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tion. In the Statistics of Cities prepared by the Department of Labor, an attempt is made to present the most important items for the cities of over 30,000 population. The figures given are determined after investigations by the agents of the department in the comptroller's books, and are presented in a much more intelligible fashion than in most municipal reports; but with the limited means at their disposal, and the fundamental absence of any general system in keeping accounts, there must remain considerable doubt as to the accuracy of the comparisons.
86. MUNICIPAL FRANCHISES.
One of the most difficult problems with which the cities of the United States are confronted is the proper management of their public utilities. And at the very heart of this problem is the question as to the policy of the city in regard to granting franchises. Shall they be given away, sold outright, granted for a short term of years, taxed, or exempted? Upon the proper solution of these questions depends to a large degree the happiness and welfare of the people. In the following selection Professor D. F. Wilcox discusses these questions: 1
It is now well known that the franchises of a great city, under the conditions ordinarily imposed, are of enormous value. A franchise has value only in so far as it partakes of the nature of a monopoly in practical operation. Unless the monopoly element enters in some degree, the franchise is a mere license or permit.
The movement for the taxation of franchises as real estate has gained considerable headway since it was put into practical operation in New York a few years ago. A franchise is undoubtedly a right to the use of land and should be classed along with landed property strictly. The taxation of franchises is in no sense a compensation for them. It is simply the taxation of a certain amount of very real property that is in private hands. Nevertheless, in
1 Reprinted from Wilcox, D. F., The American City, by permission of MacMillan and Company.
bringing this class of property upon the tax rolls, when up to this time it has been as clearly and universally exempt as United States bonds, we take out of its value a sum equal to the amount of taxes annually paid capitalized at the normal rate of interest. For example, supposing that the city of Gasopolis twenty years ago gave to a company the right to use the streets for the purpose of distributing gas to be sold at a maximum price of $1.00 per 1,000 cubic feet, the franchise to continue for forty years, subject to such regulations and conditions as may have been imposed when the charter was granted. Now suppose that the company invested $100,000 in the construction of its gas-plant and distributing system, and is now able to pay a normal dividend upon $200,000 worth of stock. We should say that the franchise of the company under the existing conditions is worth $100,000. If we have been taxing only visible property, we have the gas company assessed for $100,000 only. That has been the condition under which the franchise was worth the other $100,000. If now we begin to tax the franchise as real estate, and put the whole $200,000 upon the tax rolls, we have taken away a certain amount from the value of the property. If the tax rate is 2 per cent., for example, the amount of taxes received on account of the franchise will be $2,000, and the franchise itself will be worth $2,000 per year less to its owners. If the normal rate of interest is 5 per cent., then the value of the franchise will have been diminished $40,000, which is $2,000 capitalized at 5 per cent. By bringing the franchise under the tax law, the government will thus confiscate 40 per cent. of the value of the franchise. Yet this is confiscation only in the same sense that any new tax involves confiscation. Nevertheless, in this hypothetical case we should have the gas company assessed at $200,000 when its property, under the new condition involved in the taxation of the franchise at its previous value, has been reduced in value to $160,000. Under the circumstances, therefore, the franchise should be assessed at less than its previous value.
If assessed at $71,428.57, its value will be brought down to exactly that amount, and the tax will be just.
We must not be deluded, however, by the idea that by taxing a franchise we receive compensation for it. It would be absurd to say that a grant of land by the government is not a gift, because the land is taxed at its full valuation after it becomes private property. If I sell my neighbor a house, he is not relieved from paying taxes because he bought the house. True, one of the conditions that fixed the price of the house was the general fact of its being property subject to taxation. And so if the city sells me a franchise and I pay full value for it under the condition that it shall be exempt from taxation, then if later the city taxes the franchise, in justice it should return to me, not the whole amount I paid for my special privilege, but just the difference in value between the franchise taxed and the franchise not taxed.
The only possible excuse for giving away any franchise is the desire to "build up the country,' to encourage the development of property for the benefit of the community and as a basis for future taxation. Upon this theory franchises were given away in the earlier history of most American cities. Indeed, new franchises are still given away on that theory in many cases, especially where the grant is made for the development of a new kind of public utility such as the distribution of heat and cold. This is precisely the same theory on which the United States has given away lands of great potential value to actual settlers.
But for any city of considerable size now to give away a street railway, gas, or electric light, water, or telephone franchise on the same conditions under which similar franchises now have an immediate and real market value is, unless to be regarded as charity, a rank injustice, a governmental iniquity-for what else is it to give to one the property of all? And, indeed, to sell a franchise on condition that it shall be exempt from taxation is a ruinous mortgaging of the future. For example, if the city of Gasopolis now sells
a twenty-year franchise under condition of exemption from taxation, it will receive $100,000 in cash, which may be immediately devoted to some permanent public improvement requiring the expenditure of that amount. If, on the other hand, the franchise is sold subject to taxation, the city will receive only $71,428.57 down and will have to borrow the remaining $28,571.43 needed for the desired improvement. If the city pays 32 per cent. interest on this sum, it will amount to exactly $1,000 per year. On the other hand, the city will be receiving 2 per cent, in taxes on $71,428.57, which is the value of the franchise. This will amount to $1,428.57 per year, so that the city will be the gainer by $428.57 annually.
As I have said, the value of a franchise depends on the monopoly element in it. This may be expressed in the grant or may be simply the result of conditions which discourage or prevent competition. In the nature of the case a franchise for the establishment of a continuous line of fixtures in the street tends toward monopoly. It is open for a city to adopt one of two courses toward these privileges. First, the city may cultivate the monopoly features in order to raise a revenue from them. Or, second, the city by regulation may hold down prices or hold up the service to the point where the monopoly principle loses its venom, and the franchise has no value. Usually this question resolves itself into the question of a percentage of gross receipts for the city treasury or lower fares for the street-car passengers, lower tolls for the telephone patrons, or lower prices for the gas, water and electric light and power consumers. There is comparatively little clear thinking on this question in American cities, and every man answers it according to his instincts. If he is a large property owner, he is anxious to relieve himself of a portion of the burden of direct taxation and favors selling franchise-monopolies so as to replenish the public treasury. If, on the other hand, he is poor or in very moderate circumstances, so that his street-car fare, his water rate, and his gas bill are a burden to him, he wants
prices reduced so that he can get transportation, water, and light at cost. It is generally agreed that a consumption tax on the common necessities of life operates as a special burden upon the poor, and is therefore unjust and undemocratic. On this theory, then, democracy will insist that franchises for the supply of the common necessities of urban life must have their value regulated out of them in the interest of cheaper and better service. It is not inconsistent with this theory, however, to leave enough value in franchises to pay all the expenses incidental to their exercise. That is to say it may be proper to require street-railway companies to pay into the public treasury, in addition to any tax that may be levied on their property, a sum sufficient to reimburse the city for all extra expense in the construction and care of streets caused by the presence and activities of the streetrailway business. The taxpayer has no claim to relief by means of the profits of public utilities except in so far as he furnished a street specially prepared for their fixtures. It is the user that makes a public utility profitable, and consequently he should get the benefit.
One method of receiving compensation for franchises, now often advocated, is by the provision in the grant that the grantees' plant and property in the streets shall fall to the city without compensation at the expiration of the franchise period. Such an arrangement for franchise grants is now optional with New York, Chicago, San Francisco, and some other cities in different parts of the country.
Some of the provisions of the newer charters, especially those of western cities, are interesting and instructive. St. Paul and Portland, Oregon, represent two distinct policies with reference to public utilities. St. Paul does not permit municipal ownership of street railways or commercial lighting plants. Nevertheless, close restrictions are put upon the grant of franchises. They require a three-fourths vote of all the members of each branch of the city council, and if vetoed by the mayor, they must receive a four-fifths vote for repassage. Every franchise must provide for the payment of at