Taxation and lncreased Cost of Doing Business

Bv E. C. Parker Patten-Blinn Lumber Co., LosAngeles

Address Delivered Before the Annual Convention of the California Retail Lumbermen's Association at Del Monte, October 23,1936

I have been asked by the program committee to read a paper I have prepared on the subject "Taxation and Increased Cost of Doing Business." After listening to the interesting speakers this morning and this afternoon and the excellent address made bv President La Pointe, this afternoon, I will not feel hurt ifro*. oi you decide to "take a walk."

I will first discuss the subject of taxes, not from any theoretical or professional standpoint, but only as they affect you and me as lumbermen trying to make our business pay. California lumbermen, as a class, have been so busy the last four or five years trying to get hold of enough money for payrolls on Saturday night that about the only kind of taxes they knew or cared about were city and county property taxes, a few city license taxes and a few other nuisance taxes. These were about tlre only taxes they paid to the tax collector direct and since the city and county property taxes have, in most instances, actually decreased on the same pieces of property since 1932, the retail lumber dealer was letting the other fellow do the tax worrying.

Conditions in the lumber business have now changed to such an extent that lumbermen are beginning to take notice and see what this tax business is all about.

Governments-City, County, State and Federal-have been sorely pressed in the past four or five years. Conditions have been such that money over and above the ordinary expenditures has had to be spent. Every business man during this period has been obliged to take many steps that he did not want to take, and has had to spend money to protect his interests which he did not want to spend. Those in charge of Governments have had to take steps which they probably didn't want to take and spend money in an endeavor to protect communities and do that which they considered under the circumstances to be for the best interests of the Country.

Hundreds of thousands of people were in destitute circumstances, and relief for them at the time seemed necessary. Other hundreds of thousands needed work, and a great many people thought it best to spend money to make work for them. Other hundreds oI thousands were being foreclosed out of their homes and farms, and a great many people thought it was a good thing to spend money to save them and stop the property deflation. Many other people thought it wise to spend money to build up the purchasing power of farmers and spend money for other such projects with the idea in mind of bringing back recovery.

It is probable that any group of men, as heads of government units, would have spent an amount of money which, after it was spent, many of us would have thought was too much. Considering all circumstances, results in my opinion have justified a certain good percentage of the expenditures which have been made by Federal, State and local Governments: but fhe exact line of distinction between what has been wise and sound. and what has been unwise and unsound, I will leave to you to decide. I can assure you that you will be amply assisted in your decision by turning on the radio on any evening from now till November 3rd.

But my subject deals with taxes which we have now and the taxes which are to come, and what, if anything, there is for us as lumbermen to do about it. California's share of the Federal debt, based on Catifornia's population, to the whole. is about $1,773.511,975: while the Stiie;na local debt is $1,057,351,122, or a total debt liability of Californians of about $2,830,863,097. On a per capita basis, this is an increase in three years in Federal debt of $87.93 or 48%, an increase in State debt per capita of $13.07 or 57y'o, and, a decrease in local debt per capita of $12.38 or 9%. The reason, of course, that the per capita State and local debt has increased only 69c is due to the immense sums amounting to about $1,100,000,000 spent in the cities and counties, etc., of this State by the Federal Givernment.

I could go on indefinitely with statistics about increases in Federal, State and local taxes; For instance, California has a population of double what it was in 1917, but \Me spent on the averige in the last six or seven years, over four times as much on our schobls. We will spend in 1936 for State and local government, four times what was spent twenty years ago, although our population has only doubl9d, a1d this is irrespective of the Federal funds which will be spent in this state.

California's share of the Federal, State and local debt, which has to be paid eventually by taxes, is as stated about $2,830,863,097.00, not to mention contingent liabilities, such as State bonds, authorized but unsold, etc., which runs into an immense sum.

Many of us just working in the lumber business do not know what this means. Well, one way to visualize it is to understand that it will take 42.7% of the assessed value of all the land, improvements, and personal property in the state to pay for it. Of course, this debt will be ammortized over a great many years. It is also well to remember in this connection that governments do not look upon debt in the same light as a business man does. A business man $'ants to pay ofi all his debts at the earliest possible moment; whereas, any of you who have read treatises on government debt know that there are many arguments pro and con as to the effect of debt on a nation's monetary policy.

All nations, notably England, in the past few years have compefed with each other to keep their money cheap as regards other nations. But, this nation's policy will be to reduce the debt to a certain point at the earliest p-ossible moment, and we will be called upon to help do it.

Without even considering the accumulated debt, the lumber dealer will be called upon to pay taxes to maintain current expenditures of Government which will be on a high basis. The Federal Government will collect in taxes for the fiscal year 1937 a total of about $5,665,830,000, which is about 50/o more, in dollars, than the yearly average for the past four or five years, included in which figure is about $2,303,363,000 of income tax, which tax is about double the yearly average for the past four or five years, The State and local governments in Calilornia will collect in taxes for the fiscal vears 1937 a total of about $500,000,000 which is about 30/o more, in -dollars, than the yearly average the past four or five years.

There has been a lot of discussion in the papers and on the part 6f all business men about balancing the budget. I think it must be admitted that the heads of all governmentat bodies want to balance the budget. It is my opinion that with increasing business the budget will be balanced. But as a practical matter, we lumbermen are interested in knowing where the budget is to be balanced. It is pretty generally conceded by non-partisan economic wrifers that irrespective of who heads the National Government that the budget will be balanced at a high figure. As long as large sums are to be spent for relief and kindred expenditures, and as long as such powerful blocs as the farmers are to be paid subsidies, and other kindred blocs and programs are to be sustained, then just so long must the budget be at a high level. It is not very encouraging in this regard to note that both National Parties are now promising and proposing to spend liberally for relief and to give more and larger subsidies than ever to farmers.

It is also quite generally admitted that whichever National Party is in power, the total of taxes collected will be more or less the same in amount for several years to come, at least. If total expenditures are drastically reduced, then the policy will be to retire debt and the total collections will likely be the same. Kiplinger, in his Washington letter of August 29th, says, and I quote, "Either man will hold tax reduction for later in his term."

Enough has been said to prove, if any proof were necessary, that ft's simply a ma$er of the right kind of dry kilns, properly operated. And it's really amazing what a good kiln operator can do with roonlnEvtrntllll we as luobermen are going to have included in our expense accounts' an item which will be much larger than heretofore. And how are these taxes to be collected from lumbermen There are two kinds of taxes-those you pay in cash to the tax collector, and those you pay in the price of the goods you buy. First, as to those we pay direct: We are all familiar with City and County property taxes. It is, I think, a fact that they have actually been somewhat reduced. On 170 identical properties the assessment ior 1935-36 was lL.7/o less than L932-33 and the amount paid was 11.3% less. This tax is large, but there is tittle that cdn be said or done about it.It is interesting to note.in this regard that_an agent from the L. A. County assessor was in our office several days ago seeking data on the increase in building material prices, with a view to increasing the next assessment, and if you have read Los Angeles newspapers, you know what is liable to happen to the tax rate. Then we have the city license tax getting higher and higher. In several towns where the license was $10.00, it is now from $50.00 to $100.00.

Direct tax payments to the State will not likely be as large tn proportion as County or Federal taxes to lumbermen. They include the- new personal income tax, equal to one-quarter of the Federal income tax, and the State Franchise tax at the rate of 4Vo ol net income. Then there are the Motor Vehicle License taxes and the new levy of $1.75 per $100.O0 on motor vehicles, and such nuisance taxes to lumbermen as the highway transportation tax, which has made the lumbermen more grey hairs and cost less money than any tax I know of, Then there is the Truck Gross Receipts nuisance tax ol r/a of l/o. One of our best employees spent two days working up the data for the quarter ending September 30th and our full tax was 82c.

Now that there is a hope of profit on the part of lumbermen, the Federal taxes become very important, especially to those of us who are incorporated. The capital stock tax of $1.00 per $1000.00 on your declared value is an ea-sy way for the G6vernment to collect about 90 million dollars. The excess profits tax of 6/o to lZVo on profits over certain percentages of declared value will not $'oJry many lumber dealers this year, and especially in view of the fact that you could make a new declaration on July lst. But the normal income tax and the surtax on undistributed income will give them plenty to worry about. Time will not permit going into any detail relative to the complicated provisions of this tax. To take a simple example of a corporation with a net income of $15,000.00 and which paid out no dividends, the total tax would be $3607.25 or-24.05/o of income. The old rate would have been l3%%. On $15'000.00 net income, where $6705.00 or one-half of adjusted net income was paid out in dividends, the total tax would be $2162.80, of. 14.4%. The old rate was L39/r%. On $15,000.00 net income where $13,410'00 or all the adjusted net income was paid out in dividends, the total ta)< would be $1590.00 or !0.6/o, whereas the old rate was \Q/{".' Corporationb which have adiusted net incomes under $50,000.00 have certain rate advantages over those having over $50,000.00. The object ot the law is tJ force dividends intd the handi of the stockholders. The stockholders must then pay 4 personal income tax, and, under the new law, dividends are subjecd [o both the normal tax and surtax provisions.

This tax works a detriment on those corporations which have debts which should be paid. In California ii is particularly detrimental to those corporations which, during the depression' acqulrec a surplus deficit, and the State Law says that you cannot in such conditions pay dividends. Any of us lumbermen know that net ln.come is nof cish income. Oui net income is usually in more trucks' more accounts receivable, or more land, and the government wants cash. And if dividends are declared, they certainly should be in cash in order that your stockholders can pay his personal income tax.It is my opinion that this law should be amended so that socalled cushiotts ian be p,rovided to correct some of its unequitable features.

The Capital Gains section of the income tax law should be amended also, so that if you sell a piece of land and lose $10,000.00, you c.an use the full amount on your return, since you have to turn rn the whole $10,000.00, if you make a gain. At the present time the total loss you can tai<e on capital losses, such as land and buildings is $2000.00. '

Then there is the kind of taxes we pay in the price of our goods' These include taxes of all kinds-sellers passing on to us the direct taxes they pay, such as property taxes, income taxes, etc'; and passing on to-ui the multitude of miscellaneous taxes such as sales taxes, gas tax, manufacturers' excise taxes, custom taxes, etc.' et-c. -.

- Nobddy loves a tax, but I am not one of those who believes in indiscriminate condemnation of all taxes. There are two or three mitigating statements that at least can just be said concernilg them. For-instince, there is no question that taxes have raised the price level throughout the United States, and lumber dealers being owners of thirigs, it may be possible that some California lumbermen may feel thit'his invlntories and things have been increased in value for-a long time to come, that the real estate he had to take from customerJ has been stabilized, and that the customer who has owed him money will be better able to pay now that his real estate is increasing in value. Some people say that taxes increase- prices., and thus cut down purchasing- power ind therefore curtails business' Well, that may or may no-t be true, but even so, the lumber dealers do not. need to worry about high lumber prices reducing building yet awhile, when the records show that ths 1sfeil sates. errerage.the first nine months of 1936 is 5.88 per M less than the 17 year average from l9l9 to 1935, inclusive, and 912.25 per M less than the period of our greatest building prosperity from l9l9 to 1928 inclusive. I will leave it to you to decide these economic questions any way you wish.

Then, too, Governments give individuals certain protection and certain benefits without which this country would be a poor place in which to live. People themselves are persistent in their demands for benefits for their particular group or for their particular locality, but benefits for the other groups or for some other locality are all wrong. Government should spend for protection and for those things which the people as a whole are entitled to. But the taxpayer is entitled to feel and know that the taxes assessed are equal, that .they are fair, and that they are not discriminatory. They are entitled to know that the power to tax in this countiy is not the power to destroy.

Those are principles which it is the duty of the legislative committee of our State association to see that lumbermen get. I think the people as a whole believe in these principles of taxation, and, iI their.elected representatives, by reason of tremendous pressure from certain groups, do not follow these prip_ciples, the people will eventually right the wrong. A good example of this type of tax legisla- tion.-was passed by the California legislature in October, 1935. This was the California Chain Store Tax, by which act the owner of a single store would pay $1.00 a year, and doubling for each store till nine had been reached, and then $500.00 per year for each additional store.

By reason of a referendum petition the bill will be submitted to the voters of the State at the general qlection November 3rd. This tax was not a tax voted primarily for the purpose of revenue, but was a measure which its proponents frankly admit was enacted to put chain stores out of business. The tax would yield only about lVo of the State's budget per year, and the Governoi at the tax conference in February, 1936, said that it related primarily to an economic que,stion ald had so little to do with revenue that they would not even discuss it.

There has been a sentiment against bigness on the part of legisla- tors the past few years, but this tax is not even a tax on bigness. It is not a tax on bigness because it has no relation whatevir to the volume of business done, on the amount of profit made, nor on the amount of money invested; but is based solely on the NOMBER of stores, whether they are colossal stores like the May Company, super markets like Ralphs Grocery Company, or holes in the wall like See's Candy Shops. It is, my friends, admittedly a use of the tax power to drive a certain group out of business. The efiect of the tax is unequal, unfair and discriminatory, and why is it unequal, un- fair and discriminatory? Does it seem equal and fair to you that a large department store on South Broadway in Los Angeles, with 164 separate departments under o'ne roof and doing a Susiness of $27,000,000 per year should pay $1.00 per year, whereas Van de' Kamp's Bakeries, with l2l little shops located throughout Southern California, and doing a business of 92,700,000 pei year should have to pay a total of $56,511.00? Does it seem fair to you that another large department store on Sorith Broadway in Los-Anseles which made a net profit in 1935 of the sum of $1.411.661.00 wilf oav a tax of $15.00, whereas Grandmother See, with her 28 little ,,hole in the wall" candy shops, who made a net profit of $7,500.00, will pav a tax of $10,011.00? Does it strike you as. a discriminatory act thit makes the Western Auto Supply Co., selling tires, tubes,-and auto accessories, pay a tax of $51,511.00, whereas a well known oil company, the name of which is now on the lips of every one of you, with far more stores and which is selling tires and tubes and iuto accessories, will pay nothing at all? Does it make sense to you that a large chain of 200 bakery shops on wheels calling at your front doot every day, will pay nothing at all, whereas, Van de Kamps, with l2l little bakery shqps anchored to windmills on the corner near your home will pay $56,511.00?

Is this the kind of American tax legislation that you and I as lumbermen are liable to be subject to, to pay the large debts and high budgets which are ahead of us? I do not believe it, and I think the people on November 3rd will swamp this legislation with such a vote that you and I can be assured of fair and equal and American tax legislation.

Another item of expense, which is now and will become more and more important to lumbermen, has to do with problems of labor. First, let us consider briefly the Social Security legislation and the payroll taxes it will impose. The State of California, by reason of this Act, has passed an Unemployment Reserves Act, by which every employer of over eight people, with certain exceptions such as agricultural labor, must pay to the State in the year 1936, 9/10 of llool its total payroll, and l/10 of. lVo to the Federal Government, a total ol ZVo in 1937, and, a total of 3/o in 1938. After 1941 the employer will be classified in accordance with his actual stabilization of employment experience and if an excess of contributiorls by such employers over benefits paid and charged against him equals various percentages of his average yearly payroll, certain reductions are made, but not to be less than l/o. But that is five years from now, if in fact you can qualify for any reduction at all,

Then, there is the Federal Old Age Insurance. Plan, under which lumbermen will begin to pay lVo on its payroll, except on that portion of employees' salaries over $3000.00, which tax increases %Vo every three years until in 1949 it equals 37o. Time will not permit any discussion of the economic effect and details of the social security acts, For our purpose we are interested only in the fact that in 1937 the State Employment and Federal Old Age Pension Acts will take a 3Vo tax on our payrolls and in 1938 a tax of. 4Vo. There has been some political discussion lately of amendments to the Old Age Pension Plan, but you will note that the suggestion was to include all people over 65 under the plan instead ofl/3to % of them as under the present plan, and that instead of payroll taxes, a system of special income taxes was suggested. Various features of the Act may be amended under either party, but the lumberman can rest assured that he will have substantially the same tax to pay in some form. Payrolls on the average over a period will equal about 25/o of sales, and t}:.e 3qo payroll tax in 1937 .will add aboat fu, ol lVo in per cents to our expenses.

Secondly, let us consider the question of wages in the labor problem, I think that every lumberman is anxious to see labor get a good wage. It helps to make purchasing power and to make the worker more satisfied. Lumber dealers quite generally in Southern California increased wages of yard men firom 257a to 35Vo in June, 1935. This has materially increased our cost of doing business. Labor conditions throughout the country, and Southern California is no exception, are such that it is becoming increasingly more difficult to handle lqmber on an economical basis. For instance, at our Wilmington plant, we, together with other lumber dealers, increased ordermen and laborers on June 5, 1935, about 3l%%. In the first six months of 1936 we assembled and loaded out a much larger volume than in the first six months of 1935, and our calculations, based on a 3lft/s wage increase, showed us fhat the increase per M feet to assemble and load lumber should have cost us about 24/z/o more for labor, but the actual figures are that it cost us 37/z/o more for labor. We increased those in the wharfage and handling crews.3l/o, and in spite of the increased volume, it cost us for labor per M feet 662/3% more for

I'EPENIDABETTT-RIGIIT PRIGES ANd COITPLETE STOGKt

the first six months of 1936 than for the first six months of 1935.

On June 6, 1936, the lumber dealers in metropolitan Los Angeles increased wages again about 8/o to lUVo and further increased their cost of handling lumber per M. Lurnber dealers are not so concerned with the increase in wages. They want labor to be paid well, but they are concerned with the significance of the fact that wages per hour go up a certain per cent, but that cost per M for labor goes up a still higher per cent in the face of increased volume, We can look forward to increasing costs of labor in the next few years, make no mistake about that.

Other expense items are rapidly increasing. We are paying in our expense items, such as stationery, typewriters, etc., the direct taxes that some one else had to pay. Our incidental or general expense and stationery accounts in 1936 will cost our company right at 50% more than in 1926 or 1927, when our business was about the same. Salaries are being adjusted. Many of your yard men and truck drivers are making more than your office man whom you took out of the yard or off the truck not so many months ago because he was more capable than his co-workers in the yard, and salaries are thus bound to increase. The extravagant services which lumbermen feel it necessary to give to sqll lumber are gradually adding little by little to our expenses and will cOntinue to grow, as there seems to be no place or way to stop it when once begun. The wonderful sales and service advantage of the one yard today becomes the burdensome expense of all yards tomorrow.

Four-fifths of my time has been taken up in talk about the increased expenses our industry will, without any question, be faced with, and one-fifth will be taken up with what to do about it, and, in my opinion, that will be just about the proportion of what will be done about it.

Well, what is there to do about it?If ever there was an industry which needed the help of a strong central trade association, it is the modern lumber dealer selling commodities which are most difficult to properly cost, due to remanufacturing problems, the up- grading and down-grading of stock, and the fact that different priced lots are mixed in a mass and cannot be kept separate. Show me an industry that deals in a commodity which does not have individuality, and I'll show you an industry that will operate on a lower and lbwer gross profit basis unless it has a strong and effective trade association.

Unfortunafely for the lumber dealer, all 2x4's look alike, and every one of us, if we are to do business, must price them grade for grade in accordance with what our neighbor prices them, irrespective of what he knows about his costs. An industry that sells a commodity that does have individuality, such as automobiles, typewriters, chandeliers, or clothes, has a certain leeway in gricing and is not so dependent on what his neighbor does. There isn't one out of ten men in this audience who can tell me whether I paid $40.00 or $65,00 for this suit I have on. Any lumberman who buys nails or corrugated iron knows that the American Iron and Steel Institute is an example of a strong trade association telling an industry handling goods with no individuality when and how to cnarge.

\(/HEN YOU SELL

STRUCTURAI

Booth-Kelly Douglas Fir, the Association grade and trade mark certify to your cuEtomers the quality of the stock you handle. Builders quit guessing about what they're buying, and buy where they know what they're getting.

LUMBEE? gO

SUGTNE ORE:

General Saler Office: Eugene, Ore.

Mills: Wendling, Ore., Springfield, Ore.

CALTFORNIA REURESENT.A,TIVES

Northern California Southern California

Hill & Morton, Inc. E. J. Stanton & Son

Deniron St. Wharf 2050 E. 3Eth St.

Oakland-ANdover 1077 Lor,Angelee-CEntury 29211

The lumber industry in California has no uniform system of accounting. If the lumber dealers in this room were asked what items composed their "Cost 6f Goods," there would be at least ten difierent methods and answers. If they were asked what items composed their "Operating Expense," you'd get ten more different methods and answers. What, for instance, is cash discount? Is it an item of expense, or a deduction from sales? What is cartage collection? Is rt a credit to expense, or an addition to sales? What is the cost of milling in your mill? A charge to "Cost of Goods," or a charge to expense? How can any price committee or a manager of a trade associatign make up a proper price list without a knowledge of the industries' costs based on the same method of accounting?

You hear a lot said about the wrongness of indirect and hidden taxes, and that may be right. I do not care to argue the point, but I can say that they are almost a blessing to us rugged individualists of the retail lumber industry, and why? Because when taxes are passed on to us by the seller for our salable goods, our trade association cannot wait to call a meeting to increase our pricesl but let us pay increased income or local taxes and charge them to expense, and due to lack of statistics this fact is so -slow to be realized or anticipated by lumber dealers that the increased expense is not reflected in our prices.

Actual statistics based on the sale of many millions of feet of lumber in the first six months of 1936 show that the average sales price of lumber sold at retail was $1.31 higher than the first six months of 1935, and that the average purchase price of many millions of feet of lumber in the first six months of 1936 was $1.36 'higher than 1935. Irrespective of increased labor costs and other expenses, irrespective of increased tax liability applicable to this year's business, our sales price was increased 5c less than the actual purchase price.

Actual statistics based on an inventory taken June 30, 1936, show that the percentage of gross profit on lumber and commodities for the first six months of this year increased one-half of. l/o in percentage over a 18 year average, and that operating expenses the first six months of 1936 were 24.5 /s greater in percentage than an 18 year average. Do I make myself clear? The gross margin of profit is % of l% more in 1936 than an 18 year average, but operating expenses are 241/o greater than an 18 year average. There is little or nothing you can do about reducing expenses, but this industry simply must throw off the shackle of a low margin complex and get itself on a higher grois profit plane.

With a' good volume of business now upon us, and with every indication of a good volume for two or three years to come, isn't it time for lumber dealers to adopt a "good neighbor policy" and assist each other to make a reasonable profit? Isn't it time that this industry quits "fumbling" with this price problem. Isn't it time that this industry establish an independent or affiliated cost finding department under the head of an expert Cost Accountant? Isn't it time that members of this industry throw aside their "rugged individualism" and cooperate with each other to the end that our investments may be saved and a proper return may be made thereon?

Wholesale Jobbing

LUMBER

SASH & DOORS

MILL WORK

BUILDING MATERIAIS