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Taxation: a Delicately Planned Arrangement of Cargo James E Taxation: A Delicately Planned Arrangement of Cargo James E. Sabine* [One of the problems of the expansion of governmental functions is] * distributing the burden of taxation equitably among taxpayers ac- cording to their ability to pay. The revenue laws must be as delicately planned as the arrangement of cargo for the hold of a ship if they are to equilibrate the incidence of a variety of taxes .... t N 0 ONE HAS CONTRIBUTED as much to the tax system of California as Chief Justice Roger J. Traynor. This system is a monument to his creative talents and industry. His contribution is not just that of a theorist; he has been on the front line in the areas of legislation, tax administration, and the case-by-case evolution of tax law in the courts. I THE EARLY DAYS Chief Justice Traynor's career in taxation in large part accounts for the establishment of a revenue system that soon gained recognition as one of the finest in the country. While in his early thirties, he figured prominently in the drafting of the statutes that still serve to provide the principal state revenues. The tax system of which he was the chief architect has stood the stress of state government for over thirty years, during which time the state population has expanded from some five and a half million to over eighteen million and the revenue from state taxes has increased from less than 100,000,000 dollars1 to over 2,800,000,000 dollars2 a year. There have been few significant additions to the Cali- fornia tax system since Chief Justice Traynor drafted the principal statutes. The State of California reaps endlessly the benefits of his labors. Chief Justice Traynor's interest in taxation was sparked by Morley's Life of Gladstone. As a then young graduate student simultaneously engaged in earning his Ph.D. in political science and his law degree at the University of California, he pondered Gladstone's comment that a sound revenue system is indispensable to sound government. Young Traynor brought his own reflection to bear upon that comment across * Assistant Attorney General of California; Visiting Lecturer in Law, University of California, Berkeley. t Traynor & Surrey, New Roads Toward the Settlement of Federal Income, Estate and Gift Tax Controversies, 7 LAW & CONTEm. PROB. 336 (1940). 1Report of Cal. Tax Research Bureau 182 (1933). 2 CAL. ConmoT.ra ANN. REP. A-16 (1964). CALIFORNIA LAW REVIEW [Vol. 53: 173 busy days consumed with teaching and writing. His reflection culminated in a small classic, as original in analysis as it was painstaking in documen- tation, entitled "National Bank Taxation in California."8 In 1930 he established one of the pioneer law school courses in taxation at a time when such courses were unheard of in the curricula of most law schools.4 He was an inspiring teacher. During the decade in which he taught taxation, he so successfully conveyed the intellectual excitement and challenge in the world of taxation that he set the careers of many of hig'students. Fortuitously Chief Justice Traynor's emergence as a tax expert came at a time when his services were most needed, during the depression years. In that desperate time the state's financial needs far outran the revenues available under a wholly inadequate tax system. In a report submitted January 16, 1933) the State Board of Equalization advised the Governor the state was "confronted with a tax crisis," and that "what may be done to meet this crisis is, in our judgment, the most vital problem con- fronting the people of California and their legislative representatives today...." 5 Public interest in state tax problems in the early nineteen- thirties is reflected in a comment of the State Board.of Equalization in 1935 that "tax problems have had more public attention in California during the past two years than in any previous biennial.period since the State Board of Equalization was established in 1879."'' , The legislature had, in 1931, created a Tax Research Bureau "to make a full and complete investigation of the actual operation of the systems of revenue, taxation and public finance" and to report its recom- mendations to the Legislature. One of the nation's ablest tax adminis- trators, the late Dixwell L. Pierce, who served for thirty-seven years as Secretary of the California State Board of Equalization, successfully sought the services of the rising young professor of taxation to serve as Legal Counsel to the Tax Research Bureau. These two men of gentle temperament, dedicated to just as well as efficient tax administration, became effective colleagues in the never-ending tasks that beset them. In the course of his new responsibilities in Sacramento, superimposed upon his teaching at Boalt Hall, Traynor undertook a critical study of the Bank and Corporation Franchise Tax Act, as it read in 1931, setting forth proposed changes and the reasons therefor. This analysis served, in part, as a basis for recommendations made by the Bureau to the legislature. He also wrote a comprehensive one-hundred page chapter 3 17 Ca'. L. REV. 83, 232, 456 (1929). 4 Traynor, Tax Laws Deserve Sound Administration, PROCEEDINGS OF FORTY-Nint ANNuAL CONFERENCE or THE NATIONAL TAX ASSOCIATION 44 (1956). 5 Report of California State Board of Equalization for 19 3 1 r19 2 , 9 (1933). 6Report of California State Board of Equalization for 1933-1934, 9 (1935). 19651 TAXATION I on the Bank and Corporation Franchise Tax Act for the 1932 edition of Ballantine's California CorporationLaws. 7 The report of the Bureau was submitted to the legislature on January 23, 1933,8 and it prompted the enactment during the next four'years of a comprehensive program of state taxation that has survived across the years with little change. In 1933 there was a complete revision of the Bank and Corporation Franchise Tax Act with the most significant changes being made in the method of taxing national banks. As principal draftsman of the revised tax on banks, Traynor ingeniously solved the problem of equalizing the taxation of banks and non-financial corporations in a manner consistent with the federal statute authorizing state taxation of national banks.' The solution was to tax banks under the Bank and Corporation Franchise Tax Act at the same basic percentage of net income as other corporations, but also to impose an additional percentage on banks equivalent to the percentage of net income that other. corpora- tions were required to pay as personal property taxes, from which na- tional banks were exempt under federal law.1" The California method has been recognized as a fair solution of the problem,11 and extended litigation contesting the validity of the Cali- fornia method of taxing national banks ended in vindication of the tax. Upholding its validity, in Security-FirstNational Bank v. FranchiseTax Board,'" the Supreme Court of California stated: "Section 4a is designed to impose on banks a fair and equitable tax within the restrictions of section 5219, and the lack of any discrimination against banks is clear -when the entire tax burden of other corporations is taken into considera- tiqn .... ""8The court further observed that "the statutory scheme was reasonably designed to obtain equality of tax burdens ...." 4 The United States Supreme Court upheld the action of the California Supreme Court .by dismissing for want- of a substantial federal question 5 the appeals -taken by the banks. -7BALLAirrn, C oaxx CoaoRanoN LAWS ch. 20 (1932). 8 Report of the'California Tax Research Bureau (1933). 9-Rev. Stat. § 5219 (1875), 12 U.S.C. § 548 (1958). 0 1 Section 4a of the Bank and Corporation Franchise Tax Act (now CAL. Rxv. & Tax Code, §§ 23186, 23186a and 23186b). The 1933 amendments were the subject of a three part article by Professor Traynor and Frank M. Keesling, Recent Changes In The Bank And CorporationFranchise Tax Act, 21 CALir. L. REv. 543 (1933), 22 CAIwm. L. REV. 499 (1934), 23 CAraF. L. REv. 51 (1934). ""Massachusetts and California appear to have found the fairest solution to this problem .... " Howell, Special Problems in State Taxation of Bank Income, 9 NAy'L TAX J. 278, 281 (1956). 12 55 Cal.,2d '407y.359 P.d--625,'11 Cal. Rptr. 289 (1961). (Traynor; J.didiiot partici- pate in the consideration or decision of the case.) 18Id. at 414-15. 14 Id.at 417. 15 Security First Natl Bk. v. Franchise Tax Bd., 368 U.S. 3 (1961). CALIFORNIA LAW REVIEW [Vol. 53: 173 In 1933 the legislature also enacted the Retail Sales Tax Act,16 for which Traynor served as the chief draftsman and first administrator. Traynor also participated in the drafting of the Motor Vehicle Trans- portation License Tax Act,17 enacted in 1933, the Personal Income Tax Act'8 and the Use Tax Act, 9 enacted in 1935, and the Corporation In- come Tax Act, 0 the Private Car Tax Act,2' and the Use Fuel Tax Act," enacted in 1937. All through the nineteen-thirties the then Professor Traynor executed with distinction a series of impressive responsibilities in taxation, serving various times as Legal Counsel to the Tax Research Bureau, Sales Tax Administrator, Consultant to the State Board of Equalization, Consulting Tax Expert for the United States Treasury Department and Consultant to the Attorney General of California. Some of these special assignments continued until he was appointed an Associate Justice of the Supreme Court of California in 1940. Before his appointment to the Supreme Court, Chief Justice Traynor wrote extensively on tax subjects. The author remembers that lights burned late at night in Traynor's basement office in the old Boalt Hall, and, perhaps as recompense, his writings illuminate the field of state taxation.
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