Opinion
No. 30128
Decided June 6, 1945.
Taxation — Municipal corporation may acquire and operate public utility — And issue mortgage bonds beyond general limit of bonded indebtedness — Sections 4 and 12, Article XVIII, Constitution — Power of General Assembly to exempt real property from taxation limited — Section 2, Article XII, Constitution — Power to tax and exempt personal property, limited by Article I, Constitution — Municipal powers and functions public or governmental and private or proprietary — Municipally owned real estate used in private or proprietary function — General Assembly without constitutional authority to exempt same from taxation — Municipality forfeits immunity from taxation upon entering private competitive business — Personal property used for municipally owned private competitive business, not exempt — Sections 5351 and 5356, General Code.
1. By virtue of the provisions of Section 4, Article XVIII of the Constitution of Ohio, any municipality may acquire and operate any public utility, subject to the restrictions prescribed therein, and by virtue of the provisions of Section 12 thereof, any municipality which acquires any public utility and desires to raise money for such purpose may issue mortgage bonds therefor beyond the general limit of bonded indebtedness prescribed by law.
2. The power of the General Assembly to exempt real property from taxation is limited to the kinds and classes enumerated in Section 2, Article XII of the Constitution.
3. The power of the General Assembly to determine the subjects and methods of taxation and exemption of personal property is limited only by Article I of the Constitution. ( State, ex rel. Struble, v. Davis et al., Tax Comm., 132 Ohio St. 555, approved and followed.)
4. The General Assembly has constitutional authority to exempt from taxation municipally owned real property used in the performance of a public or governmental function; but lacks constitutional authority to exempt from taxation municipally owned real property used in carrying on a private or proprietary function primarily for profit.
5. A municipal corporation, by entering a field of private competitive business for profit, divests itself of its sovereignty pro tanto, takes on the character of a private corporation and thereby forfeits its immunity from taxation.
6. A municipal corporation is engaged in a proprietary function in owning and operating a transportation system.
7. Personal property used in carrying on a municipally owned private competitive business for profit is not exempt from taxation under the provisions of Sections 5351 or 5356, General Code.
APPEAL from the Board of Tax Appeals.
By the record and agreed statement of facts filed in this court, we are advised that pursuant to Sections 4 and 12 of Article XVIII of the Constitution, the council of the city of Cleveland in 1941, passed legislation to acquire all the property and assets of The Cleveland Railway Company and to issue bonds to pay for and to extend and improve such property. Thereafter the city did issue bonds in the sum of $17,500,000 and acquired the property. In order to secure the payment of the bonds, the city executed an indenture mortgage on all the acquired property to The Cleveland Trust Company, as trustee, and on April 20, 1942, assumed control and operation of the transit system.
In November 1942, the electors of the city of Cleveland voted to amend the city charter, effective January 1, 1943. The amendment created a Division of Municipal Transportation supervised by a transit board with full power to manage and control the transit system of the city.
In 1943, the city filed applications with the Board of Tax Appeals to exempt the property of the transit system from taxation for the years 1942 and 1943, pursuant to the provisions of Sections 5351 and 5356, General Code. During the pendency of the proceedings the applications were amended, the claim for exemption for the year 1942 was abandoned, and thereafter the county treasurer of Cuyahoga county certified that all taxes, assessments, penalties and interest for the last-mentioned year had been paid. The applications were heard and decided as to the year 1943. John A. Zangerle, as auditor of Cuyahoga county, and the Board of Education of the Cleveland City School District contested the claim of the city that the property was entitled to exemption.
The Board of Tax Appeals, upon the authority of City of Toledo v. Jenkins et al., Bd. of Tax Appeals, 143 Ohio St. 141, 54 N.E.2d 656, concluded that the property was exempt.
The case is here on appeal from that decision.
Mr. Frank T. Cullitan, prosecuting attorney, Mr. A.M. Braun and Mr. Ralph W. Edwards, for appellant John A. Zangerle, auditor.
Messrs. Squire, Sanders Dempsey and Mr. Robert F. Denison, for appellant Cleveland Board of Education of the Cleveland City School District.
Mr. Samuel T. Gaines and Mr. Robert J. Shoup, for appellee city of Cleveland.
It should be made clear at the outset that this public utility was purchased by the city of Cleveland (hereinafter called the city), by virtue of the authority of Section 4 of Article XVIII of the Constitution of Ohio. The money required to pay for the acquired property was derived from the sale of mortgage revenue bonds in the total sum of $17,500,000, issued pursuant to Section 12 of Article XVIII thereof.
The agreed statement of facts discloses that the city owns and uses in the operation of its transit system both real and personal property. Therefore, in our view of this case, two separate and distinct questions must be determined: (1) Did the General Assembly possess authority to pass general laws to exempt from taxation the real estate here in question? (2) Did the General Assembly by the provisions of Sections 5351 and 5356, General Code, exempt from taxation the personal property here involved?
The power of the General Assembly to pass general laws to exempt real property from taxation is limited by the provisions of Section 2, Article XII of the Constitution; as to personal property, the power of the General Assembly to pass general laws to exempt such property is limited only by Article I of the Constitution. See State, ex rel. Struble, v. Davis et al., Tax Comm., 132 Ohio St. 555, 9 N.E.2d 684, and Ursuline Academy of Cleveland v. Board of Tax Appeals, 141 Ohio St. 563, 49 N.E.2d 674.
We shall first direct our attention to the real property. In the Constitution of 1802 there was no limitation upon the power of the General Assembly to exempt either real or personal property from taxation. In the year 1851 such a limitation was written into the Constitution. Section 2, Article XII of the Constitution of 1851 read in part as follows:
"* * * but * * * public property used exclusively for any public purpose * * * may, by general laws, be exempted from taxation * * *."
The above language remained in the Constitution, throughout its amendments, until 1929, at which time Section 2 of Article XII was amended by a vote of the people, effective January 1, 1931, to read in part as follows:
"* * * and, without limiting the general power, subject to the provisions of Article I of this Constitution, to determine the subjects and methods of taxation or exemptions therefrom, general laws may be passed to exempt * * * public property used exclusively for any public purpose, * * *." (Italics ours.)
Under Section 2, Article XII of the Constitution of 1851, the power of the General Assembly as to the exemption of both real and personal property was limited, whereas, under Section 2, Article XII of the Constitution, as amended, effective January 1, 1931, the power of the General Assembly to exempt is limited to real property only.
It must be kept clearly in mind that the Constitution does not grant tax immunity to any kind or class of property; that the language of Section 2 of Article XII is not a grant of power to the General Assembly but is a limitation upon the general power of that body to grant tax exemption to real property.
There can be no doubt that the constitutional provision relative to exemption of real property from taxation is neither self-executing nor mandatory and in the absence of legislative action all property of the state and its political subdivisions no matter how used would be subject to taxation. It is equally certain that the General Assembly in passing general laws to exempt real property from taxation is bound by the limitations of the constitutional provision. Columbus Metropolitan Housing Authority v. Thatcher, Aud., 140 Ohio St. 38, 42 N.E.2d 437.
We are met at the threshold of our consideration with the question: What is meant by the phrase used in Section 2, Article XII, "general laws may be passed to exempt * * * public property used exclusively for any public purpose?"
It is fair to assume that the Constitutional Convention of 1912, when it came to consider the subject of taxation and exemption therefrom, had before it the language of the Constitution of 1851, relative to that subject, and that the convention was familiar with the construction placed upon that exemption provision by this court. When the convention of 1912 made no change in the kinds and classes of real property which the General Assembly was authorized to exempt, it follows that it was intended that the provision as it applied to real property should mean what it meant when it was adopted originally in 1851.
In order to determine what was meant by that language, we must turn to the condition of things at the time the Constitution of 1851 was framed. What in the light of conditions at that time did the framers of the language intend should be exempt? It is quite evident that modern notions as to the extent to which the functions of government might be carried, then had no existence in the minds of the people.
The Constitution is a written instrument and its meaning does not change. That which it meant when adopted, it means now. Those things which are within its grants of power, as the grants were understood when made, are still within them and those things not then within them remain still excluded. It can hardly be supposed that municipal ownership and operation of swimming pools, golf courses, transit systems, airports or the like were within the contemplation of the makers of the Constitution in 1851 or in the minds of the people who adopted that Constitution.
It is generally recognized that the powers and functions of municipal corporations are divided into two classes: (1) Public or governmental, and (2) private or proprietary. See City of Cincinnati v. Cameron, 33 Ohio St. 336, and City of Akron v. Butler, 108 Ohio St. 122, 140 N.E. 324. It is equally well recognized that municipally owned property used in the performance of a governmental function is ordinarily relieved from taxation either by express constitutional or statutory provision, and that such property when used in carrying on a private or proprietary function for profit is usually required to contribute its proportionate share of the cost of government.
In 37 Cyc., 877, the rule is stated thus:
"There is no implied exemption from taxation of property owned by a municipal corporation, but which is not devoted to public or governmental uses, but held by the municipality in its private or commercial capacity and as a source of profit or to serve some mere convenience of the citizens." See, also, 61 Corpus Juris, 420, and cases cited, and 3 A. L. R., 1439.
When the framers of the Constitution of 1851 used the language, "used exclusively for any public purpose," we feel quite sure that it was not intended that public property held and used for a purely private purpose and for private gain should be granted exemption from taxation. This conclusion is fortified by the language found in a unanimous decision of this court in City of Cincinnati v. Lewis, Aud., 66 Ohio St. 49, at page 56, 63 N.E. 588, wherein it is said:
"The description of municipal property which is exempt from taxation indicates with unmistakable accuracy that the exemption is to extend to such property only as is actually employed in the exercise of municipal functions. If this conclusion were doubtful it would nevertheless be required by the established rule that all exemptions from taxation are to be strictly construed."
It must be admitted that there is considerable conflict in the authorities as to what is a governmental and what is a proprietary function. However in the final analysis we must find the answer to our problem in the Ohio Constitution as construed by the decisions of this court. Unfortunately the decisions of this court have departed at times from the principles announced in the Lewis case.
In the case of Butler, a Taxpayer, v. Karb, Mayor, 96 Ohio St. 472, 117 N.E. 953, in considering the operation of a municipal electric light plant it was held:
"Municipalities of the state are authorized to establish, maintain and operate lighting, power and heating plants and furnish the municipality and the inhabitants thereof light, power and heat. The powers thus conferred are proprietary in their character and in the management and operation of such plant municipal officials are permitted wide discretion. * * *"
And at page 483 it is said:
"We think it must be conceded that the city, acting in a proprietary capacity, may exercise its powers as would an individual or private corporation."
In the case of Akron v. Butler, supra, is found the following excellent statement of the distinction between governmental and proprietary functions.
"This court has always, as indeed have courts generally, recognized the theory that municipalities have dual powers, the one wherein they exercise the power delegated by the sovereign to preserve the peace and to protect persons and property, and the other where they exercise power, proprietary in its nature, and which relates to the development of the municipality as distinguished from the commonwealth." (Italics ours.)
In the case of Travelers Ins. Co. of Hartford, Conn., v. Village of Wadsworth, 109 Ohio St. 440, 142 N.E. 900, 33 A.L.R., 711, it is said:
"The power to establish, maintain, and operate a municipal light and power plant, under the Constitution and statutes aforesaid, is a proprietary power, and in the absence of specific prohibition, the city acting in a proprietary capacity may exercise its powers as would an individual or private corporation." See Western Reserve Steel Co. v. Village of Cuyahoga Heights, 118 Ohio St. 544, 161 N.E. 920; State, ex rel. White, v. City of Cleveland, 125 Ohio St. 230, 181 N.E. 24, 86 A. L. R., 1172; City of Barberton v. Miksch, 128 Ohio St. 169, 190 N.E. 387; and City of Niles v. Union Ice Corp., 133 Ohio St. 169, 12 N.E.2d 483.
In State, ex rel. Forchheimer, v. LeBlond et al., Judges, 108 Ohio St. 41, 140 N.E. 491, the court was considering a municipally owned transportation system and held:
"A municipal corporation in Ohio owning and operating a railroad under general legislative authority enacted since the adoption of the Constitution of 851 acts in the performance of a private or proprietary function, and is subject to the same rules and entitled to the same constitutional protection as a private corporation."
Again in Cleveland Ry. Co. v. Village of North Olmsted, 130 Ohio St. 144, 198 N.E. 41, 101 A. L. R., 426, it was held:
"A municipality operating a bus line by favor of Sections 4 and 6, Article XVIII, Constitution of Ohio, is engaged in a private or proprietary undertaking, and when such transportation service enters the territorial limits of another municipality, it is subject to the reasonable police regulations of the latter."
At page 148, Judge Zimmerman said:
"Assuming the constitutional right of defendant in error to operate its bus line on the existing basis, in doing so it acts in a private or proprietary capacity."
From what has been said we conclude that in the ownership and operation of a transit system a municipality is engaged in a private or proprietary function. If the general rule as stated in Cyc. and Corpus Juris were applied that would make an end to this phase of the case, but in Ohio that general rule has not been always followed.
In the decisions of this court there has been no deviation from the conclusion that a municipality in the operation of a public utility, whether it be a light and power plant, a waterworks, a railroad, a bus line or an airport, is engaged in a proprietary and not a governmental function (see Frederick, Admx., v. City of Columbus, 58 Ohio St. 538, 51 N.E. 52; City of Wooster v. Arbenz, 116 Ohio St. 281,
156 N.E. 210, 52 A. L. R., 518; and City of Portsmouth v. Mitchell Mfg. Co., 113 Ohio St. 250, 148 N.E. 846, 43 A. L. R., 961), yet light and power plants, waterworks, and airports when municipally owned and operated have been held exempt from taxation. Therein lies the conflict between the general rule and the Ohio cases.
If this were a case of first impression I would hold that the General Assembly is without power to exempt any public property (real property) from taxation unless such property is used exclusively for a governmental purpose; and that the ownership or operation of any public utility operated to preserve the peace or for the protection of the person or property of the citizens is the exercise of a governmental function and such property could be exempted from taxation, while the ownership or operation by a municipality of a utility which relates only to the development of the municipality itself constitutes the exercise of a private or proprietary function and such property could not be exempt from taxation. Such holding would conform to the generally accepted rule, to the decision in Cincinnati v. Lewis, Aud., supra, and to the view expressed by Chief Justice Weygandt in Federal Public Housing Authority v. Guckenberger, Aud., 143 Ohio St. 251, 55 N.E.2d 265.
There can be little doubt that the transportation of persons or property from place to place by means of a transit system consisting of street railways and bus lines is in no sense a governmental function and where a municipality owns or operates such a system for the convenience of the public it is engaged in a private competitive business for profit, and while such property is publicly owned it is not used exclusively for a public purpose.
Public property used exclusively for any public purpose is exempt from taxation for two reasons: (1) It is purchased and maintained by public money derived from taxation and to tax such property would amount only to taking public money from one pocket and putting it into another, and (2) the product of the expenditure of tax money should not be made the subject of another tax.
The property here in question was not purchased with public money. The city is in no way liable for the payment of the mortgage revenue bonds or for the maintenance of the property. If the operation of the transit system should prove to be a losing venture the only recourse of the bondholders would be to sell the property and stand any resultant loss.
The great weight of authority is to the effect that where the state (or one of its political subdivisions) enters the field of private competitive business for profit it divests itself of its sovereignty pro tanto, takes on the character of a private corporation, and thereby forfeits its immunity from taxation.
See Ohio v. Helvering, Commr., 292 U.S. 360, 78 L.Ed., 1307, 54 S.Ct., 725; County of Erie v. City of Erie, 113 Pa. 360, 6 A. 136; County of Erie v. Commrs. of Waterworks of City of Erie, 113 Pa. 368, 6 A. 138, and Negley, Sheriff, v. City of Henderson, 22 Ky. Law Rep., 912, 59 S.W. 19.
It is a matter of common knowledge that in the last three years the city has collected sufficient revenue from the operation of the transit system, over and above operating expenses, to pay off almost half of the $17,500,000 purchase price. We think that is cogent evidence that the city has entered the field of private competitive business for profit.
There is another test, which is often applied in order to determine whether publicly owned or operated property is being used in connection with a governmental or a proprietary function, that is whether in conducting the particular function the owner or operator is liable for the negligence of its agents and servants, where such negligence causes injury to the person or property of others.
It is a settled rule of law that a municipality is not liable for negligence of its agents or servants while engaged in a governmental function but is liable if engaged in a proprietary function. Applying that test to the instant case little support could be found for the assertion that the city would not be liable for any injury to persons or property caused by the negligence of its agents and servants in the operation of the transit system.
By all the applicable tests it must be concluded that when the city assumed the ownership and operation of this transit system it divested itself of its sovereignty pro tanto and entered the field of private competitive business for profit; that under such a state of facts the General Assembly, under the Constitution, could not and therefore did not authorize tax exemption of the real property, used in such enterprise.
The Board of Tax Appeals held that its decision was authorized by the pronouncements of this court in the case of City of Toledo v. Jenkins et al., Bd. of Tax Appeals, supra. An examination of those pronouncements fails to disclose any language which would warrant the conclusion that where a municipality enters the field of private competitive business for profit, the real property used in conducting such enterprise is exempt from taxation under any provision of the General Code. The distinction between the Toledo case and the instant case is that in the Toledo case the enterprise was not being conducted primarily for profit, the revenue feature was merely incidental while here the primary and principal object of the enterprise is profit.
We have pointed out that under the Constitution the power of the General Assembly is limited to grant tax immunity to personal property only by Article I of the Constitution. The remaining question therefore is: Did the General Assembly.by the provisions of Sections 5351 or 5356, General Code, grant such immunity to the personal property here in question? Section 5351, General Code, insofar as pertinent to this case reads as follows:
"* * * and public property used for a public purpose, shall be exempt from taxation."
Before directing our attention to the specific provision of the statutes it should be brought to mind that exemptions from taxation are not favored by the law. He who claims tax exemption of property, real or personal, must show clear and indisputable authority for such exemption.
In some jurisdictions this rule is not applied where publicly owned property is claimed exempt but in this state the rule is applied without respect to the identity of the claimant.
The language of Section 5351, General Code, is general and can be applied to any property whether real or personal. However, that section was passed pursuant to Section 2, Article XII of the Constitution, and is no broader than the constitutional provision upon which it is bottomed. As applied to personal property it is provided that it must be public property used for a public purpose. The public ownership and the public use must co-exist. That the property here in question is publicly owned cannot be gainsaid but whether it is used for a public purpose is quite another matter. What has been said as to the use of the real property applies with equal force to the personal property used in connection with the operation of the transit system.
Section 5356, General Code, reads as follows:
"Market houses, public squares, or other public grounds of a city, village or township, houses or halls used exclusively for public purposes or erected by taxation for such purposes, notwithstanding that parts thereof may be lawfully leased, and property belonging to park districts, created pursuant to the provisions of Section 2976-1 et seq., of the General Code, shall be exempt from taxation."
We are at a loss to understand the claim that this section grants tax exemption to a municipally owned transit system. A casual reading of the statute is sufficient we think to demonstrate its inapplicability to the present situation.
There is also a practical question involved and while not controlling is worthy of passing note. If this property is held to be tax exempt the loss of revenue to the county and the city school district will be transferred to the backs of the general taxpayers; on the other hand if the property is held taxable those who use the transit system will be required to bear the tax burden.
If a municipality can engage in the ownership and operation of a transit system, which is a private competitive business for profit, and claim tax exemption upon the real and personal property used in connection therewith, it follows that a municipality can engage in every conceivable kind of business and likewise claim tax exemption.
We conclude and hold (1) that under the Constitution the General Assembly could not and therefore did not pass any general law to exempt from taxation the real estate used in connection with the operation of this transit system, and (2) that while under the Constitution the General Assembly could, it did not exempt from taxation the personal property so used.
Therefore, the decision of the Board of Tax Appeals holding this property exempt from taxation is unlawful and should be and hereby is reversed and the case is remanded to the Board of Tax Appeals with instructions to deny the application for exemption.
Decision reversed and cause remanded.
WEYGANDT, C.J., TURNER, MATTHIAS and HART, JJ., concur.
ZIMMERMAN and WILLIAMS, JJ., dissent.
Section 4, Article XVIII of the Constitution of Ohio confers upon municipalities the right to "acquire * * * and operate * * * any public utility the product or service of which is or is to be supplied to the municipality or its inhabitants."
Section 2, Article XII of the Constitution recites in part that "general laws may be passed to exempt [from taxation] * * * public property used exclusively for any public purpose * * *." (Emphasis supplied.)
Pursuant to such express authorization, the General Assembly enacted Section 5351, General Code, declaring, inter alia, that " public property used for a public purpose, shall be exempt from taxation." (Emphasis supplied.)
The precise question to be resolved is whether property of the transit system of the city of Cleveland is "public property used exclusively for any public purpose."
There can be no doubt that property of a utility owned and operated by a municipality is public property ( City of Toledo v. Jenkins et al., Bd. of Tax Appeals, 143 Ohio St. 141, 151, 54 N.E.2d 656, 663) and, under the holdings of this court in the case just cited and in the cases of State, ex rel., v. City of Toledo, 48 Ohio St. 112, 26 N.E. 1061, 11 L.R.A., 729, and City of Toledo v. Hosler, Treas., 54 Ohio St. 418, 43 N.E. 583, such transit system, devoted to the transportation of the citizens of Cleveland generally, is used exclusively for a public purpose.
The syllabus in the Hosler case, supra, is peculiarly applicable and reads:
"Gas wells, pipe lines, pumping stations and machinery owned by a municipal corporation and used by it for the conveyance of gas to be consumed by it and by its citizens generally, are used exclusively for a public purpose and are exempt from taxation."
In 51 American Jurisprudence, 554, Section 563, the following statement appears:
"While a number of courts have taken the view that public utilities operated by a municipal corporation for compensation * * * are taxable, upon the theory that the implied exemption of publicly owned property extends only to property used for governmental, and not merely for public purposes, the majority rule is that property owned by a municipal corporation is exempt if it is devoted to public purposes, whether these purposes are governmental or primarily for the benefit of its own citizens, and accordingly, that municipally owned power and light plants, as waterworks, gasworks, transit systems, and other public utilities distributing commodities and services to the public for compensation, which are for a public, although not for a governmental, use, are included within the meaning of statutes exempting the property of municipal subdivisions."
We submit that the quoted constitutional and statutory provisions relating to the exemption from taxation of public property publicly used, coupled with the cases cited, place Ohio on the side of the majority rule as outlined in the above excerpt from American Jurisprudence. The term "public purpose" as contained in our constitutional and statutory provisions is not restricted to purely governmental enterprises, but embraces a wider field of public activity, including proprietary undertakings. Where there is public ownership and public use of a utility, as in this case, the property of such utility is exempt from taxation under our laws.
We cannot subscribe to that part of the majority opinion which says that the language employed in the Constitution is to be interpreted in the light of conditions which obtained at the time of its adoption. We take the position that the Constitution is a vehicle of life, intended to meet and to be applied to new conditions and, circumstances as they may arise and which come fairly within the purview of, the language used. 8 Ohio Jurisprudence, 128, Section 26; 11 American Jurisprudence, 660, Section 51.
Without extending this discussion, our opinion is that the property of the transit system of the city of Cleveland is "public property used exclusively for a public purpose," within the contemplation and intendment of the laws of Ohio, and that the decision of the Board of Tax Appeals exempting such property from taxation is both reasonable and lawful.
WILLIAMS, J., concurs in the foregoing dissenting opinion.