities on some equitable basis. Third, there is the possibility of centralized assessment of public service corporation property and allocation of these assessed values to the various taxing districts on a more equitable basis than the present method of situs. -vf Greater equalization in the assessment practice . Where there is a difference between assesBment ratios applied to utility property and those applied to nonutility property, greater equalization can be achieved in two ways. First, the utility assessment ratio can be raised or lowered to the level of local ratios. Second, local nonutility ratios can be adjusted to the level at which utility property is asseased. Where the utility assessment ratio is higher than local ratios generally, as is the case in Virginia, and it is desired to lower the utility ratio to a level more' in keeping with nonutility rates, there is some question as to just what nonutility, local ratio to use. One possibility is to lower an individual company's assessment ratio to that which prevails in each county and city served by the company. Another possibility is to lower the utility ratio to that level which prevails, on the average.

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316 m the company's operating service area. A third alternative Is to lower the utility assessment ratio to the statewide average. As has been noted, this Is essentially the procedure followed In Virginia; however, the statewide average used In Virginia Is based on a study of real estate ratios conducted more than thirty years ago and .. does not reflect the average ratios existing today. ., It was noted that the average assessment ratio in Virginia has steadily deteriorated over the years and that this reduction in the assessment ratio of many taxpayers, with an attendant reduction in ad valorena taxes, has resulted in greater reliance on federal and state aid to meet the costs of local government. An examination of the merits of raising local assessment ratios rather than lowering utility ratios revealed that this method would affect a general increase in the property tax base for future use by the localities without necessarily causing any change in present total tax bills. Allocation of central levies . As a point of departure in the illustrating of this device, the assessmenti ratio on utility property was left at 40 per cent and the average statewide rate of levy was applied to this valuation to obtain the total tax bill of one company. Wext examined were various methods of allocating this centrally collected levy. The situs of investment basis would distribute these funds to the localities according to the dollar investment

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317 of the company In each of the localities. This method Is presently followed in Vlrsinla, the only difference being that the individual taxing districts impose the levy ' • directly upon the property so located within their Jurisdiction rather than depend upon a state allocation made on the same basis. It was noted that to so allocate the central levy on this basis alone would be an Improvement only in the sense that a uniform rate of levy was being employed. Under a "revenues generated" basis the central levy would be allocated to the various localities on the basis of the percentage of total revenue a particular operating utility derived therefrom. This method vuould enable the localities which contribute relatively more to the utility's revenue to participate proportionately In ttie allocation of utility taxes, regardless of the location of utility property, j To overcome the objection that the "revenues generated" basis Ignores to some extent the fact that there la . no necessary correlation betvieen revenues contributed by a locality to a utility and the financial needs of thati; locality to provide necessary government services, a .!. "watt-hour meter" basis was considered. The watt-hour /; ^ meter represents one customer, \iihether it be a small ojf > large customer, thus minimizing the effects of industrial " plants vJhich consume huge quantities of pov^jer while requiring few employees and, consequently, few government services.

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318 Finally, it was observed that the dollar Investinent of transmission line is considerably greater than the dollar investment of distribution line; however, the transmission lines usually traverse "open" land which is marginal in its income -producing capacity to the utility. On the other hand, the cost of distribution facilities is relatively small but is located in high income -producing localities. The use of a "pole-line mile" basis, which considers miles of line rather than the dollar cost of line, tends to lessen the inequalities which obtain from the sole use of the situs of investment basis, ; : , Although each of these bases seems to prove inadequate as the basis of allocation when vlevjed alone, tliey do possess favorable characteristics. Therefore, it was t^gUested that a composite of a number of factors may compensate for the weaknesses inherent in any one factor. It was noted that there is nothing new in composite allocation factors; however, they have been used in the past primarily for allocation of railroad values between states rather than to allocate other utility property values between taxing districts of the same state. For simplicIty in illustrating how the composite allocation factor wight work in Virginia each factor was afforded equal weight in the formula, the various factors used being situs of Investment, revenues generated, watt-hour meters and pole-line miles.

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319 Under the first plan proposed, the composite allocsation factor vjas the average of the percentases of one company's individual factors, reduced to a total of 100 per cent. This allocation factor would then enable the central agency so responsible to distribute the centrally collected utility taxes to the various localities. The, distribution was illustrated using two total taxes of one company, those which would have been obtained by the application of the statewide average rate of levy and ' those which were actually paid, both for the year 1959. It was noted in these illustrations that, even keeping the cocipanys' tax bill at its 1959 actual level, 34 per cent of the localities served by that company would have gained In tax revenue, while over 8? per cent of the loss In revenues under this device would be borne by two s. , counties in which there is sizeable investment of utility property. • ' This first plan would allow each locality to participate fully in the allocation process while providing little or no incentive to the localities to improve their own assessment practices. One way was then considered to include the localities' local effort in the computation of the composite allocation factor. It would be expected that consideration of local effort (local assessment ratio compared with the utility assessment ratio) would encourage many localities to increase their assessment ratios and make a more pronounced local effort. However, It

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320 should be pointed out that In some cases the total effectiveness was subject to some question due to the Ineufficlency of the penalties and rewards of this plan. Accordingly, it was concluded that legislative action might be necessary to achieve substantial unifornity of assessment ratios, or at least to insure miniiauiri local; assessment ratios at substantially the same level as the utility ratio. Allocation of centrally assessed values for local taxation . Though the State Corporation Commission currently allocates centrally assessed values of utility property to the localities for local taxation, only the situs of investment allocation factor is used. Under the assumption that the same principles which vjere discussed in relation to the allocation of centrally collected levies can be equally applicable to the allocation of assessed values centrally ascertained^ a composite allocation factor can again be computed. Similarly, this composite allocation factor may or may not be adjusted to reflect the level of local assessment ratios. Conclusions i . The examination of Virginia's property tax system in some detail plus research into the laws of other states. Interviews vilth officials of several state and local governments, and readings In the literature of taxation have led to certain conclusions. Because of the many variables

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32X idilch make our economy so complex, compoundeci 'by the passage of time and changes in the political and philosophical idealogy, uhe conclusions set forth in this thesis represent hut points of departure toward furtiier study. As to property taxation generally The heterogeniety of property in today's economy precludes the taxation of Just one type of property as might have been possible in a less complex economy. Because property takes so many forms and because, with the credit -economy of the present day, the ownership of property does not necessarily reflect the ability to pay taxes, it has become a peculiarity of our times to place increasing emphasis on the abilities of people to earn a reward for their efforts. No longer is property a measure of peoples* efforts; consequently, many governments have learned to seek support for their activities, not from property owners, but from people with the ability to earn rev
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322 to productivity then one Tnight concludo that the purpose of property taxation is to control or regulate private _ , property. Although this is not the avpwed purpose of -, property taxation It must be observed that this purpose Is unvjlttingly accomplished by the retention of this system of taxation. Accordingly^ it is concluded that ., property taxation generally could be abolished in favor of some scheme of taxation based on productivity.'^^ ' The solution, it must be admitted, is not quite so simple. The property tax is an old tax and would be hard to shed from our economic system. Further, it in fact' does accomplish the purpose of providing local revenue"; to local governments, and does so with varying degrees of efficiency, most of vjhich have been more or less adequate, and many of which have been more or less inequitable. The retention of the property tax, in any event, seems Inevitable for the present; therefore prudence, being the better part of valor, dictates that efforts be made to make the existing system as equitable as possible* •'•^"Most thinkers in the field of taxation have come to believe that a fair basis for comparing tax burdens is to be found in an examination of the relationship existing between the net income enjoyed by the various classes or types of taxpayers and the respective taxes which each is called upon to contribute. This belief rests largely upon the acceptance of the principle of ability to pay as the determinant of Justice in taxation." Dr. Stauffer, cited in Report of the Committee to Stud y the Burr'' en of Taxes on Aeai £state , General Assembly of Virginia. l-^eDruary i>, 1534, p. 40. '

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323 That the Inadequacies of the several property tax ana the inevitability of its retention have been unresolved . problems for some time is indicated by the following quotation from a 193^1 committee report to the Virginia General Assembly: I believe tliat the greatest advance raade in State taxation in the past has been in the line of getting avjay from the property . tax regardless of income therefrom and : basing taxation for the support of the government more and more upon the income of the subject taxed. A systea of direct property taxation regardless of its income is a relic of bygone ages and should , be discarded. In Virginia this system has ^ . been practically abandoned for raising revenue for State functions, but this "archaic and unsatisfactory direct property tax is the basis of raising revenue for locaTTgovernrTient support .^l That this "archaic and unsatisfactory" system of taxation still exists today in Virginia provided sufficient incentive for the present study. / As to the assessment of real estate The Constitution of Virginia (Section I69) provides that real estate shall be assessed at its fair market value. For many years, the localities have failed to do this and in fact have actually assessed property at an increasingly lower rate of fair market value; thus, a practice has generally evolved which is counter to the constitutional provisions. If in the past the constitutional requirement has been honored more in the breach Ibid., p. 37,

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32^ than in the observance then public policy would seetn to dictate that the Constitution be ainendecl so that the practice will be legal, or else that the statutes be tightened to insure compliance. Though aost of the existing inequities which arise frora the current assessment practice v^ould be corrected by strict compliance with the constitutional requirement of assessment at full market value, the more gross inequities would be substantially corrected if the constitutional requirements v;ere lowered to some percentage of full value and rigidly enforced. In any case, any departtare from a constitutional mandate will result In certain inequities and is to be strongly disapproved. As to the assessment of public service corporation property The physical properties of public serv .ce corpoWl' tlons are assessed annually by the Virginia State Corporation CoramisBlon under the Constitution and statuses of the state. After establishing public service corpora. tlon property values, generally original cost less an allowance for depreciation of approximately 20 per cent, the State Corporation Commission prov:'des for the "equalization" of the locally-taxable physical property of public service corporations with the valuation levels on proper';.y assessed by local officials. The method most frequently used is to apply to utility property the statewide average assessment ratio, found to have been

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325 approxitnaoely 40 per cent many years ago and still used today. This practice is defective for three reasons. First, It is a clear violation of the constitutional mandate for assessment at fair market value. Strict adherence to the Constitution would, however, preclude any equalization of utility property with other property as long as the localities continue to assess at some fraction of full value. Until this is corrected the lesser of two evils seems to be equalization at some fraction of full value for public service corporation property. The second defect then resides in the equalization factor itself. Although the statewide average assessment ratio may have been found to be approximately 40 per cent at one time, assessment ratio studies conducted since the origliial adoption of this equalization factor indicate that it has declined materially. Thus, the attempt to equalize the assessment of public service corporation property meets with failure when the factor used in the equalization process is inadequate. To the extent that the equalization factor is inadequate as it IB In Virginia then public service corporations are being discriminated against in violation of the constitutional provisions for uniformity, A side effect of the present equalization practice was also noted. Even if the statewide average assessment ratiu were 40 per cent, the ratio applied to utility property, the wide variations in ratios

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326 used to determine the average lead to unequal taxation of public service corpora t_ons which do not operate throughout the state. It was noted, for example, that all of Virginia's low-ratio localities are located in the southwestern section of the state. Therefore, the equalization of the property of public service corporations serving that area at the statewide average does not succeed in equalizing the assessment of these companies with the assessment of local property. The third defect of the present 40 per cent equalizatio.i factor rests in the fact that it was determined by a study of real estate alone, since data relative to tangible personal property was both unavailable generally and unreliable when available. It is to be expected, however, that the effect. ve average assessment rat^o of this type of properti^ is considerably less than ti-iat on real estate since so much of this property escapes taxat.;.on. Equalization of utility property on the basis of real estate studies alone does not cons der the fact that considerable utility property is personalty. Thus, to the extent tiiat perso^ial property is actually assessed at some fraction of full value which is even less than the real property ratio, public service corporations are being further discriminated against.

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• 327 As to the taxation of tangible ~ personal property The very nature of tangible personal property makes its assessment difficult in most cases. So much of it is capable of being, and in many cases actually is, concealed that some states have abandoned taxation of it entirely or have specifically listed certain items of personalty, Buch as automobiles, as subject to taxation. Where certain items of personalty are excluded from taxat-Oi:, or are specifically included for taxation, inequalities necessarily result. It appears that little can be accomplished toward the goals of uniformity and equity in taxation by such a procedure. In those states where personal property is loosely defined, as is the case In Virginia, there arises another kind of inequity. First, those who are honest enougn to report all of their persoaalt^ for tax purposes bear a disproportionate share of the tax burden at the relief of those taxpayers who intentionally or Inadvertently fail to record their personalty with the tax collector. Second, public service corporations, because of their regulation, roust report all of their personalty to the tax collector and are thus discriminated against to the extent tiiat soRie substant-al proportion of other such property is not taxed. The general conclusion is obtained, therefore, that the taxation of personal property should be abandoned as administratively unworkable and, consequently, inequitable.

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328 As to the rate of tax levy Conclusions as to the rate of tax levy imposed by the various localities on property are composed of two parts. First, it makes little difference what rate a particular locality imposes upon the assessed value of the property located therein, as long as all of the property is uniformly assessed, for there would be subBtantial uniformity in the taxation of those who benefit from the services of the local government. However, since the public service corporation is an economic entity serving a relatively large geographical area it appears that its property, taken as an economic unit, should be taxed at one rate, preferably reflecting some sort of average of the rates existing witnin its service area, whether a few counties and oities or the entire state. The second conclusion as to the rates of levy obtains from the observation that in some localities different xaues are imposed upon real estate and personal property. In all cases examined, the rate imposed upon personalty was found to be Higher than that imposed on realty. Presumably this stems from the desires of local tax collectors to in some way compensate for the fact that substantial personalty escapes taxation, and that the effective assessment ratio on personalty is considerably less than the real estate assessmewt ratio. Not only are those who do report their personalty for taxation thus

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329 further dlscrlininated aGainst but also tnere exists in Virginia yet another form of diacriniination. The property of public service corporations is not classified by the central assessing agency into categories of personalty and realty; therefore, arbitrary classifications have been made by the localities in which there is a higher rate on personalty. To the extent that some utility real property is erroneously classified as personalty, this places an inequitable burden upon the public service corporation. This inequity would be eliminated with the abandonment of taxation on personal property. However, as long as personal property continues to be taxed in Virginia, improper classification of property will continue to result in discriminatory taxation. It would seem that since public service corporation assessments are "equalized" by a factor obtained from the study of real estate ratios alone that equity would dictate that the rate of taxation so imposed should be restricted to the rate imposed on real estate locally. As to recommendations Recognition of existing Inadequacies impels the search for improvements. The pressing need for reforms in the property tax system as presently administered was emphasized by one authority wno wrote x There are numerous • . . methods which might be considered for meeting some of the current and emerging jurisdictional problems. It is likely that txiere would

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be considerable opposition to any of them. One thing that does seem to stand out rather clearly, however, is that revenue inadequacies, friction, and dissatisfaction with tne property tax will markedly increase if we continue to try to muddle along under the present Jurisdictional setup, ^2 A different method of allocating the tax revenues from public service corporations, and other large industries j can be espoused not only in the name of fairness to business enterprises, but also in the name of good government. To this end, several proposals were made in this thesis to partially overcome the present inadequacies of the property tax system in Virginia, while attempting to retain ad valorem taxation Itself as a means of raising local revenue. Of the proposals made one seems to stand out as injecting more fairness into the property tax structure In Virginia while maintaining an element of political appeal. The proposal calls for allocation of centrally assessed values of utility property, or of a centrally collected tax levy Imposed on public service corporations, among the taxing districts on the basis of a composite allocation factor. This allocation factor could Include situs 12 Mabel Walker, Executive Director of the Tax Institute of Priijceton, New Jersey, address before Local Government Workshop; Preview of Local Government I9601970, New York State Office for Local Government, Albany, New York, June 7, i960.

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331 of Investment, gross operating revenues, length of line, and number of customers, in the case of electric power companies, and similar factors in the case of other public utilities. In addition, a device could be incorporated into this method which would encourage the localities to improve their own assessment practices. Such a method, if it provides certainty in taxation and is coupled with fairness and a desire for self-help on the part of the communities, will go a long way toward achieving compliance with constitutional provisions as well as providing a tax climate favorable to new investment and general economic growth. The property tax is far from an ideal taxj few theorists would claim that it is even a very good tax. It is not clearly a benefit tax; it is not based on the ability to pay; and it tends to operate as a regressive tax. It is a traditional tax of great usefulness to local governments particularly, however, and it does have certain qualities which contribute to the financial stability and autonomy of local government. Apart from the thorny problem of determining value« especially of public service corporations, the property tax has in the past shown a remarkable ineptitude for reasonable and equitable administration. Some progress has been made in appraisal technique; however, the appraisal of utility property and nonutility property continues to lack the uniformity necessary for equitable

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332 taxation. Assessment administration, wtiether because of staff and fiscal problems or by design, has led to discriminatory taxation of public service corporations. If the constitutional mandate of uniformity, and . presumably equity, is to be followed, then a re -evaluation of the assessment practice as applied to utilities is , mandatory. Aside from constitutional and statutory requirements, theoretical and practical considerations demand a degree of equality and equity in taxation which public service corporations in Virginia do not have today. One answer seems to lie in an improvement of the assessment practice and administration, an improvement which would make the ad valorem tax system in Virsinia more productive, more reliable, and more equitable to all of those who must operate under it and who benefit from its existence.

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BIBLIOGRiVm Books Anderson, William M, Taxation and the American Economy . Kew York: Prentice-Hall, Inc., ii^^i. .. Bldwell, Frederick D. 'xaxatlon In New York State . Albany: J. B. Lyon Company, 19lb. [ ' ^, Bonbrlght, J. C. Valuation of Property . New Yorkx McGraw-Hill Book Cor;ipany, 1937. Buck, A, E,, and others. Municipal Finar-ce , Kew York: Macmillan Company, 192b, '. , Clemens, Ell Winston. Ec on cm Ic 3 a nd Pub 1 ic Ut 1 1 i t ie s . New York: Appleton-Century -Crofts, Inc., 1950* Glaeser, Martin 0. Public Utilities in American Capitalism , New York: Macmillan Company, 1957, Uroves, Harold M. Firianc.ing Qovernmeut . New York: Henry Holt and Company, 1945T • Postwar Taxation and Economic Progress . New York: McGraw-Hill Book Company, 19Hb, Hanson, A. H. and H. S. Perloff . State and Ix^cal Finance in the National Economy . New York: W. W, Norton and Company, Inc., 194M. Hartman, P. J. Taxation of Interstate Commerce . Buffalo: Dennis and C ompa ny , Inc . , 1953 • Jensen, Jens P. Property Taxaoion in the United States . Chicago: University of Chicago Press, 1931. Mills, M. C. and G. W. Starr, Readings in Public Finance and Taxation , New York: Macmillan Company, 1532. Paton, W. A, and R, A. Stevenson. Principles of Account ing . New York: Macmillan Company, 152 1, Pegrum, Dudley F. Public Regulation of Business . Homewood, Illinois: Richard I), xrwin. Inc., 1559, 333

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334 Sciiultz, William J. atid C. Lowell Harriss. American Public Finance , New York: Prentice -Kail, Inc., 19^9. Seliginan, E. R. A. Essays on Taxation , New York: Macmillan Company, i9'«iS>. , Shif i,lng and Incidence in Taxation . New York: CoTuibia University Press, l$2b, Shoup, Carl, and others. Facing the Tax Problem . New York: Twentieth Century Fund, Inc., 153Y • Smith, Adam, The Wealth of Nations, New York; Random House, Inc., 1937T Stauffer, William H, Taxation in Virginia , New York; The Century Company, 1931. Taylor, Philip E. The Economics of Public Finance . New York: Macmillan Company, 1953. Troxel, Emery. Economics of Public Utilities . New York: Rineiiart and Company, Inc., 19^7. Journal Articles Baldwin, Rosalind G. "Property Tax Updated," National Municipal Review , Vol, XLIV, No. 10 (November, 1955;* pp. b7-7b. Byrne, Tnomas A. "Pull-Value Assessments in Practice: Reasons for Under-Assessment, " Assessors' I
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335 Morgan, Cecil. "Eleven Counties Start Assessment Reform," Tennessee Planner , Vol. XVIII, No. 2 (October. December, 195ti), PP. 43-4?. Myers, Eugene A. and Randall S. Stout. "Recent Trends in Property Tax Equalization," National Tax Journal , Vol. 3 (June, 1950), pp. 179-186. Rountry, J. Edward. "Equalization at Market Value," Appraisal Jo urnal, Vol. XXIV, No. 2 (April, 1956), ppl 222-225. Russell, John H. "Changes in Real Est-ate Assessment Ratios," The Commonwealth, August, 19^5* PP. 11-15. Sager, William H. "Property Classification for Taxation." Virginia Law Revi ew, Vol. U3, No. 8 (December, 1957), pp.'*1325-i337. Shannon, Francis J. "Assessment Improvement Program in Kentucky," National Tax Journal, Vol. 3 (September, 1950), pp. 233-241. Welch, Ronald B. "Better Assessment Administration Increases Revenue," Municipal Finance , Vol. XXVXI, No, 2 (November, 1^5^), pp. IbH-W. Articles in Collections Bergren, Arthur L. "Equalization in New York," Proceedings of the For^y-Ninth Annual Conference on Taxation . Harrisburg, Pa: National Tax Association, 19'?7, pp. 225-231. Carbert, Leslie E. "Full-Value Assessment Versus Fractional-Value Assessment," Proceedings of the Forty Sixth Annual Conference on TaxatlonT Harrisburg, Pa: National Tax Association, I9i?3, pp. 164-174. Ellis, Dean. "Problems in the Use of Stock and Debt and Income Factors in the Assessment of Telephone and Electric Utilities," Proceedings of tne Fifty-Tnird Annual Conference on raxau ion . Harrisburg, Pa: National Tax Association, I9b0, pp. 390-401. Goes, Clifford. "Appraisals," Proceedings of the FortyFirst Annual Conference on TaxatlonT Harrisburg, pa: xotionai Tax Association, 194b, pp. 146-151. Haig, R. M. "Taxation," Encyclopaedia of the Social Sciences, XIV, 530-541)/ New York: The Macraillan Company, 1948.

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336 Hall, James K. "Equalization of Property Assessments In Washington," Proceedings of the Forty-Ninth Annual Confere nce on TaxatlonT Harrlshurg, Pa.: National Tax Association, l9b'(, PP. 207-215. • Kenady, James C. "A Fair Rate for Capitalization of Earnings," Proceedings of the Forty-Sixth Annual Con ferenc e on Taxation , Harrisburg, Pa.; National I'ax Association, 1^53, PP. 417-422. Macy, C. Ward. "The Theory and Practice of Central Assessment," Proceedings of the Forty -Ninth Annual Conference on TaxatlonT iiarrisburg, Pa.j National Tax Association, 1957, PP. 501-510. Martin, James W. "Deriving a Capitalization Rate by Statistical Analysis: A Progress Report," Proceedings of the Forty -Sixth Annual Conference on Taxation . Harrlsburg, Pa.: National Tax Association, 1953* pp. 423-433. . "Obsolescence and the Assessment of Public Service Properties," Proceedings of the Fifty-Third Annual Conference on Taxation . Harrisburg, Pa.; National Tax Association, WO, pp. 4lO-4l8. Publications of the Government, Learned Societies, and Other organizations Addresses and Proceedings of the Fourth International Conference on Taxation. Columbus, Ohio: International Tax Association, 191O. Appraisal of Railroad and Other Public Utility Property for Ad Valorem Tax Purposes . Report of the Cormnlt"cee on Unit Valuation of the National Association of Tax Administrators. Chicago: Federation of Tax Administrators, 1954. Bird, Frederick L. The General Property Tax: Findings of the 1957 Census of Governments . Chicago; Public Administration Service, 19bO. Comparative Cost of Local Government . Report of the Auditor of Public Accounts, Commonwealth of Virginia. Richmond ; 1943, 1958 and 1959.

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337 Guide f or Aesessment -Sales Ratio Studies . Report of the Committee on £>ales Ratio Data of the Nai^ional Association of Tax Administrators. Chicago; Federation of Tax Administrators, 195^* Guide for West Virginia Assessors . Cliarleston: 1958 Kuehnle, Walter R. Valuation of Real Estate for Ad Valorem Tax Purposes. Privately puialisued monograph, Chicago: I9t?4, Local Tax Rates, Tax Year 19^9 . Virginia Department of Taxation Bulletin Ih, b'i. Richmond: 1950. , Local Tax Rat es ^ Tax Year 1952 * Virginia Department of Taxation Bulletin No. By. Richmond: 1953. Local Tax Rates, Tax Year 1953 * Virginia Department of taxation Bulletin No. 91. Richmond: 195^. Local Tax Rates, Tax Year 1955 . Virginia Department of Taxation Bulletin No. 9b* Richmond: 1956. Local Tax Rates, Tax Year 1956 . Virginia Department of ••.axatlon Bulletin No. 97. Richmond: 1957. Local Tax Rates, Tax Year 1957 * Virginia Department of Taxation Bulletin No. 99. Richmond: 1958. Local Tax Rates, Tax Year 1958 . Virginia Department of Taxation Bulletin No. iOl. Richmond: 1959. Local Tax Rates, Tax Year 1959 . Virginia Department of ^L'axation Bulletin Ko. I03. Richmond: i960. Means, Ernest E. and W. M. Martin. County Property Tax Assessment in Florida . Tallahassee: Bureau of Governmental Research and Service, Florida State University, 1957. Opportunities for the Improvement of the Virginia State Tax Structure . Report of the Committee on Taxation and Government. Richmond: Virginia State Chamber of Commerce, 19^5Preliminary Report of the Tax Commission, State of tVest \lrsinla . Cliarlestont Ibm, Report of the Auditor of Public Accounts, Year Ended June 30, 1959 . Cornmoni'iealth of Virginia. Richmond: 1900. Report of the Auditor of Public Accounts, Year Ended June 30, 1950. Commonwealth of Virginia, riichraond : 1961.

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338 Report of the California State Board of Equalization . Sacramento: ibdo. Report of the Commission on State and Local Reven\:^3 and Expenditures, Commonwealth of Virginia. Richmond : I9S9. Report of the Committee on Assessment Organization and control . Chicago; itatlonal Association of Assessing Officers, 1941. Report of the Governor *s Minnes ota Tax Study Committee . St. Paul: 155b. Report of the Special Committee on Taxation . Cleveland: Cleveland Chamher of Commerce, 1^595, Report of the Virginia Department of Taxation, Fiscal Year Ending jQ> I93tj . Commonuea 1th of Vlrslnia. Richmond: 1937. Report of the Virginia Department of Taxation, Fiscal Year Ending June 30, 1939 » Commonwealth of Vlrslnia, Richmond: 1940. Report of the Virginia Department of Taxation, Fiscal Year Ending June 3Qj 19^0 * Commonwealth of Virginia, ' Richmond J I9i?i. Report of the Virginia Department of Taxation, Fiscal Year Ending June gOj 1^55^ commonwealth of Virginia. Richmond: 195b. Report of the Virginia Department of Taxation, Fiscal Year Ending June 30, 195^ Commonwealth of Virginia, ilichmond: 190O. Report of the Virginia Department of Taxation, Fiscal Year Ending June 3c* l^SOT Commonwealth of Virginia. Richmond: 1901. Second Report of th e New Jersey Commission on State Tax Policy . Trenton; IW. : — — — Statement Showing the Assessed Value of the Property of Electric Light and Power Corporations ; — Virginia E corporation Commission, Richmond: 1949. ^tate Statement Showing the Assessed Value of the Property of Electric Light and power Corporations . Virginia State corporation commission, Uichmond: 1$59.

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339 Taxation of Public Service Corporations In Virginia , Heport of the Public Service Tax Study Committee, Commonwealth of Virginia. Richmond: 19^7, Taxea on Real Estate . Report of the Committee to Study the Burden of Taxes on Real Estate, Commonwealth of Virginia, Richmond: I936, Tax Reform and Tax Revision , The Conference Board Studies in Busi.:ess Economics No. 58, New York: National Industrial Conference Board, Inc., 1957. The General Property Tax in New Jersey: A Century of inequitleg . iSixth Report of the New Jersey Coramis s ion on State Tax Policy, Trenton: 1953. ... Uniform System of Accounts . National Association of Rail~ road and utilities Commissioners. Washington: NARUC, 1936. Uniform System of Accou nts for Class A Electric Utilities, i^ubllc Utility Reports, 193^ 423, Uniform System of Accounts for Telephone Companies . Fed era 1 Communications Corranission, Washington: Government Printing Office, 1935. » Uniform System of Accounts Prescribed for Public Utilities and Licenses . Federal i'ower commission, Washington x Government Printing Office, I936. United States Bureau of the Census. 1957 Census of Govern ments. Cornpendium of Government Pinances , Vol. HI. — Washington: Government Printing Office, I959. . ........ United States Bureau of the Census. I957 Census of Govern "y"ts. Historical Summary of Governmental Finan ces in the united states, vol. Iv. Washington: Government — iTinting urrice, 1959, United States Bureau of the Census. I957 Ce nsus of Governments. Taxable P roperty Values in the United ^tat esT vol. V, Washington: Government Printing Office, 1559, Virginia Tax Laws. Richmond: Virginia State Chamber of commerce, 1959, West yirginia Taxes . Final Report of State Tax Study uoramisslon. Charleston: i960.

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3Mo Unpublished Materials Accounts and records, Appalachian Power Company, Roanoke, Virginia, : , . ... Brown, James E. "Valuation of Piiblic Utility Properties for Rate Making Purposes." Unpublished Master's thesis, Michigan State University, East Lansing, 1958. Johnson, Johnny H. "Local Taxation of Public Utilities." Paper read at tlie Local Government Officials' Conference at the University of Virginia, Charlottesville, Virginia, August 30, i960. Memoranda to operating subsidiaries, American Electric Power Company, New York. Stauffer, William H. A Study of Property Values in Virginia With Comments on the Asse38roent"Thereof . I9^b, Report to the State Corporation Commission of Virginia » Appalachian Povjer Company, April li?, 19^0, Thomson, J, Cameron, "State and Local Taxation: Neglected Issue." Paper read at the Golden Anniversary Conference of the N ational Tax Association, Columbus, Ohio, October 21, 1957. Virginia Department of Education. Staff studies conducted in i960. Virginia Department of Taxation, Staff reports, 19ii2-1960. Virginia Department of Taxation, Working papers for the 1950 and 1956 real estate assessment ratio studies. Virginia State Corporation Commission. Reports and working papers . Walker, r4abel. "Preview of Local Government 196O-I970," Paper read at the Local G overnroent Workshop, New . York State Office for Local Government, Albany, New York, June 7, i960. Court Cases and Legal References Acts of 1870-71, Commonwealth of Virginia. Acts of 1879-80, Commonwealth of Virginia.

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3^1 Acts of 1897-98, Commonwealth of Virginia. Adams County v. Northern Pacific Hallway Co,, II5 F 2d (l§iiO)'. — Adams Express Co. v« Kentucky , I66 U.S. I71 (I896), Adams Express Co. v. Ohio State Auditor, 165 U.S. 19^ •• . umr* American Sugar Refining Co. v. Louisiana, 179 U.S. 89 umf! Asbury Hospital v. Cass County, 326 U.S. 2Q7 (19^5). Bailey v. Megan , 102 P 2d 651 (1939). Beers v. Glynn , 211 U.S. 477 (1909). Bell's Gap Railroad v. Pennsylvania , 134 U.S. 232 (I89O). Branlff Airways v. Nebrasks State Board of Equalization and Assessors , U.S. 83'^ (1^54) . Caskey Baklnc Co. v. Commonwealth of Virginia, 313 U.S. (I9I1). — — ^ Chicago, Ba lt imore a nd Quebec Railway Co. v. Babcock, 204 O.iS. 5BE> (1507). Chica go and Nor thwestern Railway Co. v. Department of Revenue, 12hi II .1;. 2d TO Chicago and No rthwestern Railway Co. v. Eveland, 13 F 2d ?M2 (i. cir., l:;^2b). Chicago an d Northwestern Railway Co, v. State, 128 Wis. fe3 (l$Ob). ^ City of Richmond v. Commission , I88 Va. 100 (1948), City of Richmond V, Conmionvjealth of Virginia, ex rel .. Record No. 33^*9, Opinion or Justice Abram P. Staples, State Corporation Commission of Virginia, Cleveland, Chicago and St. Louis Railway Co. v. Backus. Ib4 U.iJ, 43^ (1894). ^ Colgate v. Harvey , 296 U.S. 4o4 (1935), Constitution of 1902, Commonwealth of Virginia.

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3^2 Cooley V. Board of Port ifardens , 53 U.S. 298 (185I). Coulter V. Louisville and Nashville Railway Co ., I96 U.S. 555 (190b). Cumberlanci Coal C o. v. Board of RevlElon, 284 U.S. 236 Cl$31). Danville Holding Co. v. Clement, I78 Va, 223 (19^1). Delaware, Lackawanna & Western Railroad Co. v. Heeld , 23 N.J. 56l'(l$57). Fargo v. Hart, 193 U.S. 490 (1904). ' ^ Federal Power Corntnisslon v. Hope Natural Gas Co ., 320 U.S. 591 (1944). ~ First National Bank v. Holmes , 246 111. 362 (I9IO). Freeman v. Hewitt, 329 U.S. 249 (194?). General Statutes of North Carolina. Great Northern Railway Co. v. vieeks , 297 U.S. 135 (1936). H. P. Hood & Sons, Inc. v. DuMond , 336 U.S. 525 (1949). Hopkins v. Southern C alifornia Telephone Co ., 275 U.S. 353 (19iib). : ~ Ingraham County v. City of Bristol, l44 Conn. 374 (1957). Keeney v. New York , 222 U.S. 525 (1912). Knoxvllle v. Knoxvllle \vater Co ., 212 U.S. 1 (1909). Luckett V. Tennessee Gas Transmission Co., 331 S.W, 2d (i960). Maxwell v. Bugbee , 250 U.S. 525 (1919). McAhron v. Bradshaw, II3 P. 2d 932 (I89I). Nashville, Chicago and St. Louis fiallvMay Co. v. Browning, 310 U.S. 362 (1940). . : . , . ' Norfo lk Sc Western Railway Co, v. The Board of Public .i/orks, 122J w. Va. 562 (1942). Northern Pacific Railway Co. v. Adams County , 1 F, Supp. lt)3 ^1932;.

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3^3 Northwestern States Po rtland Cement Co, v. Minnesota, 35B tJ.S. 4bO 11^39)" . ~ Ohio Oil Co. V. Conway, 281 U.S. 146 (1930), Omaha v. Water Co ., 218 U.S. l80 (1910). Opinion of the Jastlceo , 208 Mass. 6l6 (1911). Ott V. Mississip pi Valley Barge Line Co ., 33^ U.S. l69 (1949). Pittsburg, Chicago and St. Louis Railway Co. v. Backus , 154\^S. H'Ai (1^94). Pullman Palace Car Co. v. Pennsylvania, l4 l U.S. 18 (I89I), Real Property Tax Law, State of New York, Rowley v. Chicaso and Nort hwestern Railway Co », 293 U.S. 105 (1934) . ' Senate Bill No. 3, First Extraordinary Session, Legislature of West Virginia. Charleston: 1955. Shenandoah Valley Railroa d Co. v. Supervisors of Clark County , 7^ Va. 2bD (lbi54). Sioux City Bridge Co. v. Dakota County , 260 U.S. 441 (1923). Smyth V. Aroes, 169 U.S. 466 (1897). Southern Railway Co. v. Kentucky , 274 U.S. 76 (1927). Southern Railway Co. v. Watts , 260 U.S. 519 (1923). Southwest Bell Telephone Co. v. United States, 262 U.S. 27(, (1$23). State ex rel. Equity Farms, Inc. v, Hubbard, 203 Minn. Ill (153b). — — ' State. Freight Tax Case , 15 VJallace 232 (I873). State Railroad Tax Cases, 92 U.S. 575 (I876). Stebblns v. Riley , 268 U.S. 137 (1925). Stewart Dry Goods Co. v. Lewis, 294 U.S. 550 (1935). Sunday Lake Iron Co. v. Vj'akef leld , 247 U.S. 76 (1927). Swltz V. Middle town Township , 23 N.j. 580 (1957).

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344 The Pas3enF,er Cases, 7 Howard 283 (l849). • Union Refrlge ra-oor Transit Co. v. Kentuclqr., 199 U.S. 194 (1905). Union Tank Line v. v/rlght , 249 U.S. 63 (1919). United States v. burnison, 339 U.S. 87 (1950). Virginia and Te nnessee Railroad v. washlnfston County , 71 Va. 4Y1 (i8Vb). ~ Wallace v. Hlnes , 253 U.S. 66 (1920) . Western Maryland Rail way Co. v. The Board of Public Works , 1231 W. Va. (194ii). ^ Western Mary la no R ailv)ay Co. v. The Board of Public works , 141 W. ' ^Va. 413 (ifej. " ^ Williams V. I>layor of Baltimore, 289 U.S. 36 (1933). Williams v. Stoc kham Valves and Fittings, Inc ., 358 U.S. 450 (19b9). Williamson v. State of New Jersey , 130 U.S. I89 (l889)» Wisconsin and Mich igan Railway Co. v. Powers , 19I U.S. 379 (1503).

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APPENDICES

PAGE 365

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APPENDIX D TOWN I£VIES A problem arises In connection with town levies. In the distribution of state collected revenues from public service corporations, both cities and counties will participate. Towns are not, however, autonomous fiscal entities in Virginia, but are included in the county in which they are located. Further, not all towns levy a tax on property; however, to fail to provide for those towns which now obtain property tax revenues would spell financial disaster for many of them. Consequently, some provision for town requirements must be made. Table 58 sheds some interesting light upon the taxing practice with respect to the towns in one company's operating area as it has existed for the years 195^ through 1959. Since 1954 there has been a gradual increase in the statewide average rate of property tax levy, vjhile at the same time the average rate of taxation imposed by towns In one company's operating area has shown a significant decrease. Expressed in another way, the average rate of taxation imposed by towns, upon the property of the public service corporation investigated, has declined to 16. 9 per cent of the average rate imposed by cities and counties. One factor in the explanation of this trend is that the size of towns remains relatively small, alleviating the 358

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360 need for the Increase In revenues which would have been obtained from the more than 100 per cent Increase In investment which has taken place since 195^, taxed at the 1954 average rate. Too, the fact that the cost of schools, which comprised 74.25 per cent of all county expenditures 2 in fiscal year 1959, was administered mainly by the counties relieved the towns of that additional responsibility and, consequently, of the need for the same proportion of additional revenue one would expect the counties and cities to have. Prom Table 58 it is observed that the average town levy as a percentage of city and county levies was, for the period 1954 through 1959* 20,9 pei^ cent, although the trend is apparently downward* In spite of this trend, a rate of taxation equal to 20 per cent of the uniform rate so determined for cities and counties could be levied against public service corporation property specifically for towns, the allocation process to be similar to that applicable to cities and counties. That an analysis of town rates in areas other than that served by the utility investigated in this report may yield a result divergent from the 20 per cent of the statewide rate as herein computed is not material. The ready availability of data 2 Report of the Auditor of Public Accounts, Commonwealth of Virginia, Year Ended June 30, 1959, p. 8,

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361 and ease of computation resulted in this ratio in the present analysis; however, it must be pointed out that any such ratio, as long as it is fairly computed and uniformly applied between like public service corporations, is equally satisfactory. What is important, however, is that the problem of town levies can be overcome. Since the problem can be overcome, and in view of the relative immateriality of town levies, such levies are given little attention in this thesis.

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362 APPENDIX E TABLE 59 ASSESSED VALUE, TAXES PAID, AVSRAGji TAX RATE, IN T0Wi4S Oi\"LY, ONE ELECTRIC POWER COMPANY, 195^-1958 Assessed liinOUn Average County Town va xue or lax xaX rtai/e * 0, f 4^9 ^ A7 On oco L usv xxie $1.00 Amherst AiDxierst xD^ ,»ty 1 AA Botetourt Fincastle 0,073 00.73 1 AA Grundy pp*903 OKA AO 359.03 1 AA varroxJL U •! 1 1 o«i T T ni.lJ.svxixe Qn Q QA 013 • 3^ 0 AA Cra 1q i^ew oastie 4,883 0)1 Jit c: A .50 D~cix.e Lison u J. j.ntwood 35*737 093 '"ft Haysi ii,2d3 9, OD
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4 363 TABI£ 59 (continued) Average Tax Ra'ue County TO 195^ \contlnued) Town Assessed value Amount of Tax Smyth Chllhowie Marion Saltsville Tazewell Bluefield Cedar Bluff Nor-ch Tazewell Pocahontas Richlands Tazewell Washington Abingdon Damascus Glade Spring Saltsville Wise Pound Wythe Rural Retreat Wytheville Total 1955 Alberrnarle Amherst Botetourt Buchanan Carroll Cra Ig Dickenson Floyd Fluvanna Franklin Qiles 19,683 148,324 438,772 49,922 13,147 14,389 52,049 33,536 36,813 324,972 32,604 12,709 8,049 19,683 8,156 88,549 295.25 3,708.10 6,581.58 1,248.05 177.48 323.75 780.74 335.36 736.26 9,749.16 552.08 190.63 120.74 196.83 163.12 1,770.98 $8,672,091 $56,770.86 Grayson Henry Montgomery Patrick $1.50 2.50 1.50 2.50 1.35 2.25 1.50 1.00 2.00 3.00 2.00 1.50 1.50 1.00 2.00 2.00 .65 Scottsvllle $ 6,890 $ 68,90 $1.00 Amherst 17,609 176.09 65. 4i 1.00 Fincastle 6,541 1.00 Grundy 39, 175 587.63 1.50 Hillsville 4o, 120 5,189 1,003.01 2.50 New Castle 25.95 .50 Clintwood 32,481 487.22 1.50 HajrSi 12,086 181.29 1.50 Floyd 10,357 103.57 •1.00 Scottsvllle 934 9.34 76.72 •1.00 Boones Mill 7,672 1.00 Rocky Mount 78,779 1,181.68 1.50 Glen Lyn 6,009,818 69,729 9,0.4.73 .15 Narrows 1,220.26 1,133.05 1.75 Pearisburg 41,965 2,70 Pembroke 13,038 12,625 97.79 .75 Rich Creek 315.63 2.50 Fries 4,730 Troute Dale 2,854 Ridgewajy^ 6,603 , 39.62 .60 Blacksburg 9,672 k 96.72 1.00 Cai.br j.a 12,022 , 120.22 1.00 Christiansburg 61,473 614.73 1,00 Stuart 52,095 573.05 1,10

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364 TABI£ 59 (continued) Assessed Value Amount of rax Average I'ax Haoe County Town 195^ (continued) Pulaski Draper Dublin Pulaski Roanoke Salem Vinton Russell Cleveland Honaker Lebanon Scott Clinchport Duff ie Id Dungonnon Gate City Nickelsville Weber City Smyth Chilhowie Marlon Saloville Tazewell Bluefield Cedar Bluff North Tazewell Pocahontas Richland s Tazewell Washington Abingdon Damascus Qlade Spring Saltville Wise Pound Wythe Rural Retrea-v. Wytheville 2,348 21,788 664,867 67,705 38,377 11,283 15,064 26,715 4,807 1,973 6,765 54,706 3,380 19,185 20,396 157,451 485,345 52,324 13,742 11,544 56,157 35,929 46,950 322,096 33,369 13,066 8,355 20,603 9,481 ?8^765 Total $8,878,973 326.82 10,637.87 582.40 383.77 55.31 188.30 307.22 72.11 67.65 820.59 305.94 3,936.28 7,405.50 1,308.10 185.52 259.74 842,36 359.29 939.00 12,561.74 667.38 195.99 125.32 206.03 189.62 1,975.30 $61,998.76 $ 1.50 1,60 .75 1.00 .50 1.25 1.15 1.50 1.00 1.50 1.50 2.50 1.50 2.50 1.35 2.25 1.50 1.00 2.00 3.90 2.00 1.50 1.50 1.00 2.00 2.00 !? .70 jemarle Amherst Botetourt Buchanan Carroll Cra ig Dickenson Floyd Fluvanna Franklin Scoutsville Amherst Flncastle Grundy h:.llsville New Castle Clintwood Haysi Floyd Scottsvllle Boones Mill Rocky Mount 7,135 19,025 7,099 42,153 43,080 5,558 36,369 12,515 11,084 972 8,164 84,208 71.35 190.25 70.99 632.30 1,077.01 27.79 545.54 187.72 110.84 9.72 81.64 1,263.12 $1.00 1.00 1.00 1.50 2.50 .50 1.50 1.50 1.00 1.00 1.00 1.50

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365 TABLE 59 (continued) County Giles Town Assessed Value Amount of Tax Average Tax Rate Grayson Hen3?y Montgomery Patrick Pulaski Roanoke Russell Scott Smythe Tazewell inued; Glen Lyn Narrows Pearisburg Pembroke Rich Creek Fries Independence Trout Dale Ridge way Blacksburg Cambria Christ iansburg Scuart Draper Dublin Pulaski Salem Vinton Cleveland Honaker Lebanon Cllnchport Duff ie Id Dungonnon Gate City Kickelsville Weber City Chllhowie Marion Saltsville Bluef ield Cedar Bluff North Tazewell Pocahontas Richlands Tazewell Washington Abingdon Datiiascus Glade Spring Saltville Wise Pound Wythe Rural Retreat Wythevllle Total $6,689,382 71,199 14,662 13,615 1,520 3,000 §,388 16,731 13,375 63,556 52,708 2,455 23,9^6 677,719 72,390 44,340 7,230 36,894 5,42^ 2,174 7,570 56,077 4,161 22,920 22,546 262,814 ^90,592 56,579 14,393 11,833 40,359 36,199 40,712 323,223 35,516 14,101 8,526 21,735 9,940 105,141 $9,743,300 §10,034.07 1,245.08 1,197.34 219.93 340*38 50.33 . 167.31 , 133.75 635.56 579.78 359.19 10,843.50 515.77 443.40 36.15 199.07 424.28 81.38 $1.75 1.75 2.70 1.50 2.50 ,60 1.00 1.00 1.00 1.10 1.50 1.60 .75 1.00 .50 1.25 1.15 1.50 75.70 1.00 841.46 1.50 338.19 1.50 6,570.35 2.50 7,358.88 1.50 1,414.48 2.50 194.31 1.35 266.24 2.25 605.39 1.50 361.99 1.00 814.24 2.00 11,312.80 3.50 887.90 2.50 211.51 1.50 127.89 1.50 217.35 1.00 198.80 2.00 2,102.82 2.00 $65,675.74 $ .67

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366 TABI£ 59 (continued) A T7a VtO CTA vounuY xown VaXUc UX XaA Xojv net uc TffiK7 19? ( i^VwuUoVxX XV * 66 R7 i 1 00 X • IQ Pen Xi^O • 1)^ 1 00 X • w/ 47 XIlwcIs UXc 7'5 liR X . w 1 rouuv -Xxe 11,698 uruncy po, JxO OH** » f f X .pu nxxxov xxxc Xf \>'iy • OX <• Pw vX^a Xg IMcVf wCli3 0X6 cy • wx RO • pu w X XII l/nUwU 6nn TP VwV/ • X£ X . pu na^o X X*t , X ( u 5>1 0 61i x.pu r xo^ o xc , v/c:3 x^UtC^ 1 nn Fluvanna Scottsvllle 999 9.99 1.00 ' Jf rauKXlU y J xUu fill fi-^t; yx • UD X .uu jtocKy noun^ J.,
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TABLE 59 (continued) 367 County Town iTnue(3) Bluefield $ Cedar Bluff North Tazewell Pocahontas Richlands Tazewell Abingdon Damascus Glade Spring Saltville Pound Rural Retreat Wythevllle Assessed Value nlllOUri 1/ V a OX XSA Tax Rs .,e XU.A X Vw4 v/W ^ X f H (J 1 • V/ V ^2. "50 £ . £^ 497.60 , 1.50 363.75 1.00 787.64 2.00 9,180.94 2.84 907.08 2.50 219.99 1.50 136.15 1.50 225.59 , 1.00 212,36 2,00 2,124.06 2.00 $72,060.57 $ .53 Tazewell Washington Wise Wythe Total 1958 Albemarle Amherst Botetourt Buchanan Carroll Craig Dickenson Floyd Fluvanna Franklin dlles Grayson Kenry Montgomery Patrick 59,480 15,042 11,982 33,173 36,375 39,382 323,837 36,283 14,666 9,077 22,559 10,643 106,203 Scottsvllle $ 6,893 Amherst 22,173 Piucastle 7*883 Troutville 13,450 Grundy 74,887 Hillsville 43,6l2 New Castle 6,872 Clintwood 36,011 Haysl 16,171 Floyd 12,745 Scottsvllle 1,039 Boones Mill 10,264 Rocky Mount 86,726 Glen Lyn 14,183,076 Narrows 61,215 PearlBburg 109,567 Pembroke 17,974 Rich Creek 15,731 Fries 1,527 Independence 17,51'! Trout Dale 3,273 Ridgeway 9, 172 Blacksburg 21,637 Cambria 14,063 Christiansburg 65,832 Stuart 61,557 68.93 221.73 78.83 1,123.30 1,090.31 34.36 540.16 242.^6 127.45 10.39 102.64 1,300.89 17,019.69 1,071.26 2,958.31 269.61 393.27 55.03 216.37 140,63 658,32 677.35 I 1.00 1.00 1.00 1.50 2.50 .50 1.50 1.50 1.00 1.00 1.00 1.50 .12 1.75 2.70 1.50 2.50 • 60 1.00 1.00 1.00 1.10

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368 TABI£ 59 (continued) Amount of Tax County ip'pii IconT Pulaski Roanoke Russell Scott Town inud'd ) Draper Assessed Value Average Tax Rate Stqythe Tazewell Washington Wise Wythe Total Dublin Pulaski Saletn Vinton Cleveland Honaker Lebanon Clincnport Duffleld Dungonnon Gate City Nlckelsville Weber City Chilhowie Marlon Saltville Bluef ield Cedar Bluff North Tazeviell 12,4l3 Pocanhontas Richlands Tazewell Abingdon Damascus Glade Spring Saltville Pound Rural Retreat Wytheville 2,763 26,175 712,233 70,586 51,319 7,581 16,712 39,226 5,968 2,368 7,599 53,817 ^,778 25,862 26,214 273,285 636,686 63,516 15,762 31,609 39,963 5l,l43 328,681 27,036 15,987 10,131 24,271 11,075 113,270 523.50 11,395.72 502.93 513.19 75.81 208.90 451.09 89.52 75.99 807.26 393.21 6,832.13 9,550.29 1,587.90 212.30 279.29 474.13 399.63 822.86 15,993.62 675.90 239.81 151.97 242.71 221.50 2,265.40 $17,618,893 $83,388.45 2.00 1.60 .75 1.00 1.00 1.25 1.15 ' 1.50 1.00 1.50 1.50 2.50 1.50 2.50 1.35 2.25 1.50 1,00 2.00 4.87 2.50 1.50 1.50 1.00 2.00 2.00 $ .47

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APPENDIX P COMPUTATION OF OPERATBia REVENUES, APPALACHIAN POWER COMPANY, 1959 \ . J The operating revenues of this company, broken down by cities and counties, was unobtainable under the present accounting system; however, with recodification in billing •nd minor modification .n the computer analyses made by the company this da^a could be made available without substantial additional cost to the company, it was possible, however, with the existing system, to arrive at a reasonably close estimate of each locality's contribution zo company operating revenues. • Two company divisions operate in Virginia, and zhere exist certain differences in the rate, billing process, and accounting. Accordingly, it was necessary to obtain separate computations for each division. Total company revenues were computed from available data as follows: Roanoke Division $21,7'*5.642 Bluefield Division 18,939, loO Total $40,68^4,802 In each division, certain revenues were known, includ ing industrial revenues, revenues from public street and highway lighting, and sales made to non-associated utilities. Further, the revenues from certain cities imposing a municipal tax were also known. In each division, the subtraction of these known amounts from total revenues 369

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left an amount which could be attributable to the remaining cities and counties. There was no way of accurately apportioning this resldualj however, since the rates lUthln each were substantially the same, aad s^nce the large users of power had already been determined, it was felt that an allocation made on the basis of watt-hour meters would provide a close approximation as to operat_ng revenues generated within each county and city. Tables 60 and 61 show further how this computation was made. TABLE 60 COMPUTATION OF REVENUES TO BE ALLOCATED ON BASIS OF WATT -HOUR METERS, APPALACHIAN POWER COMPAiiY, ROANOKE DIVISION, 1959 Total revenues ^21,7^5,642 Deduct: Account 602.2, industrial revenues $4,652,657 Account 603, public street and highway L-ghti^g 17>3S9 Account 605.2, electr-C utility, non-associated 1, 106,918 City of Roanoke 5,623,163 City of Lynchburg 3, 484, 306 Total 14,884,493 Balance to be allocated ^ 6,86l,l49 Total number of watt -hour meters in Roanoke Division, exclusive of deductions above 6l,710 Average revenue per watt-hour meter $111.18

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371 TABI£ 61 COMPUTATION OP REVSlilBS TO BE ALLOCATED ON BASIS OF WATT -HOUR WETERS, APPALftCHJ^N POWiiR COMPANY, bluefjjsld division, 195S Total revenues $l8,939,'i60 Deduct: ^ ^ Account 602.2 and 602.3, industrial ^ _ revenues $6,7^5,752 Account 603, public street and highway lighting 109, 35© Account 605.2, electric utility, non-associated ??T'I5S City of Galax ^^^,^^2 Total iifWdfd'^^ Balance to toe allocated |10,896,9il Toi^al number of watt-hour meters in Bluef ield Division, exclusive of deductions above 109, 92o Average revenue per watt-hour meter |99»13 In tables 62 and 63 each locality's revenues generated is computed by multiplying the number of wact-hour meters by the appropriate average revenue per meter for that division, and then adding back the deductions listed in tables 60 and 61.

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BIOGRAPHICAL SKE!£CH James Earl Brown was born October 6, 1932* at Ashland, Kentucky, In August, 19^9* he was graduated from Thomas Jefferson High School at Richraond, Virginia. In June, 195^# he received the degree of Bachelor of Science from the University of Richmond. From 195^ until 1957 he served as an Instructor of Finance and Accounting and in Special Services with the United States Array. In 1957* he enrolled in the Graduate School of Michigan State University. He worked as an Instructor of Accounting until June, 195S* He received the degree of Master of Arte in 1958 • . , In 1958 he enrolled in the Graduate School of the University of Florida. He worked as a half-time Instructor of Accounting until June, I96O, while pursuing his work toward the degree of Doctor of Philosophy, Prom September, i960, until August, 1961, he worked as Assistant Professor of Accounting, Finance and Statistics at the University of Washington, From September, 1961, until the present time he has worked as Assistant Professor of Business Administration at Emory University, James Earl Brown is married to the former Mae Maxine McAllster. He is a member of the American Accounting Association, the American Association of University Professors, the Southern Economics Association, the American Association of Management Consultants, Beta Alpha Psi, and Phi Delta Theta. 376

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This dissertation was prepared under the direction of the chairman of the candidate's supervisory coinniittee and has been approved by all raembers of that committee. It was submitted to the Dean of the College of Business Administration and to the Graduate Council, and was approved as partial fulfillment of the requirements for the degree of Doctor of Philosophy, August, 1962 ( I Dean, CollbtSe or iiusiness Administration Dean, Graduate School Supervisory Committee j