Being unable to agree entirely with the conclusions reached by the majority of this court as stated in the opinion delivered today, I am constrained because of the importance of the questions involved to record my dissent and to state some reasons therefor.

So much of the opinion as holds that the tax levied by the act under consideration is not a property tax, but is in the nature of an excise tax, I approve and concur in. I am, however, unable to approve that part of the opinion which upholds those sections of the act which permit the exemption of state banks and trust companies and which approves the deduction of dividends from the stock of state banks and trust companies.

Subsection (3) of section 14 of the Act (section 4281b-14 (3), Kentucky Statutes 1936 Revision) exempts state and national banks and trust companies from the provisions of the act.

Appellants vigorously urge that this exemption is arbitrary and unreasonable and that it is unconstitutional. Appellee, while admitting that there is a constitutional *Page 405 inhibition against arbitrary classification for tax purposes, contends that the exemption referred to is not arbitrary but is a reasonable classification made necessary by reason of the fact that this state could not under its present statutes of taxation levy an income tax on national banks and that the exemption is necessary in order that banks organized in Kentucky may compete with national banks. That banks must be treated alike for taxation purposes.

Frankly, I am unable to follow the reasoning of appellee in this contention. A state cannot grant an exemption merely for the purpose of putting a taxpayer on a favorable competitive basis with one not subject to the taxing power of the state. This rule is supported by Union Bank Trust Co. v. Phelps,288 U.S. 181, 53 S. Ct. 321, 322, 77 L. Ed. 687, 83 A.L.R. 1438, where the Supreme Court said:

"To accept the doctrine that as the states can only tax a federal instrumentality when permitted by Congress, therefore they cannot tax competitors of such instrumentalities within their general jurisdiction in some other fashion without violating the Fourteenth Amendment, would be both illogical and destructive of their proper independence."

Just what type or kind of tax, within constitutional limits, should be levied upon national banks is a legislative problem. But the doctrine that the determination of that question is ipso facto and in all events determination of the tax to be levied on state banks is unsound. If the Federal Government should decline to permit taxation of national banking associations, could it be seriously contended that that operated to relieve banking corporations chartered by and doing business in Kentucky from taxation? I think not.

In the majority opinion this court undertakes to justify the exemption upon the ground that the present economic conditions demand considerate treatment of banking institutions, and that these institutions perform the function of supporting in a large measure government credit, and that it is the policy of the government to encourage low interest rates and that the matter of taxation has a very vital relationship to interest rates. The majority opinion cites the case of Miles v. Dept. of Treas. (Ind. Sup.) 193 N.E. 855, 97 A.L.R. 1474, as authority for the right of the Legislature *Page 406 to classify banks for different treatment under income tax statutes.

With the greatest deference to my colleagues who have so held, it seems to me that this line of reasoning is forced. It is not even urged by the appellees. There is nothing in this record upon which it might be concluded that the tax levied will so increase the cost of operation of a state bank as to jeopardize its existence, and certainly if that reasoning is sound, it seems to me it could be equally urged that the effect of the tax would be such as to endanger the very existence of numerous other equally legitimate businesses whose margin of profit is equally small. Moreover, while it is true that banks do perform the function at least in part of supporting government credit, it is equally true that income from government securities is nontaxable under this act. The net income which is taxable under this act is at least theoretically the gain from the operation of the business and, therefore, it seems to me that the exemption of this income in the hands of banks could not reasonably be expected to justify reduction of interest rates.

Regarding the case of Miles v. Dept. of Treas., supra, that case did not involve a statute worded like ours. The Indiana act (Acts 1933, c. 50) involved in the Miles Case classified "banks, trust companies, building and loan associations, brokers, finance companies, dealers in commercial paper, and persons engaged in the business of lending money or credit" (section 1 (g) into one class for the purpose of defining "gross income" of those persons subject to tax. That classification is obviously one which, due to the peculiarity of the business engaged in, makes it practical that different methods be used in arriving at income to be taxed; but the Kentucky act simply exempts without reference to the other businesses referred to in the Indiana statute and in the Miles opinion.

The Supreme Court of the United States in the case of Warren v. Shook, 91 U.S. 704, 710, 23 L. Ed. 421, defined "banking" as follows:

"Having a place of business where deposits are received and paid out on checks, and where money is loaned upon security, is the substance of the business of a banker."

This court approved that definition in the case of Marvin *Page 407 v. Kentucky Title Trust Company, 218 Ky. 135, 291 S.W. 17, and I think it is obvious from that definition that the Indiana classification as referred to in the case of Miles v. Dept. of Treas., supra, is a far more accurately bounded classification than is the classification created by the exemption in subsection (3), section 14 of our Income Tax Statute, for it is common knowledge that only a portion of the credit so necessary to our present-day living is extended by either state or national banks, and if the economic conditions of our country are such as to compel or to justify a preferred treatment of this subject, then that treatment should be extended to all engaged in that business.

There is no question, as I see it, but that the exemption of state banks and trust companies from the provisions of the act is a discrimination. While it is certainly true that it is not within province of the judiciary to interfere with the action of the legislative branch in classification of businesses or things for tax purposes, where the discrimination or classification is so unreasonable or capricious or arbitrary as to have no basis in fact and to have no substantial relation to the object of the taxing statute or the thing taxed, it is certainly the duty of the court to decline to permit such a Statute to stand. In this view I am supported by Patton v. Brady, 184 U.S. 608, 22 S. Ct. 493, 46 L. Ed. 713; Colgate v. Harvey, 296 U.S. 404, 56 S. Ct. 252, 80 L. Ed. 299, 102 A.L.R. 54; Hager v. Walker, 128 Ky. 1, 107 S.W. 254, 32 Ky. Law Rep. 748, 15 L.R.A. (N.S.) 195, 129 Am. St. Rep. 238; Williams v. City of Bowling Green, 254 Ky. 11,70 S.W.2d 967.

As authority for the exemption of state banks, appellee has cited Hunton v. Commonwealth, 166 Va. 229, 183 S.E. 873. I have read this case closely, but I do not find there involved the validity of the bank exempting statutes. Likewise Colgate v. Harvey, supra, is cited, but I do not find that decision helpful in the solution of this difficulty.

Even a casual reading of our Constitution demon strates the fact that exemptions from taxation under it are, or are intended to be, prohibited by it or repugnant to it. Equity and fairness in the distribution of the burdens of government, as well as with regard to its benefits and protection, are at once the goal and the port of society. One of the principle burdens of government *Page 408 is its cost. This is paid by taxation of its citizens, and many of our illustrious statesmen have urged and many of our distinguished jurists upheld income taxation as taxation inherently fair in its nature and most equitably distributing the cost of government in direct proportion to the taxpayers ability to pay; but no matter how fair and equitable a tax may be in theory, the delicacy of its balances are likely to be disturbed through any exemption.

To justify the exemption of a business such as is here involved, namely, state banks, by urging that it will enable them to compete on more favorable terms with business which cannot be taxed or which may not at present be taxed in this state, is to me both illogical and untenable.

The majority opinion further justified the classification by holding that the tax is not levied upon income. There is some basis for this conclusion in certain expressions found in the act, but it seems to me elementary that the tax here is imposed upon income as distinguishable from the imposition of a tax upon persons, corporations measured by income. In Fletcher's Cyclopedia Corporations, sec. 6904 is found the following rule with reference to income taxes:

"These (income taxes) are divisible into (1) franchise taxes measured by income, and (2) taxes imposed on net income by the state or the United States. While both are generally held to be excise taxes rather than property taxes, there is a clear distinction between the former and the latter. A franchise tax, although measured by income, is not an income tax, although such a tax is held in some states to be in effect an income tax. In the one case income is the measure of the tax while in the other case income is the subject of the tax. One is a tax upon the net income of property and the other is a tax on the net income of one who owns or operates it."

I think the tax here is clearly upon income, and if I am right in that conclusion, then under the doctrine of this court as announced in Hager v. Walker, 128 Ky. 1, 107 Ky. 254, 32 Ky. Law Rep. 748, 15 L.R.A. (N.S.) 195, 129 Am. St. Rep. 238, that when the Legislature undertakes to exercise the power it has to impose special or excise taxes, the tax imposed must apply alike to *Page 409 the subject of the taxation. This doctrine has been followed by our Court of Appeals in an unbroken line of decisions. The tax as I see it is upon income, and I fail to find any substantial difference between $5.000 of income earned by a bank and exempt under the statute and the same amount of income earned by the plaintiff corporation and taxable under the statute. Moreover, and for the same reasons, I am of the opinion that there is no justification for subsection (k) of section 3 of the act which would authorize the deduction of dividends received from stock in state banks and trust companies from income otherwise taxable. In this conclusion I believe I am also supported by the rule announced in 61 Corpus Juris, 1573:

"Dividends are not exempt from taxation as income of the stockholder receiving them by reason of the fact that they represent a distribution of earnings or profits which, as income of the corporation, were not taxable to it, since the income of the corporation and the income of its stockholders are entirely distinct."

Subsection (l) of section 3 authorizes deductions of contributions or gifts made by individuals for the use of the state, and for what may be stated as educational, religious, literary, and military purposes. Just why such contributions should be subjects of deductions when made by individuals, as distinguished from such contributions when made by corporations, it seems to me is unexplainable, as is likewise the provision of this section which authorizes such deductions only when the contributions or gifts are used exclusively in Kentucky. This section as written would deny a deduction for a contribution to such charity as the American Red Cross, or any church or religious society supporting either charities or religious works outside the bounds of Kentucky, or even a contribution made by a public-spirited citizen to the Federal Government for scientific or charitable purposes. It would deny the deduction of a gift made by an alumnus of Harvard University to his university, and yet permit the deduction of a contribution or gift made by an alumnus of one of our state institutions to that institution.

Section 3 (c) of the act provides for the deductions of taxes. This authorizes deduction only of such taxes as are paid to the state, its political subdivisions, and income taxes paid to the Federal Government. A situation *Page 410 is thereby created whereby, although the state may tax income arising from property beyond its confines, the state does not permit the deduction of taxes necessarily paid in earning such income. A situation might easily be conceived where there is considerable gross income but no net income after the payment of taxes, required to be paid but not subject to deduction. Then, too, license taxes are paid to other states by corporations and individuals engaged in business there. The payment of these is absolutely necessary in order to earn the income taxed by Kentucky, and they are as properly deductible, it seems to me, as a similar tax paid to this state. A corporation must necessarily pay the Federal Government various taxes such as excise taxes, capital stock taxes, and stamp taxes. A reasonable interpretation and construction of this language would require that stamp taxes and excise taxes paid to the Federal Government are not deductible. Only such taxes as the statute names may be deducted. See State ex rel, Hickox v. Widule, 166 Wis. 113, 163 N.W. 648, and State ex rel. Ford Motor Co. v. Gehner, 325 Mo. 24, 27 S.W.2d 1.

Other objections might be urged, but the foregoing will suffice. I am of the opinion that the tax is not a property tax, but is in the nature of an excise tax, and is an income tax which is distinguishable from other classes of taxes under our law; that the act is unconstitutional and void, in that it arbitrarily and unreasonably grants exemption by its provisions to state banks and trust companies, thereby discriminating without basis, reason, or cause in their favor. If it were possible to expunge from the act the section giving rise to this exemption and the section authorizing the deduction of dividends paid on the stock of state banks and trust companies, the remainder of the act might be saved, but such construction is impossible in view of the rule of this court followed in the case of Board of Education of Woodford County v. Board of Education, 264 Ky. 245, 94 S.W.2d 687, and in my opinion the act is so destroyed by its obviously unconstitutional provisions that it is no presumption that the Legislature would have passed the act without the unconstitutional features, and I must so hold. *Page 411