Beals, J.
Plaintiff Aberdeen Savings & Loan Association and sixty-two other savings and loan associations, doing business in this state and organized under the provisions of chapter 1, title XXI, Rem. Comp. Stat., § 3716
et seq.,
and acts amendatory thereto, brought this action against the members of the state
tax commission, seeking to enjoin the enforcement as against plaintiffs of chapter 151, Laws of 1929, p. 380, providing for a tax, measured by income, upon banks and financial corporations, plaintiffs praying in the alternative for relief against certain alleged threatened illegal applications of the act by defendants.
To plaintiffs’ complaint, defendants demurred. The demurrer having been sustained by the trial court, plaintiffs elected to stand upon their complaint, and from a judgment dismissing the action, they appeal.
In their complaint, appellants allege that, prior to the convening of the legislature in January, 1929, the system of taxation which had theretofore been in effect in this state had been seriously affected by litigation which had been instituted by certain of the railroad and banking corporations for the purpose of procuring relief against alleged excessive, unjust and discriminatory taxes levied against their respective properties, which litigation threatened to seriously impair the revenues of the state and also of the counties and other municipal corporations. Appellants quote at length from the messages of the Governor to the state legislature, and set forth certain proceedings of the legislature, had with a view to some readjustment of the laws having for their object the raising of revenue.
Chapter 151, Laws of 1929, p. 380, against which act this attack is waged, attempts to provide, as expressed in its title, “for a tax measured by income upon banks and financial corporations;” provides for the assessment and collection thereof and for certain offsets or deductions to be considered in determining the amount of taxes due from institutions liable to pay the same. Corporations organized to do “a savings and loan or building and loan” business are expressly named in the act as subject to the provisions thereof. The terms
“gross income,” “net income” and “financial corporation” are in the act defined as follows:
“The term ‘gross income,’ as herein used, includes gains, profits and income derived from, business of whatever kind and in whatever form paid; gains, profits or income from dealings in real or personal property; gains, profits or income received as compensation for services, as interest, rents, commissions, brokerage or other fees or otherwise received in carrying on such business; all interest received from Federal, state, mm nieipal or other bonds, and, except as héreinafter otherwise provided, all dividends received on stocks; Provided, That the premium income of insurance companies shall not be included in gross income.
“If the gross income is derived'from business done in part within and part without the state of Washington, gross income means that portion of the income derived from business done within this state, to be ascertained and allocated in such manner as will fairly determine the gross income derived from business done within the state. The commission shall have power to prescribe such rules and regulations as will, in its opinion, carry out the direction and detail of this .provision. .
“The term ‘net income,’ as herein used, means the gross income less the deductions allowed. . . .
“The term ‘financial corporation’ shall include any corporation, other than a bank, engaged within the state of Washington in the business of acting in . any representative or trust capacity; or in the business of a savings and loan or building and loan society or association; industrial loan company, or finance company ; or in the business of buying, selling, discounting, or dealing in stocks, bonds, debentures, bills of exchange, warrants, notes and/or other evidences of debt; or in the loaning, collecting and reloaning of money.”
■ After the section of the act containing definitions of the terms therein used, the act continues:
‘ ‘ See. 2. Every national banldng association, located or doing business within this state, shall annually pay
to the state, in addition to all other taxes or charges, a tax according to or measured by its net income, to be computed in the manner hereinafter provided, at the rate of five per cent upon the basis of its net income for the next preceding fiscal or calendar year.
“Sec. 3. Every bank, other than a national banking association, doing business within this state, shall annually pay to the state, in addition to all other taxes ■ or charges, for the privilege of exercising its corporate franchise within this state, a tax according to or measured by its net income, tó be computed in the manner hereinafter provided, at the rate of five per cent upon the basis of its net income for the next preceding fiscal or calendar year.
‘ ‘ Sec. 4. Every financial corporation doing business within this state' shall annually pay to the state, in addition to all other taxes or charges, for the privilege of exercising its corporate franchise within this state, a tax according to or measured by its net income, to be computed in the manner hereinafter provided, at the rate of five per cent upon the basis of its net income for the next preceding fiscal or calendar year.
“Sec. 5. If the entire business of a bank or corporation is done within this state the tax shall be based upon its entire net income; and if the entire business of such bank or corporation is not done within this state the tax shall be based upon that portion thereof which is derived from business done within this state, as herein provided. . . .
“Sec. 24. The commission shall between the first day of May and the first day of July in each calendar year, from the reports filed with it or from other information in its possession, determine the net income of each bank and corporation as the basis of computing the tax provided for in this act. Such basis shall not be increased beyond the amount of net income-shown by the taxpayer’s return unless the commission shall give ten days’ notice in writing by registered mail to the* taxpayer of the amount to which it is proposed to increase such basis of computation, and of the time and place when and where such taxpayer will be heard by the commission in opposition to such proposed increase.
“Sec. 25. The commission shall on or before the first day of September next thereafter prepare and transmit to the assessor of each county within the state an assessment roll for such county and shall place upon such assessment roll the name of each bank and corporation liable to a tax for the taxable year for which such assessment roll is prepared, and having its principal office or place of business within the county for which such assessment roll is prepared.
“The commission shall also enter upon such assessment roll opposite to or in connection with the name of each bank or corporation the name or designation of the city, town, township, school district and other taxing districts within said county in which said taxpayer has its principal office or place of business together with the net income' or basis for the computation of the tax as determined by the commission and the amount of the tax due and payable as computed by it.
“The assessor of such county shall enter upon the tax rolls of the county the name of each bank and corporation and the amount of such tax due from it as shown by such assessment roll. . .
‘ ‘ Sec. 27. All taxes collected or paid under the provisions of this act shall be for the use of the state and of the county, city, town, school district, municipality or other taxing district in which the bank or corporation has its principal office or place of business and shall be by said county treasurer distributed in the manner and in the same proportions as provided by law for the distribution of taxes upon personal property. ’ ’
Appellants contend that the act of the legislature which they attack in this proceeding violates the constitution of the United States and the constitution of the state of Washington. Constitutional provisions upon which appellants rely are the following:
. Constitution of the United States, article I, § 10, paragraph 1:
“No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal;
coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder,
ex post facto
law, or law impairing the obligation of contracts; or grant any title of nobility.”
Fourteenth amendment to the constitution of the United States, § 1:
“All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law, nor deny to any person within its jurisdiction the equal protection of the laws.”
Article VII of the constitution of the state of "Washington, § 2:
“The legislature shall provide by law a uniform and equal rate of assessment and taxation on all property in the state, according to its value in money, and shall prescribe such regulation by general law as shall secure a just valuation for taxation of all property, so that every person and corporation shall pay a tax in proportion to the value of his, her, or its property: Provided, that a deduction of debts from credits may be authorized: Provided, further, that the property of the United States, and of the state, counties, school districts, and other municipal corporations, and such other property as the legislature may by general laws provide, shall be exempt from taxation.”
Article VII of the constitution of the state of Washington, § 9:
“The legislature may vest the corporate authorities of cities, towns, and villages with power to make local improvements by special assessment, or by special taxation of property benefited. For all corporate purposes, all municipal corporations may be vested with authority to assess and collect taxes, and such taxes
shall- he uniform in respect to persons and property within the jurisdiction of the body levying the same.”
Article XI of the constitution of the state of Washington, § 12:
“The legislature shall have no power to impose taxes upon counties, cities, towns, or other municipal corporations, or upon the inhabitants of property thereof, for county, city, town, or other municipal purposes, but- may by general laws vest in the corporate authorities thereof the power to assess and collect taxes for such purposes.”
Appellants, in the first place, argue that the act of which they complain violates the fourteenth amendment to the constitution of the United States in that it denies to appellants the equal protection of the laws.
The supreme court of the United States has held that a corporation is a person within the contemplation of the constitution.
Smyth v. Ames,
169 U. S. 466;
Southern R. Co. v. Greene,
216 U. S. 400;
Quaker City Cab Co. v. Pennsylvania,
277 U. S. 389.
In discussing the “equal-protection” clause of the constitution, the supreme court in the case of
Strauder v. West Virginia,
100 U. S. 303, said:
“The Fourteenth Amendment makes no attempt to enumerate the rights it- designed to protect. It speaks in general terms, and those are as comprehensive as possible. Its language is prohibitory; but every prohibition implies the existence of rights and immunities, prominent among which is an immunity from inequality of legal protection, either for life, liberty, or property. ’ ’
In the later case of
Barbier v. Connolly,
113 U. S. 27, the supreme court used this language:
“The Fourteenth Amendment . . . undoubtedly intended not only that there should be no arbitrary deprivation of life or liberty, or arbitrary spolia
tion of property, bnt that equal protection and security should be given to all under like circumstances in the enjoyment of their personal and civil rights; that all persons should be equally entitled to pursue their happiness and acquire and enjoy property ; that they should háve like access to the courts of the country for the protection of their persons and property, the prevention and redress of wrongs, and the enforcement of contracts; that no impediment should be interposed to the pursuits of any one except as applied to the same pursuits by others under like circumstances ; that no greater burdens should be laid upon one than are laid upon others in the same calling and condition, and that in the administration of criminal justice no different or higher punishment should be imposed upon one than such as is prescribed to all for like offenses.”
A discussion of these principles is also found in the case of
Atchison, Etc., Railroad Co. v. Matthews,
174 U. S. 96, as follows:
“The equal protection guaranteed by the Constitution forbids the legislature to select a person, natural or artificial, and impose upon him or it burdens and liabilities which are not cast upon others similarly situated. It cannot pick out one individual, or one corporation, and enact that whenever he or it is sued the judgment shall be for double damages, or subject to an attorney fee in favor of the plaintiff, when no other individual or corporation is subjected to the same rule. Neither can it make a classification of individuals or corporations which is purely arbitrary, and impose upon such class special burdens and liabilities. Even where the selection is not obviously unreasonable and arbitrary, if the discrimination is based upon matters which have no relation to the object sought to be accomplished, the same conclusion of unconstitutionality is affirmed.”
The allegations of appellants’ complaint, which of course stand admitted by respondents’ demurrer, include statements to the effect that over 300,000 per.
sons are int.erested as shareholders in the savings and loan associations doing business in this state, the average holding of each shareholder being approximately $350. Appellants further allege that approximately ninety per cent of the gross income of each of the appellants is derived from interest paid on loans secured by first mortgages on improved real estate, and that, in purchasing or making such mortgages, appellants, in the terms which they can offer, come into competition with other corporations as well as with many private persons who are also making such loans within this state. It is, of course, evident that the rate of interest borne by the loans made or purchased by appellants is an important element to be considered in connection with the ability of appellants to secure safe and desirable loans.
Appellants also allege that the minimum rate of return paid by them to their shareholders is five per cent per annum, and that the average rate of return is five and sixty-five hundredths per cent, and that the rate of return cannot be generally reduced below the latter figure without material and serious detriment to their business and to the securing by them of adequate funds with which to transact their business. Appellants argue that, as the competition in loaning money between them, on the one hand, and other corporations and private parties, on the other, is keen, a tax of five per cent upon their net income constitutes a substantial burden upon them, which, in view of the fact that no such tax is paid by private parties or some other competing corporations, deprives them of the benefit of the “equal protection” clause of the constitution and renders the law of which they here complain unconstitutional and void.
Appellants also allege that, under this law, the banks doing business within the state of Washington
would pay a tax at the rate of $0.57 per thousand dollars of resources, whereas appellants and other similar associations in the state would pay an aggregate tax equal to $2.46 per thousand dollars of resources.
The question of whether or not the act which we are now considering imposes a tax upon appellants for the privilege of exercising their corporate powers within this state, or whether, on the other hand, it purports to impose a tax directly upon property, to wit, upon the net income earned by appellants upon which the amount of tax due is to be computed, or upon the occupation with which appellants are engaged, is important. Respondents do not seriously contend that a tax of like general nature to that which we are now considering can be lawfully levied directly upon appellants’ property, which is equivalent to the levy of such a tax upon the net income earned by appellants, or that such a tax can be levied upon the occupation of doing a financial business. . Respondents contend that the act imposes a franchise privilege tax upon the corporations included within its terms, to be paid by them for the privilege of exercising corporate powers.
In the case of
Quaker City Cab Co. v. Pennsylvania, 277
U. S. 389, it, appeared that the cab company (the plaintiff in error) was a New Jersey corporation, authorized to do business in Pennsylvania and carry on therein a general taxicab business. The state of Pennsylvania sought to collect a tax of eight mills upon the dollar upon the gross receipts of the corporation. The cab company was, in its business, subject to competition by individuals who were also operating taxicabs. To these the act did not apply, and they paid no tax upon their receipts. Corporations operating taxicabs were not exempted from any of
the taxes imposed upon natural persons engaged in the same business, and every such corporation, whether domestic or foreign, paid a capital stock tax and another tax on the par value of all stock issued, if a domestic corporation, and, if a foreign corporation, a like rate on its capital employed in Pennsylvania. The court, speaking through Mr. Justice Butler, says:
“Plaintiff in error is entitled in Pennsylvania to the same protection of equal laws that natural persons within its jurisdiction have a right to demand under like circumstances.
Kentucky Finance Corporation v. Paramount Exch.,
262 U. S. 544, 550. The equal protection clause does not detract from the right of the state justly to exert its taxing power or prevent it from adjusting its legislation to differences in situation or forbid classification in that connection, ‘but it does require that the classification be not arbitrary but based on a real and substantial difference having a reasonable relation to the subject of the particular legislation.’
Power Co. v. Saunders,
274 U. S. 490, 493. . . .
“There is no controversy as to the application of the tax. Plaintiff in error assumes that the section covers its .gross receipts, as held by the state court, but insists that the section is invalid because it does not extend to like receipts of natural persons and partnerships. No doubt there are situations in which, as appears in
Cudahy Packing Co. v. Minnesota,
246 U. S. 450, and other cases, a percentage of gross earnings may be taken as a tax on property used in the business and properly may be deemed not to be a tax or burden on such earnings. But the practical operation of the section is to be regarded, and it is to be dealt with according to its effect.
Frick v. Pennsylvania,
268 U. S. 473.
Panhandle Oil Co. v. Mississippi,
277 U. S. 218. Here the tax is one that can be-laid upon receipts belonging to a natural person quite as conveniently as upon those of a corporation. It is not peculiarly applicable to corporations as are taxes on their capital stock or franchises. It is not takén in
lieu of any other tax or used as
a
measure of one intended to fall elsewhere. It is laid upon and is to he considered and tested as a tax on gross receipts; it is specifically that and nothing else.
“In effect § 23 divides those operating taxicabs into two classes. The gross receipts of incorporated operators are taxed while those of natural persons and partnerships carrying on the same business are not. The character of the owner is the sole fact on which the distinction and discrimination are made to depend. The tax is imposed merely because the owner is a corporation. The discrimination is not justified by any difference in the source of the receipts or in the situation or character of the property employed. It follows that the section fails to meet the. requirement that a classification to be consistent .with the equal protection clause must be based on a real and substantial difference having reasonable relation to the subject of the legislation.
Power Co. v. Saunders, supra.
No decision of this court gives support to such a classification. [And the supreme court of Pennsylvania has condemned such a classification.
Schoyer v. Comet Oil & Refining Co.,
284 Pac. 189, 196-197.] In no view can it be held to have more than an arbitrary basis.”
The court held that the law, as construed and applied by the supreme court of Pennsylvania, violated the constitution of the United States, and that the tax could not be sustained.
Respondents contend that the tax provided for by the statute is technically an excise for the privilege of doing business as a corporation, or what is generally known as a corporate franchise tax. For the purposes of this opinion, we assume that a tax by way of an excise to be collected by the state for the exercise of corporate privileges would be valid. The act itself, in §§ 3 and 4, contains a recital that the tax is to be paid by each corporation liable thereto “for the privilege of exercising its corporate franchise within this
state.” Such a legislative declaration is to be carefully considered by tbe courts and due weight given thereto. Courts should, however, in construing an act containing such a declaration, consider the true operation and effect of the law which must be dealt with on the basis of the practical results which follow its operation, and not alone by legislative declarations contained therein.
In this connection, the following opinions of the supreme court of the United States are pertinent:
Craig v. Missouri, 4
Peters (U. S.) 410;
Mugler v. Kansas,
123 U. S. 623;
Louisville Gas & Electric Co. v. Coleman,
277 U. S. 32;
St. Louis Cotton Compress Co. v. Arkansas,
260 U. S. 346;
Postal Tel. & Cable Co. v. Taylor,
192 U. S. 64;
Macallen v. Massachusetts,
279 U. S. 620.
- The tax here sought to be levied is, as was stated by the supreme court of the United States in the case of
Quaker City Cab Co. v. Pennsylvania,
as above quoted:
“. .
one that can be laid upon receipts belonging to a natural person quite as conveniently as upon those of a corporation. It is not peculiarly applicable to corporations as are taxes on their capital stock or franchises. It is not taken in lieu of any other tax or used as a measure of one intended to fall elsewhere. It is laid upon and is to'be considered and tested as a tax on gross receipts; it is specifically that and nothing else.”
The law of Pennsylvania providing for taxation of taxicab companies, which was being construed by the supreme court in the ease last cited, provided for a tax upon gross receipts, while the statute now before us provides for a tax upon net income, but we can see no distinction in principle in this particular- between the two acts. In our opinion, the principles upon
which the supreme court of the United States held the statute of the state of Pennsylvania unconstitutional are extremely pertinent here.
Assuming, as we do, for the purposes of this opinion, that the state can fix any excise or franchise fee or tax which must be paid by corporations organized under the laws of this state, we must, nevertheless, note that this act operates only when the corporate privilege to do business is exercised. It is the engaging in business, or the exercise of the corporate privilege, which causes the tax to attach, and it is the business in which the corporation engages which brings the corporation in competition with other persons, natural or artificial, in the carrying on of which every person is entitled to the equal protection of the laws in accordance with the mandate of the Federal constitution.
Appellants rely on the opinion of the supreme court of the United States in the case of
Macallen Co. v. Massachusetts,
279 U. S. 620, in which an opinion of the supreme judicial court of Massachusetts, holding constitutional a law of that state providing for the payment by Massachusetts business corporations of an annual payment by way of an excise, was reversed and the law held unconstitutional. The statute of Massachusetts which was attacked required, among other things, the payment of “an amount equal to two and one-half per cent of that part of its net income, as defined in this chapter, which is derived from business carried on within the commonwealth.” The law had, at one time, exempted from the net income upon which the tax should be computed, interest upon bonds, notes and certificates of indebtedness of the United States, but by amendment this exemption was deleted and no deduction of such interest in computing the net income
• was provided for. In considering the questions presented, the supreme court says:
“The words of the act and the opinion of the state court as to the nature of the tax are to be given consideration and weight; but they are not conclusive. As it many times has been decided, neither state courts nor legislatures, by giving the tax a particular name, or by using some form of words, can take away our duty to consider its nature and effect.
Choctaw & Gulf R. R. v. Harrison,
235 U. S. 292, 298;
Galveston, Harrisburg, etc. Ry. Co. v. Texas,
210 U. S. 217, 227. And this court must determine for itself by indepen- ' dent inquiry whether the tax here is what, in form and by the decision of the state court, it is declared to be, namely, an excise tax on the privilege of doing business, or, under the guise of that designation, is in substance and reality a tax on the income derived from tax-exempt securities. If, by varying the form — that is to say, if, by using one name for a tax instead of another, or imposing a tax in terms upon one subject when another is in reality aimed at — the substance and effect of the imposition may be changed, constitutional limitations upon powers of taxation would come to naught. The rule is otherwise.”
The court assumes, as a controlling principle, that the state cannot tax the instrumentalities or bonds of the United States, while on the other hand the state is at liberty to tax corporations with respect to the doing of business. Holding that the state cannot tax the income of a corporation derived from nontaxable securities, the court says:
“It necessarily follows that the legislature may not, by an artful use of words, deprive this court of its authority to look beyond the words to the real legislative purpose. And the power and the duty of the court to do so is of great practical importance. For when the aim of the legislature is simply to tax the former, it is less likely to impose an injurious burden upon the latter than when the aim is directed primarily against the latter.”
The court concluded that the amended act imposed a tax upon Federal bonds and securities, and was therefore void.
The opinion of the supreme judicial court of Massachusetts was filed during the month of September, 1928, prior to the enactment of the law now before us, while the opinion of the supreme court of the United States last referred to was not filed until May, 1929. Counsel for respondents endeavor to distinguish the case of
Macallen v. Massachusetts, supra,
but we are unable to follow counsel in their argument.
On behalf of respondents, it is argued that the ruling in the
Macallen
case was based wholly on the fact that the court felt constrained to hold that the real object and purpose of the Massachusetts act was to impose a tax upon governmental tax-exempt securities. It is-true, as above stated, that the act, as originally passed, provided that interest upon such securities should be deducted in determining the net income upon which the tax should be computed, and that a special tax commission appointed to consider the tax situation in Massachusetts made a report in which it recommended that the law be amended by disallowing this exemption, and that the legislature thereupon passed an amendatory act following the suggestion of the commission, thereby distinctly indicating a change of policy on the part of the state. In its opinion, the supreme court of the United States refers to this action on the part of the legislature as indicating an express purpose to subject governmental tax-exempt securities to the burden of the tax, and states “that the amended act in substance and effect imposed a tax upon Federal bonds and securities.” It is, of course, true that these remarks of the supreme court were clearly warranted by the facts before it, but we are
unable to see that this makes any difference in tbe principle involved.
Tbe act of tbe legislature of tbis state now under consideration was enacted after tbe passage of the amended act by tbe Massachusetts legislature, and after that act bad been held constitutional by tbe supreme judicial court of that state. No act of any similar nature existed in tbis state prior to. tbe passage of tbe statute of 1929, and we cannot imagine that it could be held that tbe amended act of Massachusetts was unconstitutional, in so far as it affected Federal tax-exempt securities, and that tbe act of tbis state could be held good in that particular, simply because, prior to tbe enactment of tbe 1929 statute, no law of similar purport bad existed in tbis jurisdiction.
It is true that tbe primary purpose of tbe legislature of Massachusetts, in passing tbe amendatory act, may have been to procure for tbe state, as part of its revenue, a proportion of tbe interest paid to Massachusetts corporations by tbe United States on governmental securities, while nothing in tbe record now before us indicates that such was tbe
primary
purpose of tbe legislature of tbis state in enacting tbe 1929 law. But tbis again makes no difference in tbe principle involved, which is identical in both instances. It is, of course, true, as argued on behalf of respondents, that tbe supreme court of tbe United States did not bold that a state cannot tax tbe corporate privilege and measure tbe tax by net income, tbe court expressly saying that “tbe state is at liberty to tax a corporation with respect to tbe doing of its business.” Tbe court continues, however, by saying that “tbe state cannot tax tbe income of the corporation derived from nontaxable securities.”
Tbe legislature, in enacting such a statute as that now before us, must be held to have primarily intended
all the major consequences of the act, and we are clearly of the opinion that, under the ruling of the supreme court in the case of
Macallen v. Massachusetts, supra,
the law of 1929 unlawfully attempts to levy a tax upon governmental securities, which, under the law of the United States, the state has no' right or power to tax,
Appellants, in their complaint, allege that respondents, in preparing to administer the law, refused to allow appellants to make any deductions on account of payments made to their members or shareholders for the use of the money of such members on deposit with appellants, while allowing banks to make deductions as to all interest paid by them.
This matter is argued at length and we have carefully examined the authorities cited. It is, of course, true that banks, in paying interest upon their savings or time deposits, pay according to an agreed rate, while appellants, in crediting their members or shareholders with dividends, do not make such credits on any contract rate, but adjust them upon the basis of corporate earnings. The full amount of the deposits and credited dividends are subject at all times to withdrawal by the member (subject, of course, to the rules of the savings bank as to the giving of notice, when required), the principal sum deposited being nowise subject to any hazard or risk, the element of speculation attending only the dividends which may or may not be earned from the funds deposited by the shareholders. The fundamental relation between the member and the depositee is always that of debtor and creditor, and the payments or dividends, when paid, for the purposes of an act such as that now before us, would seem to partake well nigh exactly of the nature of interest paid by a bank upon money deposited with it. For some purposes, indeed, the two propositions
are entirely different, while considered from other angles they are practically identical.
There is, of course, a great difference between the corporate structure of a savings and loan association and that of a commercial bank, and the word “depositor;” when used in reference to a commercial bank, imports in law a different meaning from that which the word implies when used in connection with a savings and loan association, as, in the latter case, money placed by the depositor in the association is, to a great extent at least, capital for investment for the depositor’s benefit, such deposits being, as stated by the supreme court of the United States in the case of
Bank of Redemption v. Boston,
125 U. S. 60, “the only capital which is invested and employed.”
Respondents argue that, as the purpose of the act is the production of revenue, and that, if the distributions made by mutual savings banks and financial corporations of a similar nature are held to be deductible, there will be little revenue raised from such institutions. This is probably true, but that fact has only incidental bearing upon the determination of the important question which we are now discussing.
"We have examined the authorities cited in the brief of
amici curiae
to the effect that a depositor in a savings and loan association is not always considered strictly a creditor of the institution, and that such depositor bears a relation to the institution entirely different from that of a depositor in a commercial bank. These authorities support the propositions advanced in the brief, but are not controlling here. We have also considered the opinions of the supreme court of the United States in the cases of
Savings Bank of Danbury v. Loewe,
242 U. S. 357, and
Gary v. Savings Union,
89 U. S. 38.
Amici curiae
argue that interest, to be deductible,
'must be paid by the taxpayer, and that distributions to appellants’ shareholders out of their own money cannot be considered deductible interest paid for the use of money borrowed from others. This argument apparently works both ways, as it would seem that a savings association should not be taxed upon the business which it does with its shareholders’ money, if it is allowed no credit for what it pays the shareholders for the use of that money. Such a law as this should be construed consistently. If the money deposited in savings associations belongs a,t all times to the shareholders, then the only net income earned by the association is its profit, and the dividends credited to .the shareholders are their income, not that of the company, while, if the income of the institution includes the money credited as dividends, the corporation, in computing its net income, should be allowed credit for dividends paid; otherwise the equation is unequal.
After careful consideration, we are of the opinion that appellants, under any law similar to that now under consideration, would be entitled, in computing the net income' upon which they are to pay a tax, to some credit on account of dividends paid to members.
Appellants argue that the primary purpose of this act was to tax national banks, and that state banks and other financial corporations were included within the purview of the act because of a supposed necessity for their inclusion by reason of § 5219, U. S. Rev. Stat. (12 U. S. C. A., § 548), by which Congress vested the state legislatures with the power, within certain defined limitations, of taxing shares of national banking associations or the net income earned by such associations, or taxing them according to, or measured by, their net income, subject to the limitations set forth in the section of the Revised Statutes above referred to.
It is, of course, true that a state cannot tax a national hank without authority from Congress, and then only strictly according to the terms of the authority granted, because such banks are agencies of the United States, created by and acting under the constitution and laws of the Federal government to promote governmental purposes.
First National Bank of Guthrie Center v. Anderson,
269 U. S. 341;
Owensboro National Bank v. City of Owensboro,
173 U. S. 664.
The authority of the state, then, to levy such a tax as this upon the net income of, or according to, or measured by, the net income of, a national bank, is not a tax upon the corporate franchise of such an institution, but would be a special tax to be levied strictly in accord with the act of Congress above referred to. This distinction is recognized in words by the act now before us for consideration (§§ 2, 3 and 4 of the act of 1929,
supra),
which recites that, as to national banks, the tax provided for thereby is a tax according to, or measured by, the net income of such institutions, while, as to every other bank and every financial corporation doing business within this state, the tax,- in exactly the same amount, levied in the same way, is a franchise privilege (or excise) tax.
Respondents argue that, even though the act should be held unconstitutional in so far as it purports to levy a tax upon the net income of national banks, such a holding would not necessarily invalidate the act, as the paragraph providing for the levy of such a tax against national banks could be deleted from the act without impairing the other features thereof. Assuming, without deciding, that the result of a decision that the section providing for the levy of a tax against the net income of national banking associations was void would simply be the deletion of the section of the act establishing such tax, and in view of the importánce of
the questions involved, the length to which this opinion is necessarily extended, and the result which we have reached, we do not at this time pass upon the validity of the act in so far as the same purports to levy a tax upon the net income of national banks.
Respondents and
amici curiae
argue ably and at length upon all phase's of this litigation: They cite many authorities, some of which clearly sustain respondents’ position. We have read the texts and cases relied upon by respondents, and, after thoughtful consideration, are of the opinion that the opinions of the supreme court of the United States above referred to lay down the better rule, and are, indeed, controlling upon the phases of this litigation in regard to which they are respectively relevant.
The matters presented on this appeal are of great and far-reaching importance. Bearing in mind, on the one hand, the importance of the questions involved and the amount of time requisite for a careful study thereof and of the very many authorities cited by the respective parties, and remembering, on the other hand, the importance of a speedy determination of this appeal and the injury to the public which would result from further delay in deciding the questions now before us, we conclude that no further discussion of the issues here involved is advisable. Having due regard for respondents’ arguments to the effect that a statute will not be held unconstitutional by construction, nor unless the court is clearly required by the law to hold the statute void, that laws are presumed to be valid, and that acts providing for the raising of revenue should always receive most favorable consideration, we are, notwithstanding these propositions, fully convinced that chapter 151 of the Laws of 1929, p. 380, is unconstitutional, in that it violates the “equal protection” clause of the constitution of the United
States
(Quaker City Cab Co. v. Pennsylvania, supra),
and for the further reason that it is in contravention of the laws of the United States which provide that no state has authority to tax the income from tax-exempt governmental securities
(Macallen v. Massachusetts,
279 U. S. 620).
This holding renders unnecessary any discussion of appellants’ contention that the act impairs the obligation of contracts in violation of article I, § 10, paragraph 1, of the constitution of the United States, and that it violates the uniform taxation provisions of the constitution of the state of Washington, or other provisions thereof.
The judgment appealed from is reversed with instructions to the trial court to overrule respondents’ demurrer to appellants’ complaint.
Mitchell, C. J., French, Tolman, Main, and Parker, JJ., concur.