Financing a Second Era of Internal Improvements: Transportation and Tax Reform, 1890-1929

The year was 1915, and Edwin R. A. Seligman had a problem. He was not preoccupied with the battle for woman suffrage, which women would win in his state of New York just two years later. Nor was he immediately concerned with the war in Europe, which would soon involve the United States. Nor yet was he worried about hordes of immigrants, the labor question, or the regulation of big business. Those larger issues in the political history of the Progressive Era concerned him, but his immediate problem was both far more mundane and far more fundamental: How could the State of New York keep paying its bills?

A Columbia University economics professor, nationally known tax expert, and president of the nation's most influential tax policy institution, the National Tax Association, Seligman took the problem personally. In 1915, he was serving as special adviser to the joint committee on taxation of the New York State Legislature (New York Legislature 1916: 7; Butler et al. 1942). He had served on several previous New York tax commissions as well. Largely under Seligman's guidance, the New York State Legislature had succeeded in abolishing the state property tax in 1902. For the next nine years, the state had paid the cost of government from other sources (Sowers 1914: 147; Yearley 1970: 242–46). ¹ But in 1912, New York had been forced to reimpose the property tax. By 1915, even property tax receipts could not remedy the state's cash shortage. What had gone wrong, and how could it be fixed?

As Seligman delicately put it in his presidential address to the National Tax Association, "the need has recently arisen for a vastly increased revenue" (Seligman 1921b: 643). New York's cash shortage did not originate in the state's new workmen's compensation system or any other Progressive innovation. Instead, it came from the recent resurrection of a very old form of government activism: "the enlargement of the Erie Canal and. . . an improved system of state highways" (ibid.: 642). New internal improvements had destroyed Seligman's carefully crafted system of indirect taxes. The only solution, he concluded, was to impose a state income tax.

Seligman's problem was just as important to Americans as the more dramatic political contests over woman suffrage, involvement in World War I, and immigration. Changes in the states' sources of income and spending priorities between 1890 and 1929 affected the everyday lives of Americans whenever they drove their new automobiles or paid their taxes. In 1926, the director of the Automobile Chamber of Commerce called "highway improvement one of the primary functions of the state government" (Brosseau 1926: 60). Graded and graveled rural highways became the primary good offered by the states to their citizens, paid for by gas taxes, license fees, and, in some states, corporate and personal income taxes.

Across the nation, state officials such as Seligman were scrambling to meet two converging popular demands: lower taxes, especially property taxes, and more public services, especially transportation. Those demands, which often took the powerful form of popular initiatives, wrought fundamental changes in American state government. In 1890, most states depended primarily on property tax revenues; by 1929, states could tap into whole new sectors of the economy by means of automobile licensing, gasoline sales taxes, and income taxes. The states poured out their new riches on gravel and concrete. Highways, the single largest spending priority for many states by the 1920s, absorbed most of the new revenues. New taxes funded a new era of internal improvements.

The sudden surge in transportation investments led directly to new taxes in the form of highway user fees, such as automobile license fees and gas taxes. Most highway bond measures were explicitly funded by such user fees (National Automobile Chamber of Commerce 1932: 42). ² But user fees...