Keith v. State Funding Bd.

• Decision Date: 05 April 1913
• Parties: KEITH et al. v. STATE FUNDING BOARD.
• Court: Tennessee Supreme Court

155 S.W. 142

127 Tenn. 441

KEITH et al. v. STATE FUNDING BOARD.

Supreme Court of Tennessee.

April 5, 1913

Appeal from Chancery Court, Davidson County; John Allison Chancellor.

Suit by Walter Keith and others against the Funding Board of State of Tennessee. From a decree dismissing the bill, complainants appeal. Reversed and remanded for further proceedings.

Lansden and Green, JJ., dissenting.

Thos J. Tyne, of Nashville, for appellants.

Pitts & McConnico and Pendleton & De Witt, all of Nashville, for Governor and Comptroller.

Attorney General Cates for Treasurer and Secretary of State.

WILLIAMS J.

The bill in equity filed in this suit was by taxpayers of the state of Tennessee, as complainants, against the Funding Board of the state, seeking to have declared unconstitutional and void a provision of an act of the General Assembly of Tennessee, approved by the Governor on February 21, 1913 authorizing the issue and sale of state bonds in amount sufficient to provide funds with which to pay off the outstanding bonded indebtedness of the state maturing July 1 and August 1, 1913, aggregating approximately $12,000,000.

Of the members of the Funding Board made defendants, the Governor and Comptroller answered, denying that the provision so attacked was invalid, and insisting upon the constitutionality thereof; and the Treasurer and Secretary of State in their answers join with complainants in the attack made by them.

The cause was heard on bill and answers, and on complainants' motion for an injunction to inhibit the issuance of the bonds, with an incorporation thereon of the feature so denounced by the bill of complainants as unconstitutional and void. The chancellor held that the provision attacked was not unconstitutional, but was within the power of the state acting through the Legislature, denied the injunction, and dismissed the bill. From his decree the complainants and two defendants, the Treasurer and Secretary of State, have appealed to and assigned errors in this court.

The provision of said act attacked as unconstitutional is the second proviso of the second subsection of the first section thereof, which is as follows: "And provided, further, that neither the principal nor the interest of said bonds shall be taxed by this state or any county or municipal corporation thereof, and it shall be so stated in the face of said bonds."

It is insisted by appellants that this provision is in violation of article 2, § 28, of the Constitution of the state, which is as follows: "All property, real, personal or mixed, shall be taxed, but the Legislature may except such as may be held by the state, by counties, cities or towns, and used exclusively for public or corporation purposes. *** All property shall be taxed according to its value, that value to be ascertained in such manner as the Legislature shall direct, so that taxes shall be equal and uniform throughout the state. No one species of property from which a tax may be collected shall be taxed higher than any other species of property of the same value, but the Legislature shall have power to tax merchants," etc.

The contention of appellants, for error, is that the Legislature is without power to direct the execution of a contract or to authorize the issuance of bonds by an act which is repugnant to the restrictions imposed by the Constitution upon the legislative power; that the people of the state, speaking through the Constitution, having ordained that all property shall be taxed, save certain enumerated classes of property which the Legislature may exempt, and other classes which it shall exempt, its power to exempt from taxation is restricted to the enumerated classes, neither of which includes state bonds; that the act in question in its attempt to exempt property in bonds from taxation is repugnant to and in contravention of article 2, § 28, of the Constitution, and cannot be made the basis of, or establish a valid contract.

The insistence of appellees is that the question presented by the proviso is not one of tax exemption of property, but one relating to the power of the state in contracting to borrow money for governmental purposes; that the real effect of the proviso is to recognize and preserve the state's immunity from taxation upon its credit--its power to borrow money to the best advantage; and in so far as any idea or consequence of exemption from taxation is involved, the word "exemption" not being used in the act, it is in reality only an exemption of the state's credit--a thing not touched or affected by the Constitution, except as to the purposes for which that credit shall be used.

It may be said by way of premise that the question thus raised is different from the question under immediate decision in the case of State National Bank v. City of Memphis, 116 Tenn. 641, 94 S.W. 606, 7 L. R. A. (N. S.) 663, 8 Ann. Cas. 22. The question involved and determined in the case of Bank v. Memphis was that state bonds are taxable in the hands of any one who may hold them, it not appearing that any provision had been made, in the act authorizing their issuance, to exempt them from taxation; whereas, in the present case, the contention is that the Legislature may validly provide in advance of issuance by the act of authorization, and in the face of the bonds, a contract stipulation for their nontaxability, based upon advantages and a consideration accruing to the state itself.

How far the reasoning and principle embodied in the opinion of the court in Bank v. Memphis, supra, are applicable in the solution of the question here for determination will be adverted to later in this opinion.

A fundamental argument advanced by appellees to support the nontaxability, or the exemption from taxation, of the bonds under consideration, is that the power of the state to borrow for public purposes is a sovereign attribute or function, which was not limited or even touched by the Constitution. This argument is met by a denial on the part of appellants, who insist that while the power to borrow money by means of a bond issue is inherent in the state, nevertheless the exercise of this power by the state does not involve an attribute of soveignty, or more than a right inhering in the state as a corporate entity, citing Bank v. Memphis, supra. While it is true that in several cases, including the Ohio case just referred to, the contract of borrowing money is said not to be referable to a state's sovereign power, we believe that these cases mean to have reference to obligations incident to transactions without the scope of sovereign power, or to the status of a state in respect of such contract when made; that is, that the state's rights as to construction of the instrument evidencing the contract are no higher than those of the individual with whom the contract may have been made. When a state's power to issue bonds based on her credit is considered, many cases hold that it inheres in a state in her sovereign capacity. Piqua Branch Bank v. Knoop, 16 How. 369, 14 L.Ed. 977; Danolds v. State, 89 N.Y. 36, 42 Am. Rep. 277; State v. Smyrna Bank, 2 Houst. (Del.) 99, 73 Am. Dec. 699; Jessup v. United States, 106 U.S. 151, 1 S.Ct. 74, 27 L.Ed. 86; Lynn v. Polk, 8 Lea, 121, 240. It is because the power so inheres in a state that the bonds issued by her are held not to be taxable by the United States; such bonds being but means for carrying on the work of the state government. Mercantile Bank v. New York, 121 U.S. 138, 162, 7 S.Ct. 826, 30 L.Ed. 895; Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759; s. c., 158 U.S. 630, 15 S.Ct. 912, 39 L.Ed. 1108; McCray v. United States, 195 U.S. 27, 24 S.Ct. 769, 49 L.Ed. 78, 1 Ann. Cas. 561. Such power may be required to be exercised by the state in times of her dire necessity, or to preserve her existence, and is therefore to be deemed an attribute of her sovereign power.

This conceded, it is argued that the imposition of a tax upon bonds so issued is a tax upon the state's credit, and so far that it must be within the power of the Legislature in issuing the bonds to validly stipulate for their nontaxability.

This brings us to a consideration of whether or not it is competent to a state to tax her bonds issued upon her credit. It is apparent that this question differs from that involved in the decisions of the Supreme Court of the United States denying power in the federal government to tax such securities of its coordinate sovereignty, which decisions are placed upon the ground that to do so would be to permit one sovereign power, acting in a national capacity, to tax the power of the state in respect of instrumentalities used in the borrowing of money. A sovereign state may, in its own discretion, in the absence of any constitutional prohibition, permit its own agencies or arms of government and its own property to be taxed; and, a fortiori, evidences of indebtedness issued on the basis of her credit, even when deemed to be instrumentalities of a state in the exercise of its power to borrow money. State Chancellor v. Elizabeth, 65 N. J. Law, 479, 47 A. 454; Norfolk v. Perry Co., 108 Va. 28, 61 S.E. 867, 35 L. R. A. (N. S.) 167, 128 Am. St. Rep. 940; 37 Cyc. 872.

In the Virginia case last cited it is said that this theory of a state's power to subject property held by itself for its own public purposes is in practical effect but a constitutional concept, since thus the public would be taxing itself in order to raise money to pay over to itself, and no one would be benefited but the officers employed, whose compensation would go to increase the useless levy. Cooley on Taxation (3d Ed.) 263. Practically all state Constitutions therefore, exempt from taxation property held by the state; but this is...