Non-Physical Values.
The foregoing narrative account of the general field and office handling of the Michigan appraisal of physical property, while not touching on matters of principle of valuation, except as to land values, is submitted as describing briefly the machinery of the appraisal. A number of very important issues were raised which have to do with the theory of valuation. These are worthy of discussion at length, in the subsequent consideration of the method of determination of a fair value, but are not here referred to. Within any short limits it is impossible to give a comprehensive description in detail of all the work of the Michigan appraisal. Several articles descriptive of this work have been written, giving quite full extracts from the various sets of rules which were promulgated, and describing some phases of the work in much more detail than is here attempted.
The physical valuation, as represented by two figures—the cost of reproduction of the physical property, and its present value—was submitted to the Board of State Tax Commissioners as the work of Professor Cooley, and in most of the literature descriptive of it, it has been termed the "Cooley Appraisal."
After the completion of Professor Cooley's work, his figures were submitted to Professor Henry C. Adams, who had been making a study of the income accounts of the various companies, and to whom had been assigned the duty of determining the non-physical or franchise values of the properties.
Professor Adams has described[[5]] very fully the plan adopted for this work, and this plan has been commented on so fully that any lengthy description is deemed unnecessary. It appears to be perfectly proper, however, to correct certain misstatements regarding this work.
When it was first determined to make the appraisal, Professor Cooley—not Professor Adams—was requested to take charge. The assignment to Professor Adams of the non-physical valuation was made after the physical valuation was well under way.
The use of a negative or subtractive non-physical value was considered, and advised by Professor Adams. The work was not undertaken with a view of "increasing the assessments," but to put the Tax Commission in possession of a figure which would represent the business value of the property as well as the physical value.
Professor Adams held that the non-physical element of value was not a simple commercial element, but included:
{to be a corporation,
The franchise {to use public property,
The possession of traffic not exposed to competition,
The possession of traffic through connections,
The benefit of economies due to density of traffic,
The value due to organization and vitality of industries served.
He also held that, as nothing visible or tangible gave support to this value, it must be determined on the basis of information secured from the income accounts of the company.
Without going into any complete description of Professor Adams' method, it may be said that he made an analysis of the income accounts, and, after providing for operating expenses and taxes, he deducted, as an annuity properly chargeable to capital, a certain percentage of the appraised value of the physical properties. Any remainder was capitalized to give the true value of the immaterial element, or the business value.
In the rates of capitalization and annuity used in 1902, there were certain changes, making them differ from those used in 1900, and certain changes in the detail of analysis of income accounts and methods of determining the rates of interest which are entirely immaterial to the present narrative. The work was of great importance as being the first exposition of this method of obtaining non-physical values. It was a fair, logical, and business-like attempt to determine those elements which give a well-designed, economically-built, or advantageously-located property a greater value as a money-earning concern than the actual capital invested, or than the actual value remaining in its physical property.
It will be seen that, in the case of a property in which the surplus earnings depend on excessive rates for service, it will fail as a method of determining a value for use as a basis of rate-making; and it fails, in the form in which it was used in 1900 and 1902, to bring out those negative or subtractive elements which may be determined from the income accounts, in the case of properties which do not earn a fair return on the investment. This, however, was due to the fact that the taxation laws of Michigan made no provision for any reduction of value because property was idle or non-productive, and any such deduction in the case of corporation property would place it on a different basis from other property. Professor Adams and his associates, therefore, applied only positive values, where any such were found, although advocating the use of negative values.
The writer has seen no criticism of Professor Adams' work which is not apparently incited by, either the direct interest of corporations in lowering valuations for taxation, or by an effort to confuse the subject of valuation so as to discredit the work in the eyes of taxing authorities. Any person competent to discuss the matter, who has given Professor Adams' method careful thought, will be forced to the conclusion that this was a long step in the direction of the final solution of these important and perplexing elements of value.