Letter to Counsel
June 4, 2001
Richard E. Israel, Esq.
Assistant Attorney General
Office of the Attorney General
90 State Circle
Annapolis, MD 21401
Dear Dick:
Enclosed are materials we have assembled in response to your inquiry about the amendment of Article 3, sec. 48 of the Maryland Constitution.
The change made by ratification of the amendment required corporations to surrender tax exemptions at such time as they sought to have their articles of incorporation amended or wished to have the benefit of legislation. This in turn would make it possible for the state to dispose of corporate tax exemptions it had previously granted (Comparison of Present and All Former Maryland State Constitutions, pp. 826-829). The effect of the amendment to Article 3, sec. 48 has not been researched to determine when or how it was first applied. Although the language requires corporations to surrender all claims to tax exemption on certain occasions there is no requirement that the state extinguish an exemption it has granted or is prevented from granting exceptions in accordance with the law. Below is a discussion of the materials that have been provided for your use.
Governor Jackson's 1890 message to the General Assembly advocates the need to recoup greater revenue from taxes on corporations and in particular to repeal exemptions that had been previously made. The immediate object of the amendment proposed in Chapter 195, Acts of 1890, appears to be the Baltimore and Ohio Railroad whose capital stock was exempt from taxation by virtue of the charter approved by the General Assembly (Chapter 123, Acts of 1826). Enclosed is Governor Jackson's letter of November 25, 1891 to Attorney General William Pinkney Whyte seeking an injunction to prevent the B & O Railroad from issuing additional stock as further evidence of his belief that the concessions made to this company were a great injustice to the citizens of Maryland. The Governor's message of 1892 reiterates his views on this subject.
While Governor Jackson's sentiments on corporate responsibility are no doubt sincere, it is also important to note that the state had a substantial investment in the railroad. The railroad's stock may have been exempt from taxation but the incorporation of the railroad approved by the General Assembly in 1826 reserved 10,000 shares worth $1 million for the state to purchase. This infusion of capital was beneficial to the railroad and was by far the most successful of the state's internal improvements. Dividends on the B & O Railroad stock were a source of general fund revenue for a number of years. By the 1870's the B & O was paying over $120,000 per annum in dividends. When the railroad suspended dividend payments on one stock in 1875 it was an aggregate loss of almost 2 percent of the revenue anticipated for the year. By 1890 the dividends on the stock had diminished and there was a perception, reflected in the Governor Jackson's message of that year, that the railroads were not paying their fair share of taxes.
Fiscal policy in the early part of the 19th century was predicated on a hope that state investments in the stock of companies would yield sufficient dividends to pay for the operation of government and greatly reduce or eliminate the need for property taxes. A number of charters were issued with the provision that stock be reserved for purchase by the state and, in turn, the state invested substantial funds in these stocks. By 1890 the state still had a diversified portfolio of such investments, most of which were of little or no value with the singular exception of the B & O Railroad. Complicating the issue of corporate taxation is the state's interest in the Chesapeake and Ohio Canal. Much effort was expended to protect the C & O Canal from compettion with the railroads to preserve the state's investment in the canal. It is also important to consider that many of the principal political figures of the latter part of the 19th century had a financial interest in one or more of the corporations which the state owned stock or sought to tax.
Setting aside the competing political and financial interests, the state acted in what it believed was its best interest with regard to corporate taxation. It invested when advantageous, granted exemptions as it saw fit to promote the entities in which it had invested, and enacted legislation beneficial to corporate financial interests to preserve its investment. If the returns were not satisfactory, it adjusted its policy to obtain revenue accordingly.
For background on the issues involved you will find enclosed two papers written on the operations of the Comptroller's Office for Ed's course in public history this semester at the University of Maryland. These convey a sense of the state's fiscal posture during the latter part of the century. Also enclosed is a biography of Governor Jackson and his 1892 message to the General Assembly.
Please do not hesitate to call if require further assistance. My number here is (410) 260-6402.
Sincerely,
Chris Allan
Deputy State Archivist
Enclosures