National Surety Co. v. Starkey

• Decision Date: 30 January 1919
• Docket Number: 4473
• Citation: 41 S.D. 356,170 N.W. 582
• Parties: NATIONAL SURETY COMPANY, Plaintiff and appellant, v. J. H. STARKEY, County Treasurer of Hughes County, Defendant and respondent.
• Court: South Dakota Supreme Court

41 S.D. 356

170 N.W. 582

NATIONAL SURETY COMPANY, Plaintiff and appellant,

v.

J. H. STARKEY, County Treasurer of Hughes County, Defendant and respondent. South Dakota Supreme Court Appeal from Circuit Court, Hughes County, SD Hon. John F. Hughes, Judge #4473--Reversed U. S. G. Cherry, Wm. J. Griffin, Walter S. Clark Attorneys for Appellant. C. C. Caldwell, Attorney General Byron S. Payne, Assistant Attorney General Howard G. Fuller, State's Attorney Attorneys for Respondent. Opinion filed January 30, 1919. Rehearing denied March 29, 1919

WHITING, J.

The sole question before us is: Are bonds of a municipal corporation of this state—such as of a school district or city—subject to taxation under the existing laws of this state? The trial court held that they were.

There are no express provisions of our Constitution exempting such bonds from taxation, or authorizing such exemption. The Legislature is without any power to exempt property from taxation other than such classes of property as are mentioned in the Constitution. Article 11, § 7. Respondents contend that by section 2055, Pol. Code, the Legislature has expressly provided for the taxation of "public securities." It must, of course, be conceded that these bonds are "public securities," but an examination of sections 2054, 2055, Pol. Code, discloses that, in enacting these sections, the Legislature was not attempting to extend the scope of the term "property" as used in the Constitution, but was, for taxation purposes, merely classifying, into real and perSOnal, the different kinds of property. Moreover, it is not within the proper functions of a legislative body to define a term that may be used in a Constitution; and, if we were to consider the use of the term "public securities" in section 2055, Pol. Code, as merely an effort to define "property," such definition of the term would be entitled to no weight unless it appeared that it was of such long standing and had been so generally accepted and acted upon as to show an approval thereof by the people. 6 R. C. L. 62. Section 2055, Pol. Code, is of long standing, being first found after statehood as section 4, c. 14, Laws 1891; but it was not proven that the term "public securities" as used therein has been generally understood by the people of this state as including the bonds of our own municipalities, and certainly we cannot take judicial knowledge that such is a fact. We are therefore of the opinion that the use of such term in the statute is entitled to no weight at our hands—the Legislature did not and could not either enlarge or restrict the meaning of the term "property" as such term is used in the Constitution of this state.

And yet the term "property," as used in our Constitution (article 11), is broad enough to include everything of value, tangible or intangible, capable of being the subject of individual right or ownership, and under our Constitution all property, except such as is expressly exempted therein, is declared to be subject to taxation. Ewert v. Taylor 160 N.W. 797. Inasmuch as public securities are "property," in the common acceptation of that term, it would follow that such securities are subject to taxation in this state unless some provision of the federal Constitution renders them exempt, or unless, because of some controlling rule of public policy—some superior intervening right or reason—it will be presumed that the term "property," as used in the Constitution, was not intended to include public securities or some class or classes thereof.

It has oft been urged that neither a state nor any of its counties or municipalities could be allowed to tax bonds issued by themselves, because it was contended that to do so would be to impair the obligation of the contracts—that such a corporation could not be allowed to enter into an obligation to pay a debt and interest and then destroy such obligation in whole or in part by taxing same. We are not impressed with the soundness of the reasoning advanced in support of such contention and fully agree with the leading authority, Champaign County Bank v. Smith, 7 Ohio, St. 42, and the numerous authorities that have followed it, in holding that to tax such a bond would not be to impair the obligation of the contract. We are of the opinion that, if there were not some other superior reason resting upon the sovereign rights of the state, that requires us to hold that the word "property," as used in our Constitution, was not intended to include bonds issued by this state, her counties or her municipalities, we should be bound to hold with the trial court. We cannot agree with the court in Champaign County Bank v. Smith, supra, that "the simple contract of borrowing money has no relation to her (the state's) sovereign character or power," because we believe that the exercise by a state of its power to borrow money (the use of its credit) is in and of itself the exercise of a power almost as essential to its corporate existence as is the power of taxation; but we do agree with that court that the exercise of this most essential power (that of using its credit) leaves its sovereign character and all other powers incident thereto wholly unimpaired.

The courts which have held such bonds taxable, in the absence of a constitutional provision expressly declaring them subject to taxation, have, to our minds, failed to give due consideration to the fact that, by so holding, they have ruled that it was the intent of the Constitution that, by the exercise of one of its sovereign powers, one of its instrumentalities of government, the state should cripple another power, another of its instrumentalities of government. As was said by Chief Justice Marshall in Weston v. Charleston, 2 Pet. 449, 468 (7 LEd 481):

"The right to tax the contract to any extent, when made, must operate upon the power to borrow, before it is exercised, and have a sensible influence on the contract."

In the great case of Pollock v. Farmers' L. & T. Co., 157 US 429-586, 15 SCt 673, 39 LEd 759, the court was a unit in holding a tax on the income or interest from municipal securities to be invalid, and, in addition to what was quoted from the Weston case, said:

"The tax in question is a tax on the power of the states and their instrumentalities to borrow money."

In Penick v. Foster, 129 Ga. 217, 12 LRA (NS) 1159, 12 Ann. Cas. 346, it is said:

"Nothing is better settled than that securities issued by the...