Tax Analysts Blog

When Democrats Tried to Destroy Chain Stores With Taxes

Posted on Nov 1, 2016

Democrats used to hate monopolies, and now they don't.

That's the upshot of Matt Stoller's recent article in The Atlantic, “How Democrats Killed Their Populist Soul”. It's a compelling argument, if a little overstated: The anti-monopoly tradition was never uncontested among Democrats, and it hasn't disappeared entirely from the party even now.

But Stoller is right to underscore the Democrats' past penchant for regulating economic “bigness.” He's also right to spotlight the role of one particular anti-monopoly crusader, Rep. Wright Patman of Texas.

Patman fought a decades-long battle against monopolies, engaging his adversaries on any number of fronts. But one of his most famous campaigns unfolded during the 1930s, when Patman tried to tax chain stores out of existence.

Before Wal-Mart

These days, we hear plenty of complaints about retail chains. Critics describe them as a threat to mom-and-pop businesses — not to mention the once-vibrant commercial centers that used to sustain cities around the nation.

Wal-Mart, in particular, is a favorite target for critics. But long before Sam Walton opened his first store in 1950, an earlier generation of retail giants drew the ire of both competitors and politicians.

Chain stores first appeared in the 19th century, but their growth exploded in the 20th. Companies like Sears, A&P groceries, and Woolworth's grew rapidly because they filled a need. Chains offered consumers wider selection and competitive pricing; neighborhood merchants had many virtues, but ample stock and low prices were not among them.

In the decade after World War I, chains continued to grow rapidly. J.C. Penney went from 312 stores in 1920 to 1,452 in 1930; Walgreens expanded from 23 stores to 440 stores in the same period; and A&P went from 4,621 to 15,737 stores. According to Godfrey Lebhar, author of the still-standard 1963 book Chain Stores in America, these sprawling companies accounted for almost 11 percent of all retail stores in 1929 and more than 22 percent of total retail sales.

In some market segments, chains were surging toward domination. They accounted for more than 45 percent of all shoe sales, for instance, and 90 percent of all variety-store sales. Most important, they made up almost 40 percent of all grocery sales, a highly visible and politically powerful segment of the larger retail market.

The swift rise of chain stores produced a political backlash. “The chain stores are undermining the foundation of our entire local happiness and prosperity,” warned one Indiana political leader in a typical if slightly overwrought complaint. “They have destroyed our home markets and merchants, paying a minimum to our local enterprises and charities, sapping the life-blood of prosperous communities and leaving about as much in return as a traveling band of gypsies.”

Such complaints brought forth proposals to curb the chains. Politicians began to experiment with punitive taxes. The first state-level tax designed to slow the chains appeared in 1927, and they proliferated during the 1930s. But the chains fought back, both in the courts and at the ballot box. And in 1936, they won a major victory when California voters overwhelmingly rejected their state's existing chain store tax.

The California vote dealt a nearly mortal blow to state campaigns against the chains. But in Washington the battle continued, thanks to Wright Patman and his “death sentence” legislation.

Patman's bill was designed to tax chain stores into oblivion. It would have exempted chains with nine or fewer stores, but beginning with the 10th, chains would pay $50 for each outlet up to 15. The tax would then rise progressively until it reached $1,000 per store for every outlet after the 500th. The total amount would then be multiplied by the number of states where the chain operated.

That last step would have destroyed the chains. As one observer later pointed out, Patman's legislation would have saddled Woolworth with a tax bill of $81 million, even though its 1938 net profits were just under $28 million. A&P, with net profits of just over $9 million, would have faced a bill for $471 million.

Even small chains operating within single states would have seen their tax bills soar dramatically, but for national chains, the Patman bill spelled doom. Patman's “death sentence” would have forced chains to liquidate. As one observer sympathetic to the chains later wryly said, "They could escape the penalty by committing suicide."

The Patman bill never emerged from committee, although it did give rise to some fairly spectacular hearings featuring testimony from chain-store executives and the people who sought to torment them.

Ultimately, however, Patman's bill signaled the end, not the beginning, of the anti-chain campaign. Patman found many onetime allies unwilling to support his plan. Farmers were getting more cozy with the chains, as was organized labor.

In 1938, for instance, A&P had agreed to allow the American Federation of Labor to organize grocery workers. In return, AFL leaders declined to endorse the Patman bill or any subsequent legislation to impose anti-chain taxes.

Even more important, the tide of popular opinion had turned against the anti-chain legislation. Once the target of widespread anger, the chains lost much of their notoriety as the Depression wore on. In June 1937, 63 percent of respondents to a national poll indicated support for special chain-store taxes. By 1939 almost 49 percent wanted to avoid the punitive taxation. More to the point, only 6 percent supported extraordinary taxes like the Patman bill.

The fate of Patman's bill should serve as a sobering reminder for fans of taxing bigness. In his Atlantic article, Stoller makes a powerful case for resurrecting the Democratic anti-monopoly tradition.

But it's worth remembering that even in its heyday – and in the hands of Stoller's designated hero, Wright Patman – tradition always faced a tough headwind.

This post is drawn from a longer article on chain store taxes published by the Tax History Project at Tax Analysts.

For more tax talk follow me on Twitter @jthorndike.

Read Comments (2)

Edmund DantesNov 1, 2016

Terrific article. Adds a valuable dimension to Tax Notes.

Thank you.

Mike55Nov 1, 2016

Agreed, this was an interesting article I'd have otherwise missed. And kudos for summarizing it flawlessly in eight words: "It's a compelling argument, if a little overstated[.]"

In terms of overstated.... I doubt even Rep. Patman would advocate applying the monopoly busting tactics used from roughly 1910 to WW2 to the duopolies and oligopolies of today. Stollman seems to ignore the possibility that modern Democrats stopped worrying about antitrust policy because Patman and his contemporaries did such a great job. Even after 4+ decades of terrible neglect (at least according to Stollman), we have yet to see anything resembling a Rockefeller or a Carnegie reemerge.

In terms of a compelling case.... it strikes me that perhaps antitrust laws could serve as a compromise to help us break free of our current regulatory quagmire. Everyone* agrees overly burdensome regulation has become a meaningful anchor on economic growth but, rhetoric aside, no one truly knows how to fix it. Perhaps in some cases the answer could be replacing heavy handed regulation with more aggressive application of antitrust law.

*There are a few dissenters out there, but when Larry Summers and the Cato Institute agree on an economic question, there's not a whole lot of space left for an opposing view.

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