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Published by EH.NET (November 2003)

R. Rudy Higgens-Evenson, The Price of Progress: Public Services, Taxation, and the American Corporate State, 1877 to 1929. Baltimore: Johns Hopkins University Press, 2003. x + 168 pp. $39.95 (cloth), ISBN: 0-8018-7054-2.

Reviewed for EH.NET by W. Elliot Brownlee, Department of History, University of California, Santa Barbara.

R. Rudy Higgens-Evenson analyzes an important aspect of the history of government between Reconstruction and the New Deal: the delivery and financing of public services by state and local governments. This is well-ploughed terrain, but he surveys it from an unusual perspective: the relationship between public services and the taxation of corporations.

He begins by discussing calls in the 1870s for reform of the property tax, the backbone of state and local finance. He focuses, in particular, on the charges that the property tax did not reach corporate wealth, particularly in the form of stocks and bonds, and proposals for states to replace local taxation of corporations, especially railroads, with special state-level taxes. Pressure to reform increased after 1880, he suggests, as a result of the incremental growth of spending for public schools and insane asylums. In the author’s interpretive model, the driving force in the expansion of state and local government was “activist government” (p. 2).

“Only the deep pockets of the corporations could support the new functions undertaken by state and city governments,” the author claims (p. 9). Pressure to reform public finance by taxing corporations was especially acute in the industrial Northeast. During the 1880s, many states enacted modest, state-level taxes on corporations but provided corporations relief by providing exemptions from local property taxes, which were increasing in cities making new infrastructure investments. Subsequently, state governments raised their corporate taxes to fund new public services and, at the same time, to crack down on “corporate tax-dodging” (p. 48). Corporations, in response, cooperated and tried to guide public policy. The result was the emergence of what he calls the “corporate state.” Higgens-Evenson explains: “Corporation taxes funded new public services in a cooperative arrangement between business and government along the lines laid out by Alexander Hamilton in the 1790s” (p. 9).

In contrast, within what the author calls “the Jeffersonian republics of the South, Great Plains, and Far West,” state governments focused more on regulating corporations (primarily the railroads) rather than taxing them. He explains that these states were less industrial and were “guided by political ideas that were more in line with those of Thomas Jefferson.” These states adhered to “local government, property taxation, and minimal state-level services” (p. 10).

Subsequent public investment, particularly on highways, tested the revenue systems of states throughout the nation. Between 1907 and 1929, largely because rising expenditures stressed the property-tax system, the states that Higgens-Evenson describes as the “most progressive” adopted general or corporation income taxes. Almost all states turned as well to gasoline taxes, but the taxes turned out to be most important to the “Jeffersonian republics.” There, the author finds, gasoline taxes allowed some of these states to build roads “without upsetting the older order of property taxation” (p. 91).

Corporation and income taxes, he argues, prompted the creation of the final element in the corporate state. These taxes “brought business officials into government in new roles, formal and informal.” The representatives of corporations promoted the rise of government research bureaus, directed state government reorganizations, and advised on tax administration “The new relationship between business and government, particularly in the states where corporation and income taxes supplied a significant share of revenues, completed their transformation into corporate states” (p. 93).

Much of the story that Higgens-Evenson relates will be familiar to students of the fiscal history of the United States between the Civil War and the Great Depression. Nonetheless, they will find his book interesting and useful. He understands the importance of connecting the history of taxation with the history of public expenditures; he mobilizes some valuable new data on state government expenditures; and he provides important suggestions as to the precise relationship between spending and taxing in some key states.

The author covers a great deal of intellectual ground in this stimulating book. As a consequence of its ambitious scope and relative brevity, he cannot develop some of his key ideas, such as the role of “Hamiltonian” and “Jeffersonian” philosophies. His “brief survey” of the financial systems of the states, he writes, “applies the comparative method to state revenues and expenditures to explore why some states became corporate and some became Jeffersonian” (p. 11). But he never assesses the extent to which ideas either played an autonomous role in the formation of fiscal policy or simply reflected underlying economic structures. A related problem is a rather thin exploration of the sources of “activist government.”

Higgens-Evenson also neglects important topics in the realm of institutional history. For example, he ignores some important administrative problems that shaped the taxation of corporations by states. In his emphasis on the failure of the general property tax to reach “intangible” property like stocks and bonds he neglects what was the biggest problem that state governments had with the tax. This was the control that county governments exercised over property tax assessment. As a consequence of this control, they generally engaged in a competitive under-valuation of assessment that resulted in significant inequities and growing distrust of property taxation. States concluded that they had to develop their own tax base, separate from that of local government. But they then immediately faced other administrative problems. These blocked adoption of either income or sales taxes that were general in scope. It was often for administrative convenience, as well as previous failures to tax corporate wealth, that states turned to, or expanded, taxation of corporate property, franchises, and income.

Also in the institutional realm, the author neglects analysis of corporate goals and strategies. He tends to regard corporations as engaged in the single-minded pursuit of reductions in taxing and spending. Corporations, however, often had strong interest in building public infrastructure and expanding various public services, especially education. Corporations were often willing to accept, and sometimes promoted, higher taxes as an inexpensive alternative to making private investments but reaping little or no return on those investments because of free-riding competitors.

Finally, he might have developed further his suggestions regarding the way in which variations in economic structure (and, in turn, the distribution of political power) across the states and regions produced variations in tax policy. To do so would have required more attention to variations in corporate strategies and structures. For example, an explanation of why Wisconsin and California taxed manufacturing corporations more heavily than did corporation taxes in New York would require paying attention to not only the small size of the manufacturing sector in Wisconsin and California but also the relatively small scale of manufacturing corporations in those two states, and to important disagreements over taxes within the business community (including commercial agriculture).

In sum, Higgens-Evenson’s book is a very welcome addition to scholarship on the history of public finance. Its ambitious reach and interpretive framework may well stimulate much needed research on the political economy of business taxation during the period in which the modern corporation, and perhaps the “corporate state,” emerged.

W. Elliot Brownlee is Professor Emeritus in the Department of History, University of California, Santa Barbara. His latest book is The Reagan Presidency: Pragmatic Conservatism and Its Legacies (Lawrence, KS: University Press of Kansas, 2003), which he co-edited with the late Hugh Davis Graham. Included in the volume is an essay by Brownlee and C. Eugene Steuerle of the Urban Institute on Reagan tax policy. Later this year, Cambridge University Press and the Wilson Center Press will publish the second, expanded edition of Brownlee’s Federal Taxation in America: A Short History.