Frank Albert Fetter, Change in Mortgage Taxation in New York in 1906

Frank Albert Fetter’s August 1906 journal article, published as a “Notes and Memoranda” contribution, examines New York’s replacement of an annual mortgage tax with a one-time recording tax. It places the change within the year’s broader fiscal legislation, reconstructs the interests supporting and opposing repeal, and considers evidence about the shifting of mortgage taxes into interest rates. Its central distinction is between reducing the burden of taxation and removing its conceptual defect: Fetter regards the recording tax as a practical improvement, but expects further reform eventually to exempt the paper instruments representing claims on income.

The article opens with the disappearance, at least temporarily, of the general property tax for state purposes. A constitutional amendment allowed the state to meet canal-debt obligations from other revenues when these were adequate. Fetter then surveys the authorization of a fifteen-member tax commission, modifications to corporate taxation, an effort to tax certain non-residents’ personal property situated within New York, and the governor’s veto of increased taxation on racing associations. These preliminary observations establish a legislature actively revising its revenue system, without suggesting that every revision was coherent. Changes in corporation taxes made an already complex system still more complicated, while the practical effect of the non-resident property measure remained uncertain. Mortgage taxation emerges from this survey as the session’s decisive measure.

By far the most important measure of taxation of the session was the repeal of the annual mortgage tax imposed last year, and the substitution for it of a recording tax of the same amount (½ per cent.), but payable once only at the time of record.

The identical nominal rate concealed a substantial difference in burden: one charge at registration replaced a recurring annual payment. Fetter explains the urgency of repeal through the anticipated political consequences of successful collection. Interested parties sought to remove the annual tax before it became a substantial revenue source, because dependence on that revenue would make subsequent repeal difficult. Opponents described the tax as a fiscal failure, yet acknowledged that payment had been postponed through temporary devices and that enforcement would probably become effective after July 1, 1906. Fetter reports prospective receipts of approximately $3 million in the first enforcement year, eventually rising to at least $10 million annually.

The measure thus far had been a failure as a revenue producer because of the postponement of the payment of the tax in the hope that it could be repealed.

This explanation distinguishes a tax incapable of producing revenue from one whose apparent failure resulted from resistance to its implementation. Demand mortgages deferred payment until July; mortgages nominally payable after very short periods incurred only a proportionate initial charge. Fetter also reports opponents’ allegation that large quantities of corporate mortgages were withheld from recording while repeal was awaited. He does not establish every reported device independently, but makes the connection between legal arrangements, delayed receipts, and legislative pressure central to his account.

The competing coalitions reveal why mortgage taxation could not be understood simply as a conflict between taxpayers and government. Real-estate interests, probably joined by large corporations, favored the recording tax as an attainable compromise while preferring complete abolition. Rural counties supported continuation of the annual levy. So did some citizens who approved efforts to reach capital, estate trustees who had previously paid a large share of estate income in general property taxes, and rural lenders formerly taxed more heavily. Certain corporate mortgage holders exempt from local taxation also benefited from higher market interest rates. The same reform could therefore reduce one holder’s tax burden, increase another’s return, and impose additional costs on borrowers.

Fetter turns from this political alignment to the economic question of shifting and incidence. He discusses a comparison presented by Lawson Purdy for the New York Tax Reform Association, using neighboring counties across state borders. Massachusetts exempted mortgages; Pennsylvania taxed them at four mills annually; New York had moved from locally varying general property taxes to the annual half-percent levy and then to the recording tax. These differences provided evidence about the relationship between tax liability and borrowing costs.

The conclusion of the study was that while under the old general property law the tax was nearly always evaded, the liability to taxation increased the rate of interest by a mill and a half in some counties and as much as three to four mills in other counties.

The important conceptual move is to separate actual payment from the economic consequences of liability. Even a widely evaded tax could raise interest rates. The annual mortgage tax reportedly increased rates further; the contention that the total increase slightly exceeded the tax itself is presented as a claim, not as Fetter’s independently demonstrated result.

The amended recording-tax legislation took effect on July 1 after an initial gubernatorial veto. Its expected annual yield was about $3 million, divided equally between the state and smaller local divisions. Only newly recorded mortgages came under it. Earlier mortgages remained legally subject to the general property tax, although Fetter expected little substantial enforcement against them. This divergence between formal liability and administrative practice carries through to his conclusion.

The recording tax is qualitatively as bad as the annual tax, but imposes a very much lighter burden.

Fetter’s final judgment combines practical approval with principled dissatisfaction. The two years’ legislation moved toward legal exemption, although the intermediate annual tax had actually increased the burden on most mortgages. Complete exemption of paper claims on income remained the logical destination, dependent on further change in public opinion. The article’s enduring relevance lies in its compact demonstration that statutory rates, effective burdens, revenue performance, and political support are distinct matters: none can safely be inferred from the others.