City of Tacoma v. Tax Com'n

• Decision Date: 24 May 1934
• Docket Number: 24943.
• Court: Washington Supreme Court
• Parties: CITY OF TACOMA v. TAX COMMISSION et al. (CITY OF SEATTLE, Intervener.

33 P.2d 899

177 Wash. 604

CITY OF TACOMA v. TAX COMMISSION et al. (CITY OF SEATTLE, Intervener.

No. 24943.

Supreme Court of Washington, En Banc.

May 24, 1934

Appeal from Superior Court, Thurston County; D. F. Wright, Judge.

Action by the City of Tacoma against the Tax Commission and Thomas S. Hedges and T. M. Jenner, as members of such commission wherein the City of Seattle intervened. From a decree for plaintiff and intervener, defendants appeal.

Reversed with instructions.

G. W Hamilton and John W. Hanna, both of Olympia for appellants.

W. W. Mount, John E. Gallagher, Bartlett Rummell, and Lindsay L. Thompson, all of Tacoma, and A. C. Van Soelen, Walter L. Baumgartner, and Charles v. Hoard, all of Seattle, for respondents.

J. Y. Kennedy and S. J. Brooks, both of Everett, and Lester T. Parker, of Aberdeen, amici curiae.

BEALS, Chief Justice.

This action was instituted by the city of Tacoma, a municipal corporation, for the purpose of procuring a decree permanently enjoining the tax commission of the state of Washington and defendants Hedges and Jenner, as members thereof, from enforcing the provisions of chapter 191, Laws 1933, p. 869, Rem. 1933 Supp., § 8326-1 et seq., as against the plaintiff.

The city of Seattle, a municipal corporation, filed its complaint in intervention seeking the same relief as that demanded by the city of Tacoma.

To plaintiff's second amended complaint and to intervener's amended complaint defendants demurred. These demurrers were by the trial court overruled, and, defendants having elected to stand thereon, a decree was entered permanently enjoining defendants from enforcing the act above referred to as against plaintiff and intervener. From this decree defendants have appealed to this court.

The two municipal corporations will be referred to jointly as respondents.

The title to chapter 191, Session Laws of 1933, reads as follows: 'An Act relating to taxation; imposing taxes upon the privilege of engaging in business activities and providing for the ascertainment, assessment, collection and distribution thereof; providing for the administration and enforcement of this act; providing penalties; making appropriations; and declaring that this act shall take effect immediately.'

The following portions of the statute are to be considered in determining the questions here presented:

Sec. 2. (2) 'From and after the first day of August, 1933, and until the thirty-first day of July, 1935, there is hereby levied and there shall be collected from every person an annual tax or excise for the privilege of engaging in business activities. Such tax or excise shall be measured by the application of rates against values, gross proceeds of sales, or gross income, as the case may be, as follows: * * *

'(e) Upon every person engaging or continuing within this state in the following businesses; as to such persons the amount of tax or excise shall be equal to the gross income of the business multiplied by the rate set out after the business, as follows: * * *

'IV. Electric interurban railways, street railways, and all automotive transportation systems operating entirely within the limits of any city or town or contiguous cities or towns; five-tenths of one per cent;

'V. Light and power companies; three per cent; * * *

'VII. Water companies, except, however, irrigation companies and district; three per cent; * * *

'The terms of this subdivision shall apply with equal force to any municipal corporation or district engaging in any of the business activities herein mentioned: Provided, however, that moneys received from tax sources shall not be included in computing the gross proceeds of sales or gross income upon which such tax shall be based. This paragraph shall be so interpreted as to give effect to the intent of this act which is declared to be to impose upon municipally owned and/or operated utilities and businesses coming within the purview of this subdivision an excise at the same rate as is herein imposed upon privately owned utilities or businesses of the same type.'

From their complaints it appears that respondents own and operate certain public utilities consisting of street railways, light and power plants, water systems, etc. Respondents contend that the act is unconstitutional and void in so far as it purports to provide for the levy and collection of taxes from municipally owned and operated public utilities, for the reason that it is in conflict with article 1, § 10, of the Constitution of the United States, which, among other things, prohibits the enactment by a state of any law impairing the obligations of contracts; and also with section 1 of the Fourteenth Amendment to the Constitution of the United States, prohibiting the making or enforcement of any state statutes depriving any person of his property without due process of law, or denying to any person the equal protection of the laws.

Respondents also contend that as to them the act violates the following portions of our state Constitution:

Article 1, § 23, which prohibits the passage of any 'ex post facto law, or law impairing the obligations of contracts;' and

Article 3, § 12, vesting the Governor with a certain veto power, and the Seventh Amendment to the State Constitution, known as the 'Initiative and Referendum Amendment.'

Questions concerning the constitutionality of the act here under attack, in so far as certain provisions thereof were concerned, were presented in the case of State of Washington ex rel. Stiner v. Yelle, 174 Wash. 402, 25 P.2d 91, in which proceeding the act was held good and not in violation of either the federal or state Constitutions. The main question here presented was not, however, Before the court in the case cited.

The act as originally passed by the Legislature contained a section, No. 2 1/2 (Laws 1933, p. 878), which section was vetoed by the Governor. Respondents argue here that the Governor's veto of this section must be held ineffective and void, and that, this being true, certain consequences favorable to respondents necessarily follow.

The question of the effect of the Governor's veto of section 2 1/2 was considered by this court in the case of Cascade Telephone Co. v. State Tax Commission (Wash.) 30 P.2d 976; it being there held that the veto was a valid exercise of the executive prerogative. That phase of the case has heretofore been determined contrary to respondents' contention. The history of the act and all matters in connection with the Governor's veto of section 2 1/2 are fully discussed in the cases cited, to which reference is hereby made.

Respondents next contend that, as the revenues of the public utilities owned and operated by the cities upon which the tax is sought to be levied have long since been lawfully pledged for the payment of revenue bonds and interest thereon, the act impairs the obligation of respondents' contracts with the holders of these bonds, and is therefore unconstitutional and void.

At the outset of the discussion of this phase of the case we assume that respondents, as trustees of the revenue arising from the operation of the utilities concerned, may maintain this action to preserve the fund, consisting of such revenues, for the benefit of all persons interested. No bondholder is a party to this action; the same being maintained only by the cities in their alleged capacity as trustees.

By virtue of the provisions of Rem. Rev. Stat. § 9488 et seq., respondents were authorized to acquire or construct and operate such utilities, and the issuance of bonds for utility purposes was provided for.

It is admitted herein that respondents have outstanding bonds against their public utilities in large amounts which are held by many different individuals. Under the law, these bonds are obligations only against the special funds referred to respectively therein.

The appeal herein being from a decree entered upon overruling demurrers, it must be taken as admitted that certain of the utilities conducted by respondents do not produce sufficient revenue to pay maintenance, operating expenses, and interest on bonds.

Respondents earnestly contend that, under the statutes authorizing the issuance of the bonds and the municipal ordinances setting up the utilities and creating the obligation, the entire gross revenues arising from the operation of the respective utilities have lawfully been pledged to the payment in full of the utility bonds now outstanding, and that consequently the statute here under attack, by providing for the levy of a tax, by way of an excise, upon these revenues, impairs the lawful obligation of respondents' contracts with the bondholders, and must therefore be held unconstitutional and void.

In considering the questions here presented, it may be assumed, as a general principle, that the holders of the respective utility bonds have under the law no claim against the general revenues of the municipality, nor can they demand payment of their respective bonds out of any revenues save those arising from the particular utility in connection with which their bonds were issued.

In the case of Schooley v. Chehalis, 84 Wash. 667, 147 P. 410, 413, this court, referring to the duty of the city to establish and maintain rates sufficient to insure a revenue ample to maintain the system and provide for the bond payment, said: 'We will not presume that the city will not perform this duty by fixing such rates as will enable it to maintain the plant from the revenues of the system itself, and also pay the principal and interest of the bonds, as provided by the ordinance.'

In the case of Uhler v. City of Olympia, 87 Wash. 1, 151 P 117, 152 P. 998, and Asia v. Seattle, 119 Wash. 674, 206 P. 366, the lack of authority...