Opinion of the Justices
120 A. 629
N.H.
1923
Check Treatment

To Hon. William J. Ahern,

Speaker of the House of Representatives:

In accordance with the established practice (77 N. H. 611, 618), the undersigned justice separately submits the following answer to the first question presented in your communication of March 21:

It is understood that your question presupposes the exemption from taxation of the several classes of property yielding the income proposed to be taxed, or the omission of such classes from the list of taxable property. Upon this assumption, the question is in substance the same that was considered and answered by the justices of this court in 1915. 77 N. H. 611. At that time, four of the justices advised that the proposed legislation was within the power of the legislature. In that opinion, the learned justices marshalled the available authorities favorable to the constitutionality of the proposed act as an assessment in the nature of an income tax, but concluded that it was unnecessary to express an opinion as to the validity of an income tax as such, since they found sufficient justification for the proposed act as a property tax (p. 617). The remaining justice expressed the view that the contemplated tax was an income or excise tax, and as such was wholly without constitutional warrant (p. 618), but further concluded that whether it were deemed an income or a property tax, it was unauthorized. After an examination of these opinions and the authorities cited, and after such further investigation as the limited time has permitted, I find myself in accord with the conclusion of the minority.

Difference of opinion as to the character of a tax on incomes is not confined to the members of this court. There is a decided conflict of authority among the few cases in which courts of last resort have *560 passed upon the question whether a tax on incomes is a property tax. 11 A. L. R. 313, note (1920). There are well-considered authorities which agree with the minority of 1915 that a tax upon incomes is an excise tax. Railroad Co. v. Collector, 100 U. S. 595, 25 L. ed. 647; Springer v. United States, 102 U. S. 586, 26 L. ed. 253; Flint v. Stone Tracy Co., 220 U. S. 107, 55 L. ed. 389, 413. The distinction between an excise tax and a property tax, and the reasons why the former is in violation of the provisions of the constitution, are exhaustively and ably treated in the minority opinion of 1915. It is not deemed necessary further to discuss this feature here. It is sufficient to say that in so far as the proposed tax upon incomes is regarded as an excise tax, that is, a tax upon the transfer, it is not a tax upon “polls, estates and other classes of property including franchises and property when passing by will or inheritance,” as limited by the constitution, Part II, Art. 6, as amended in 1903. This lack of constitutional authorization is entirely independent of the lack of proportionality in the tax (Const., Part II, Art. 5) due to the impossibility of correlating taxes of such diverse natures as property taxes and income taxes. There is thus a double constitutional barrier to the tax if it be construed as an income or excise tax.

But there seems to be no attempt to justify the proposed tax as an income tax, that is, as a tax upon the transfer of the income from the debtor to the creditor. It is sought rather to distinguish it from such a tax. It is supported as a tax upon specific property in the hands of the creditor, namely the money or other medium of exchange received by him by way of income on credits. In other words, it is sought to focus the tax-making camera upon the fund the instant following its receipt, after it has lost character as income and has become property, but before it has become a part or parcel of other property of its kind in the hands of its owner. This appears to be a statement of the plan most consistent with the theory that the proposed tax is a tax upon property other than upon the credit from which it is derived. Stated thus most favorably to enable the contemplated legislation to pass the constitutional barrier limiting taxation to “polls, estates and other classes of property” it is, in my opinion, still in conflict with the further constitutional requirement of proportionality. Const., Part II, Art. 5.

. It is true that the plan of taxation stated in the question avoids disproportion in the rate, but it does not avoid the disproportion arising from applying the rate to only a part of the value of the *561 property which is, in fact, sought to bo reached. This becomes evident when we analyze what is to be done. It is proposed to remove from the list of taxable property stocks, bonds and other interest-bearing credits and indebtedness (and presumably cash on hand), and to substitute as a new taxable class the income derived therefrom as dividends and interest, whenever received within the taxable year, disregarding their form and character as well as their existence or non-existence on the taxing date. The proposed act would by indirection disregard the rule of proportion, not by applying a different rate, nor by directly assessing “stocks, bonds and other interest-bearing credits and indebtedness” at a percentage of their value, but by dividing each class into two parts, principal and income, and assessing the smaller part at the uniform rate and exempting the larger part.

As respects the character of an income tax, however, courts have not only differed upon the question whether it is an excise tax or a property tax, but courts holding the latter view are again divided as to whether it is a tax on the property in the specific income or upon the credit from which it is derived. If it be a property tax, the latter view seems to me to be the correct one. “A Tax upon income from money on deposit or at interest from bonds, notes or other debts due, and as dividends from stocks, coupled with exemption from all other taxation of the principal from which such income flows, is in substance and effect a tax upon the property from which it is derived. A tax upon the income of property is in reality a tax upon the property itself. Income derived from property is also property. Property by income produces its kind, that is, it produces property and not something different. It does not matter what name is employed. ... In its essence a tax upon income derived from property is a tax upon the property.” Opinion of the Justices, 220 Mass. 613 (1920); Pollock v. Company, 158 U. S. 601, 39 L. ed. 1108. It is useless to disguise the plain facts by quibbling over the name to be given to the proposed tax, or by disregarding the inevitable operation of the proposed legislation. Until income has been paid over to the creditor, it is a part of the credit. When received by the creditor, it immediately takes on the character of the class of taxable or non-taxable property of which it becomes a part. To reason otherwise is to rest a conclusion upon a theory that income once received remains a separate entity for the purpose of taxation and for no other purpose, when, as a matter of fact, it is income only in its transition. To consider that upon its receipt it *562 is not immediately swallowed up in the class of “property” to which it is added, whether that class be money on hand or money at interest, etc., is by fiction to apply to this piece of property a constructive existence as a separate fund, contrary to the truth. The one permissible inequality under the constitution is that existing between taxed and untaxed property. 76 N. H. 609. But the implied power of the legislature to classify property as taxable and non-taxable has never been considered as authorizing the subdivision of a given class of property into parts which can be identified only by fictitious pr constructive distinctions. The principle is not materially different whether we call it “income” which it has been but which it is not, or whether we call it what it is, a “percentage” éither of the money invested or of .the money on hand with which immediately upon its receipt it becomes indistinguishably mingled. It cannot be singled out from the class of which it is a part and made taxable in disregard of the taxability or otherwise of the remainder of its class, or taxed at a different rate than such remainder, without violating the constitutional rule of proportion.

The average rate of taxation for 1922 was 2.44% (Tax Commissioners’ Report, 1922, p. 3). It can scarcely be claimed that a tax at this rate upon the income of all stocks, bonds and other interest-bearing credits and indebtedness will impose a tax upon these classes of property proportionate to the taxes assessed upon other property. “The constitutional rule of equality requires a proportional and equal valuation of the different kinds of property.” Company v. Manchester, 70 N. H. 200, 204; Opinion of Justices, 76 N. H. 588, 593.

If by indirection the result sought by the proposed legislation can be accomplished as respects money at interest, it can be accomplished as to any other subject or class of taxable property. For instance, the advocates of protection of growing timber might, without the constitutional amendment they have been seeking, find a remedy for their difficulty in an act assessing the appraised value of the current year’s growth of the timber and by exempting from taxation the balance of its value. Or, if it would be more in accordance with justice, such taxable value might be fixed at 6% as a fair average and exempting the other 94% of its value. Calling it “annual income” or “annual growth” does not create a character not otherwise existing, justifying a classification as a distinct class of property.

In other words, disproportion in taxation within the meaning of the constitution can be accomplished as effectually by taxing a part of a given class of taxable or non-taxable property and giving it a *563 fictitious name, as by varying the rules governing the ascertainment of value, or by varying the rate. There is no limit to the diverse classifications which might be made once we embark on this method. To adopt such a method would be as effectual an elimination of the word “proportional” from the constitution as if the people had adopted the recent proposed amendment. The people have declined to do it. It cannot be done by judicial construction.

The same principles apply to the consideration of the second question. In my opinion, the first and second questions should be answered in the negative. As to the third and fourth questions propounded, I join with the other justices in the answers given in their opinion.

Leslie P. Snow.

April 2, 1923.