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September 26, 2006
Retail Revolt: Chain-Store Taxes in the 1930s
Joseph J. Thorndike

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Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: Joe_Thorndike@tax.org.


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Over the last decade or so, Wal-Mart has emerged as a corporate villain of almost epic proportions. Critics have assailed the company for its apparently lethal effect on local competition; seduced by the famously "falling prices" at Wal-Mart's mammoth stores, customers have abandoned local retailers and reduced traditional commercial districts to urban ghost towns.

More recently critics have shifted their focus from Wal-Mart as retailer to Wal-Mart as employer. Its wages are too low, they complain, its fringe benefits too stingy. Sympathetic lawmakers have struggled to craft a workable response, considering various regulatory remedies.

But while critics have done a good job of capturing media attention, they've been less successful on the policy front. Recent efforts in Chicago to impose new minimum wage standards on big-box retailers fizzled out. So, too, did Maryland's plan to force Wal-Mart to provide better healthcare coverage to its employees.

The divisive debate surrounding Wal-Mart recalls an earlier episode in American commercial history. In the late 1920s, Americans began a sustained debate over chain stores, a retail innovation that swept the country after World War I. Then, as now, critics worried that large retailers would upset traditional -- and cherished -- economic relationships. Lawmakers in more than half the states responded with new taxes: Designed to curb the growth of multioutlet retailers, these levies multiplied rapidly in the early years of the Great Depression.

But the story does not end happily, at least for critics of big- box retailing. The anti-chain-store movement -- a popular campaign that burned bright for a few dramatic years -- petered out on the eve of World War II.

Retail Revolution

Chain stores arrived with the dawn of the 20th century, but many of the most prominent had their roots even earlier. The first A&P grocery opened in 1859, and Woolworth's appeared in 1879. Sears Roebuck, which began as a catalog company but grew to include thousands of retail outlets, dates to 1886 when a young railroad employee first experimented with mail-order sales of fancy gold watches.

Before the chain-store revolution, retail activity in the United States was dominated by small, independent merchants -- the country stores that still remain a fixture of American folklore (think of Mr. Olsen from Little House on the Prairie or Mr. Godsey from The Waltons). Shop owners knew their customers, and most lived near them, too. Retailers were embedded in their communities, serving a social and cultural function in addition to their obvious economic role.

This was not, however, some preindustrial, commercial idyll. In general, independent stores were poorly stocked and expensive, thanks in large part to a profusion of wholesalers. When alternatives first appeared -- initially in the form of mail-order catalogs and later in the guise of chain stores -- customers were quick to respond. Sears Roebuck, for instance, grew dramatically in the years after its founding, roughly doubling its sales from $388,000 in 1893 to almost $800,000 in 1895. By 1900 its sales had reached $11 million, and by 1908 they were more than $40 million.1

Meanwhile, urban shoppers were in the midst of a similar revolution, as large department stores challenged the primacy of small, single-product shops. By encouraging an early form of one-stop shopping, department stores posed a serious threat to specialty retailers.

Small merchants didn't accept these changes meekly. In the country, store owners organized "shop at home" campaigns, targeting mail-order firms as interlopers and urging consumers to resist the siren song of long-distance shopping. Some activists even organized catalog burnings, stressing the danger that nonlocal retailing posed not just to small merchants but to communities at large. Eager to shield its customers from abuse, Sears Roebuck promised that every transaction would be "strictly confidential," and merchandise would be shipped in unmarked packaging.2

Meanwhile, city shopkeepers asked political leaders to clamp down on department stores by limiting the number of products that could be sold under a single roof. Like their rural counterparts, city merchants couched their campaign in moral terms, treating department stores as a threat to consumer independence and civic health.

Retail in Chains

Those restrictions were more symbolic than substantive. Catalog retailers and department stores continued to grow, gradually eroding the primacy of small merchants in the American retail economy. The interlopers remained a relatively minor feature of the American commercial landscape until the 1920s. But then, in the tumultuous years following World War I, the chains began to transform the nation's economy.

Signs on chain store window welcoming farmers to town during tobacco auction sale time, 1940 (Library of Congress, Prints & Photographs Division, FSA-OWI Collection) The 1920s are often remembered for their economic vitality. But the decade was also marked by change, instability, and insecurity, as Americans struggled to cope with rapid economic, social, and cultural changes. Immigration emerged as a pivotal issue -- as it is today -- and so did tax cuts and income differentials between the nation's rich and poor. Many Americans -- especially small farmers -- failed to share in the era's vaunted prosperity, and that left large pockets of discontent amid all the affluence.3

Changes in the nation's retail landscape also proved to be a source of confusion and discomfort. Millions of Americans came to revel in the newfound consumer economy as manufacturers produced a bewildering array of products and marketed them across the nation. The advertising profession emerged as a vital element of this new, consumer-driven economy, helping to shape a new "culture of consumption" that coexisted -- often uneasily -- with more traditional notions of thrift and saving.

Chain stores played a vital role in the burgeoning world of mass consumption. Individual chains grew 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 survey of chain stores in that tumultuous era, chains accounted for almost 11 percent of all retail stores in 1929 and more than 22 percent of total retail sales. Although large, those aggregate numbers actually obscure the dominance of the chains in some segments of the new national market. Chains accounted for more than 45 percent of all shoe sales and fully 90 percent of all variety-store sales. Most importantly, they accounted for almost 40 percent of all grocery sales, a highly visible and politically powerful segment of the larger retail market.4

Chain stores had several key advantages over their independent competitors. First, chain stores served as their own wholesalers, buying directly from manufacturers and avoiding the costs of additional middlemen. Some of those savings were passed on to consumers, allowing chains to offer lower prices than most independent retailers. They also offered a wider array of goods -- fresher ones, too, in the grocery market. Finally, chain stores were more attractive than their independent competitors and made better use of modern marketing techniques, including advertising.5

Small Merchants Strike Back

The chains' proclivity for price cutting prompted a backlash from small merchants. Trade-at-home campaigns sprung up in various regions, with merchants asking consumers to keep their spending at home. "Keep Ozark Dollars in the Ozarks," urged one typical slogan.

Chain critics lashed out at multioutlet retailers, describing them as monopolistic and antidemocratic. "The chain stores are undermining the foundation of our entire local happiness and prosperity," said the speaker of the Indiana House of Representatives. "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." Other critics said chains would impoverish workers. "Do the mother and father realize what will happen to their children when they have to go to work for chain stores at $20 per week, or less?" asked the St. Louis Post-Dispatch. "The chain stores may appeal to some people as a very bright business, but our country is built on the foundation of live and let live. Economy is one thing, but eliminating that vast amount of people from work is another."6

Front of chain store, Herrin, Illinois, 1939 (Library of Congress, Prints & Photographs Division, FSA-OWI Collection) Or, as William K. Henderson, a populist demagogue and radio personality put it, "We have insisted that the payment of starvation wages, such as the chain store system fosters, must be eradicated. . . . We have importuned those who labor to join in striking down the chain system in every form and character, before it enslaves the masses and holds them prisoners of an economic system which will destroy every vestige of individual initiative and personal incentive to progress."7

The anti-chain-store movement was emotional, driven by the small merchants who stood to lose the most when national chains came to town. As a writer for The Nation said of the small retailer: "He is frightened. He doesn't realize that the sweep of the chain stores upon him is part of a historical movement, and if he did realize it he wouldn't care. He is fighting for his life. You can hardly expect him to say: 'The world is through with me and I'd better just fold up and get out.'"8

Manufacturers and distributors occasionally lent a hand to the antichain campaigns. Worried about the growing market power of multioutlet retailers, they joined with merchants to seek remedial legislation from state lawmakers. Indeed, while boycotts and moral suasion were vital elements of antichain activity, the focus soon turned to state legislatures. And strikingly, tax policy quickly emerged as the chosen instrument for those seeking to contain the chains.

Chain-Store Taxes

In 1923 Missouri considered the first chain-store tax, a draconian measure that would have exempted the first two stores owned by a single individual or corporation and imposed a $50 tax on the third, a $100 tax on the fourth, a $200 tax on the fifth, and so on. Such a system would quickly have absorbed the modest profits typical of retail outlets. Lawmakers thought better of the plan, and it never saw the light of day.

No state imposed a chain-store tax until 1927, when four took the plunge. Maryland, North Carolina, and Georgia established general chain-store levies, and Pennsylvania imposed a special tax on drugstore chains. The first three were struck down by state courts, and the last was overturned by the U.S. Supreme Court.

State lawmakers continued to pass antichain tax laws, and courts continued to invalidate them. Generally state courts objected to the legislative penchant for imposing chain taxes at some arbitrary point in the growth of a multiunit retail business. Typically owners could operate four or five stores before they encountered any punitive taxation. Judges considered that arrangement arbitrary and capricious. As a Maryland judge said while striking down a tax that applied to chains of six stores or more, "It permits the five chain stores to indulge in all the practices said to be objectionable, provided only five are guilty of such alleged offenses."9

In 1929 North Carolina and Indiana both enacted laws that managed to survive court challenges. Both laws differed from their predecessors by imposing taxes not at some arbitrary point in the growth of a chain, but on the second store operated by a single owner. By taxing any sort of multiunit retail operation, the laws escaped charges that they arbitrarily discriminated against some chains while exempting others. Under those laws, a chain was a chain, regardless of its size.

The North Carolina law imposed a $50 tax on every store after the first owned by a single individual or corporation. North Carolina's state courts, which had previously invalidated a tax on chains with more than five outlets, gave their assent to the new levy. "There is a real and substantial difference between merchants who exercise the privilege of carrying on their business in this State by means of two or more stores and those who maintain and operate only one store," said the state supreme court. Chains could be regulated through the tax system because multiunit enterprises were inherently different from single-unit stores.10

The Indiana tax was graduated, starting at $3 for the first store, rising to $10 for each additional store up to 5, $15 on stores 5 through 10, $20 on stores 11 through 20, and $25 on every store above 20. The tax was overturned by a federal court, but in 1931 the U.S. Supreme Court sustained the levy on appeal. Notably, the Court embraced not simply chain taxes, but graduated chain taxes based on the number of retail outlets.

The decision was a great victory for enemies of the chain-store regime, and it opened the floodgates of reform. Eager lawmakers around the nation introduced similar legislation; between 1930 and 1935, states considered some 800 bills to impose new chain-store taxes. Those taxes were particularly popular in the South, and one of the most radical appeared in Louisiana, courtesy of Huey Long. The Kingfish pushed through a graduated tax on chains scaled to their number of outlets nationwide, although only Louisiana branches had to pay. In effect, the tax discriminated against national chains, while letting local and statewide chains off more easily. The Supreme Court sustained the Louisiana tax: "If the competitive advantages of a chain increase with the number of its component links," the Court observed, "it is hard to see how these advantages cease at the State boundary."11

Ultimately 28 states passed antichain taxes, as did a number of cities. Of the state taxes, 22 managed to survive court challenge and hostile referenda over the next decade. In general, successful chain- store taxes followed the Indiana model, imposing graduated license fees on chains beginning with the second store operated by a single owner. The severity of the taxes varied dramatically; Montana's topped out at $30 for the 11th store in a chain, while Texas collected $750 from every store after the 51st. Given the modest profits typical of many chain stores, levies on the Texas model were onerous indeed. In 1935 the average annual net profit for chain-store grocery outlets was $950.12

California Reconsiders

Battered on the legislative front, chain-store defenders tried to regroup. While their opponents were legion, their advantages were also impressive. The chain stores were organized and efficient. They also had at their disposal the tools of modern public relations and advertising. The chains would soon demonstrate the power of those weapons as they set out to overturn a California tax using a blend of modern marketing techniques and old-fashioned political horse trading.

In 1935 California state legislators approved a graduated chain- store tax: $1 on the first store, $2 on the second, $4 on the third, and so on. The tax reached $256 for the ninth store, with every store over 10 paying $500. Supporters of the legislation organized a mass rally, with more than a thousand activists converging on the state capitol to urge the governor to sign the bill. Chain defenders, meanwhile, tried to fend off disaster. "We have all lived long enough to know that the men running these chain stores have not got horns," said one company advocate. "They are not people who chew up little babies."13

Such eloquence aside, the governor signed the bill -- but not before suggesting that chain-store companies might profitably challenge the new law in a referendum. The companies took the hint, quickly establishing the California Chain Stores Association to help coordinate the repeal campaign. The group hired the Lord & Thomas Advertising Agency to help plan the campaign. One of the biggest ad firms in the nation, Lord & Thomas was well positioned to recast the terms of popular debate, heralding a shift in the political landscape that would prove decisive in the years to come.

The chain stores began by targeting their constituents, including employees, manufacturers, and customers. For employees, the chains promised better working conditions, including more respectful treatment, company-sponsored recreational activities, and even the occasional note of sympathy or congratulations from manager to employee. At the urging of Lord & Thomas, chains promised to use an employee's name on personnel records, abandoning the practice of assigning them sterile numbers. Cynical observers found little to like in this newfound solicitude for employee happiness. "Endowed with a name instead of a number, the happy recipient of a form letter of sympathy, and member of a glee club, the employee soon came around to the boss's side," said The Nation. "He then was trained to tell his friends and relatives the whole story so that they would line up for the referendum."14

The chains also met with farmers' groups, promising to jettison injurious practices -- including unreasonable discounting -- in return for farmer support. The chains also promised to help farmers dispose of surplus crops, and in 1936 the companies organized "a four week peach ballyhoo" to help eliminate a fruit glut. Sales soared and farmers were spared a price collapse. "This success was largely responsible for persuading the chains to make such campaigns permanent policy," Time magazine reported. It also helped secure farmer support for overturning the antichain tax.15

Finally, the chains set out to prove that they cared about their customers. Store managers were empowered to make donations of money and merchandise to local causes, underscoring their concern for local communities. "And, perhaps even more significant, in dealing with landlords, bankers, real-estate and insurance agents, the chains became more polite," said The Nation.16

As the date for the referendum grew near, Lord & Thomas stepped up its advertising campaign, focusing on the pocketbook issues that seemed most likely to sway voters. They stressed the price advantage the chains enjoyed over their competitors, reminding Californians that they would pay the price for any new tax. In attacking the tax, known popularly as "22" for its legal designation on the ballot, the ad men developed a catchy slogan: "22 is a tax on you. Vote no."

Chain store, Wymore, Nebraska, 1938 (Library of Congress, Prints & Photographs Division, FSA-OWI Collection) The chains won a clear victory, with voters rejecting the new tax by a vote of 1,369,778 to 1,067,443. Fifty- seven of the state's 58 counties voted against the levy. It was a defeat from which the antichain campaign would never quite recover.

The 'Death Sentence' Bill

The drive for state chain-store taxes began to falter after the California referendum. But even more drastic legislation was still under consideration in Congress, where Rep. Wright Patman introduced federal legislation to tax chains out of existence.

The Patman bill would have exempted chains with nine or fewer stores. Beginning with the 10th store, however, 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. Amazingly, that base amount would then be multiplied by the number of states where the chain operated.

As one observer later pointed out, that calculation would have saddled Woolworth with a tax bill of $81 million even though its 1938 net profits were just $28 million. A&P, with net profits of just over $9 million, would have faced a bill for $471 million.17 Even small chains operating within single states would have seen their tax bills soar beyond their capacity to pay, but for national chains, the Patman bill spelled doom. For obvious reasons, it was soon dubbed the "death sentence" bill. The only way chains could have hoped to survive was by voluntarily liquidating. As one observer sympathetic to the chains later wryly said, "they could escape the penalty by committing suicide."18

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 antichain campaign. Patman found many likely allies unwilling to support his plan. Farmers were getting more cozy with the chains, as companies continued to offer help in disposing of surplus agricultural products.

Meanwhile, organized labor had agreed to shun antichain legislation in exchange for key concessions from major chains. In 1938, for instance, A&P had agreed to allow the American Federation of Labor (AFL) to organize grocery workers. In return, AFL leaders declined to endorse the Patman bill or any subsequent legislation to impose antichain taxes.19

Perhaps most importantly, the tide of popular opinion seemed to have turned. 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.20

Today's Wal-Mart antagonists echo many of the complaints once directed at chain stores of the Depression era. Like their forebears, these critics of retail consolidation worry about the effect of large retailers on small competitors. They also share a concern that large chains make poor employers and even worse corporate citizens.

But wherever you stand on the subject of chain marketing, it's hard to argue with the success of mass-market retailers. Some of the more hysterical Wal-Mart foes treat the company like an invading army. In looking to the past, they see the same thing in the chain- store movement. "Throughout the 1920s and 1930s," said one study by the Community Environmental Legal Defense Fund, "people in towns coast to coast banded together to stop this corporate invasion, only to be beaten back by corporations and the federal government."21 There's an element of truth in that statement. But ultimately the chains were not unwelcome invaders. Consumers may not have invited their appearance, but they certainly endorsed their existence -- with their wallets and sometimes even with their votes.


FOOTNOTES

1 Godfrey M. Lebhar, Chain Stores in America, 3d ed. (New York: Chain Store Publishing Company, 1963), 47-48; Zachary Courser, "Wal-Mart and the Politics of American Retail" (Competitive Enterprise Institute, 2005), 6.

2 Carl G. Ryant, "The South and the Movement Against Chain Stores," Journal of Southern History 39, no. 2 (1973): 208.

3 For the best overall survey of the 1920s, see David Joseph Goldberg, Discontented America: The United States in the 1920s, The American Moment (Baltimore: Johns Hopkins University Press, 1999).

4 Lebhar, supra note 1, at 70.

5 Id. at 82-83.

6 Quoted in id. at 159.

7 Quoted in Ryant, supra note 2, at 209.

8 Helen Woodward, "How to Swing an Election," The Nation, Dec. 11, 1937.

9 Quoted in Lebhar, supra note 1, at 131.

10 Quoted in id. at 137.

11 Ryant, supra note 2, at 212-213; Lebhar, supra note 1, at 141; "Tax on Bigness," Time, May 31, 1937.

12 Thomas W. Ross, "Store Wars: The Chain Tax Movement," Journal of Law and Economics 29, no. 1 (1986): 127.

13 "Chains," Time, July 29, 1935.

14 Woodward, supra note 8.

15 "Unliked Taxes," Time, Jan. 31, 1938.

16 Woodward, supra note 8.

17 Lebhar, supra, note 1, at 257-258.

18 Id.

19 Ryant, supra note 2, at 217.

20 Id.

21 Ben Price, "A Movement Diverted: How Corporations Bastardized Anti-Chain Store Campaign of the 1920s and 1930s," Community Environmental Legal Defense Fund, 2005.


END OF FOOTNOTES