The methods to be used by the different political divisions of the United States in securing increased revenues, has been an important phase of recent fiscal discussion, and no little attention has been given to the possibilities of business and license taxes. It must not be inferred from this, however, that business and license taxes have not previously had a place in our fiscal system. In many of the states they were among the early sources of revenue, and in some of these states have had a continuous existence to the present time. The use of the various kinds of franchise taxes upon corporations is, of course, a tax upon business, which has so increased in importance in recent years as to deserve treatment in a separate chapter.

Present Use of Tax. - The most extensive use of this form of revenue has been in the Southern states, where the rates have been gradually increased and extended to cover a wider range of occupations. Nearly all the states have made use of the license payment for the purpose of regulation, as in the case of peddlers, sale of liquor, etc., but often the primary consideration was sumptuary rather than fiscal. Yet in more than one third of the states rates are assessed against occupations and trades, primarily for the purpose of raising revenue. They are frequently used by the state and county governments, but the most extensive use of the license tax has probably occurred in municipalities. These taxes are sometimes used in connection with the property tax, and sometimes in addition to it.

The use of these taxes differs greatly in the various political units where they are found and generalizations are impossible. A few characteristics, however, may be noted. Manufacturing plants are usually exempt from the tax, while mercantile establishments nearly always have been included. In many places licenses are imposed upon the professional classes, but this is not general. Usually no classification or graduation has been attempted. Louisiana has been a notable exception in this respect in that a rather extensive graduation is provided. The scale in most cases is arranged on the basis of sales or gross earnings, while in some cases other factors are considered - in hotels the number of rentable rooms, in theaters the number of seats, etc. An interesting basis for graduation which has been used in the Province of Ontario may be noted here. Municipalities may levy a tax upon trades and businesses which is to be some percentage of the assessed value of the real estate occupied by the business. Businesses are classified as to their degree of profitableness, and the per cent that is assessed, based on this determination, varies greatly.

Objections and Advantages. - Much opposition has arisen to the extension of the use of business taxes. The objection that such action will repress industry was to be expected, since it is made against every tax. The problem of evasion has been, frequently, a serious one, but this has been because of a lax administration rather than to any fundamental defect in the system. The objection that this form of taxes encroaches upon the use of the property and income tax is not important, since a business is an entity distinct from its property and from the incomes of its individual owners. The problem of valuing such intangibles as franchises and good will would be no more difficult for this purpose than for any other. Much has been made of the inequalities that would occur, especially among competitors, but this, again, would be due, not to the system itself, but to an improper classification, graduation, or administration.

There is, on the other hand, much to be said in favor of the extension of the use of business and license taxes. One of the first considerations is the fiscal one - they will produce revenue quickly, at a low cost, and with comparatively little objection. This has been demonstrated by their use not only in this country, but in other countries. Business, as a unit, possesses a peculiar ability to bear burdens because of the expenditures the various political units have made in its behalf. The Federal government maintains standard weights and measures, a coinage system, and regulates transportation rates; the states maintain bureaus of research of various kinds, and the municipalities provide police, fire, and sanitary protection. Since business organizations do have abilities to meet burdens, and since this ability is greatly enhanced by governmental activities, it is all the more reason why business organizations of various kinds - mercantile, manufacturing, and others - should contribute their just share to the general public treasury.

Use in Future. - It is probable that a larger percentage of state and local revenues will come from these sources in the future than in the past. In many cities and states the increase in the returns has been marked. The possibility for the increase in the number of license charges, as well as an increase in the revenue therefrom is, in many places, unbounded. The licensing of automobiles by the states, while of some regulative value, has proved a profitable source of revenue and has but suggested future possibilities. The state of Illinois, for example, with a license charge much lower than that found in some states, colEXCISE, CAPITATION, AND BUSINESS TAXES 229 lected nearly five and a quarter million dollars during the first half of the year 1920. This can also be made a fruitful source of revenues for municipalities, and many have begun to avail themselves of it. The licensing of occupations has not been carried to the extent that it might be, either from the regulative or the fiscal point of view. In view of the fact that some remunerative sources of revenue have been cut off, and that expenditures are constantly increasing, it may be confidently expected that both our states and municipalities, if not the other political divisions, will make a more extended use of business and license taxes in the future than they have in the past.

Additional Reading

Frederick C. Howe, The Internal Revenue System of the United States,

Proceedings of the National Tax Association, 1917, pp. 10-19, 185-194.

H. E. Smith, United States Federal Internal Tax History from 1861 to 1871.