and liquors, whose profit rates are also relatively low, have suffered a decline in net profits on sales (after Federal income taxes) from 1.45 percent in 1950 to 0.97 percent in 1956.2 At the manufacturing level, the return on net assets declined 51.2 percent between 1951 and 1956-a period during which the return on net assets for all manufacturing declined only 3.5 percent.3 Thus a large number of businessmen, their employees, and their families have been prevented, by an inequity in taxation, from fully sharing with their fellow citizens the benefits of an expanding economy. ECONOMIC AND SOCIAL EFFECTS UPON THE NATION By creating a vast gap between manufacturing and distribution costs and retail price, the present excise rate on distilled spirits has provided incentive for increased production and sale of illegal, non-tax-paid spirits, or moonshine. A careful study of moonshining in the United States, based on still seizures by Federal, State, and local law-enforcement agencies, shows an increase of almost 117 percent since 1946 in the number of illegal stills seized annually. In 1956 alone, more than 25,000 such illegal distilling operations-highest total since World War II-were seized and destroyed." This same study concludes that more than 70 million gallons of moonshine may have been produced, sold, and consumed in the Nation in 1956. If correct that figure represents 25 percent of all spirits consumption in the United States. So great a production of illicit spirits represents not only a revenue loss of almost $750 million to the Federal Government, but also revenue losses of more than $200 million to the States. And it is perhaps ironical that the major areas of moonshine production and consumption are in those States whose per capita incomes are lowest. Thus the States hardest hit by the tax-dodging moonshine racket are the very ones most in need of revenue to finance education, welfare, and other vital State services. A reduction in the Federal excise tax on distilled spirits would enable the legal, tax-paid product to compete more successfully with moonshine, particularly among those consumers in lower income brackets who have felt the tax burden most severely and have therefore supplied the moonshiner with a ready market. The increased legal market flowing from such a reduction would result in greated excise tax collections by the States and enable them to increase their revenue without increasing their excise taxes. It would likewise result in additional State and Federal revenue from income taxes. At the same time, such a reduction in the excise rate would, by halting the increase in moonshining, halt the spread of the social evils that moonshining spawns-ruthless racketeering, the growth of criminal syndicates and disrespect for law and order. AN INEQUITY THAT CAN BE ADJUSTED The distilled spirits industry believes that a serious inequity in taxation has been created by the continued extension of the Federal excise rate of $10.50 per proof gallon on distilled spirits. It believes that this inequity can and should be adjusted by allowing the rate to revert to its pre-Korean war level of $9, as provided in existing legislation, and as has already been done for so many articles which bore a similar emergency tax. It believes that this adjustment should be made as a first step in any program of tax reduction for it would create a more favorable atmosphere for the economic development of the distilled spirits industry, with consequent revenue benefits accruing from both the industry itself and the individuals who earn their livelihood in it, and it would result in a social benefit to the nation as a whole by arresting the spread of moonshining and its accompanying crimes. Whether the Nation, in view of the condition of world affairs, can afford tax reduction of any nature is a matter to be determined by Congress, and the distilled spirits industry will, as it has in the past, willingly accept that decision. But if tax reduction of any nature is possible, we believe relief should first be extended to those quarters which experience has demonstrated have been adversely affected economically by the present tax rates. Dun & Bradstreet data. 3 First National City Bank of New York, monthly letter. Data given in April issue of each year. The Moonshine Racket, Licensed Beverage Industries, Inc., 1957. 20675-58-pt. 3-72 Should the members of the committee so desire, I shall be glad to submit full documentation and explanation of the points made above. RESOLUTION UNANIMOUSLY ADOPTED OCTOBER 2, 1957, BY THE NATIONAL ALCOHOLIC BEVERAGE CONTROL ASSOCIATION AT IT'S 20TH ANNUAL MEETING IN PHILADELPHIA, PA. Whereas since 1951 the Federal excise-tax rate on distilled spirits has remained at $10.50 per proof gallon, as the result of a temporary increase of $1.50 a gallon enacted on November 1 of that year to meet revenue needs occasioned by the Korean war; and Whereas the $1.50 emergency portion of that tax, though due to expire on April 1, 1954, has been extended four times since that date, despite the cessation of the emergency conditions that gave rise to it; and Whereas during this same period, taxes have been reduced in many other fields, including some which were not of a temporary or emergency nature; and Whereas it now seems reasonably certain that the Congress of the United States, when next it meets in January 1958, will take further action to reduce taxes; and Whereas the expiration of the $1.50 emergency portion of this tax would bring great social benefit to the people of the member States of this association, by curtailing the spread of moonshining, traffic in the illegal products of the moonshiner, and growing disrespect for law and order nurtured by these evils; and Whereas the expiration of that portion of the tax would also bring great economic benefit to the people of the member States of this association, by removing a price impediment to the normal sales of distilled spirits which bring profit to these States: Now, therefore, be it Resolved, That the National Alcoholic Beverage Control Association, at this, its 20th annual convention, respectfully urge the Congress of the United States that as a first consideration, it allow the Korean war emergency portion of the Federal excise tax rate on distilled spirits to expire on the date now provided for by law, viz, June 30, 1958. CHARLES B. BUSCHER, THE WEST END BREWING COMPANY OF UTICA, N. Y. Hon. WILBUR D. MILLS, My testimony is in opposition to the proposal before your committee which would reduce the excise tax on beer by $2 per barrel on the first 100,000 barrels of beer sold annually by each brewing in the United States. No one, to my knowledge, has ever voiced any opposition to this proposal because it was thought that your committee would not consider it favorably. However, based on public statements by proponents of the proposal including at least one member of the Ways and Means Committee, it would appear that the proposal may very well receive favorable consideration in the near future. Therefore, I believe, my statement should be incorporated in the record of the current hearings. I base my belief on the following sentence on page 4 of the committee's press release dated December 11, 1957: "In the case of proposals which were not covered in the subcommittee hearings last fall, and in the case of new developments in the excise tax field since those hearings, the committee will receive written statements for inclusion in the printed record of the hearings and for reference to the staffs." This proposal would be ruinous to our brewery and other medium-sized brew. eries such as ours. It would not help small breweries as its proponents contend; and it would be nothing more than a gift to the big breweries. After reading my testimony. I trust you will come to the conclusion that this tax proposal has no merit whatsoever. Respectfully, W. J. MATT, President. TESTIMONY OF WALTER J. MATT, PRESIDENT, THE WEST END BREWING CO. Mr. Chairman and members of the House Ways and Means Committee, my name is Walter J. Matt. I am president of the West End Brewing Co., Utica, N. Y., a brewery in which my family has been a majority stockholder since its founding in 1888. We are members of the Brewers Association of America and the New York State Brewers Association, but I speak for neither trade association nor any other brewery. The West End Brewing Co. is a medium-size brewery which sells about 450,000 barrels of beer annually. My purpose in submitting this statement is to register my opposition to a proposal before you which would reduce the Federal excise-tax rate on beer to $2 per barrel on the first 100,000 barrels of beer sold each year by every brewery in the United States. This proposed tax change was presented to the Ways and Means Subcommittee on Excise Taxation on December 7, 1956, by Mr. John E. O'Neill, general counsel, Brewers' Association of America, who urged its adoption. It is my sincere conviction that this proposed change in the excise-tax rate on beer will not help the small brewer as its proponents maintain. It will, instead, hurt them and will be disastrous to the medium-size brewery such as ours. I have discussed the proposal with any number of brewers who operate plants our size and they are in wholehearted agreement with me. I believe I can show you why this suggested change in the method of taxing beer should be rejected by your committee. Because of my concern over this unusual proposal, I have studied the arguments advanced over the years by its supporters. I have been unable to find any explanation as to what would happen to the $2-per-barrel reduction; that is whether the $2 would be retained by the brewer, passed on to the consumer, or whether a portion of the $2 would be passed on to the wholesaler who, in turn, would pass on a portion to the retailer. Inasmuch as the proponents have chosen to ignore this basic and vital question which arises as the result of the proposal, I shall take the liberty of attempting to provide the answer. At this point, I believe it would be helpful if we translated this proposal into terms more familiar to you. The Federal Government imposes a tax of $9 on a barrel of beer containing 31 gallons. But beer is not sold only in barrels. About 20 percent of it is sold on draught in half-barrels, quarter-barrels, and eighthbarrels. The other 80 percent is sold in bottles and cans. Because of the predominence of packaged beer, we believe it would be more understandable if we refer to the $2 per barrel tax cut as a reduction of 141⁄2 cents per case of 24, 12ounce bottles or cans. A study of the Brewers Almanac published by the United States Brewers Foundation, reveals that there has never been a two-step rate imposed on beer by either the Federal Government or by any State. Neither to my knowledge, has there ever been such a 2-step rate imposed on any product; i. e., part of the sales of a product taxed at 1 rate and part taxed at another rate. Even though we have no precedent to go by, years of experience in the brewing industry and familiarity with the operating methods of breweries, enables me to arrive at answers which, I believe, are difficult to disprove. Unquestionably, the small brewery and, in fact, all breweries, would like to keep the $2 per barrel or 141⁄2 cents per case. Frankly, if I thought every brewery could and would retain this refund of up to $200,000 annually, I would be urging the adoption instead of the defeat of this proposal. There is no question that such a windfall would be most welcome and of tremendous help to the many small breweries which are struggling to stay in business. In fact, $2 per barrel is more profit than most breweries have ever made. I am convinced that the proponents favor this proposal only because they believe they would be able to retain the entire $2 per barrel. In my opinion, this is nothing more than wishful thinking. The only way to be sure that every brewery retains the 14% cents per case would be for all breweries to agree to hold on to it. This, as everyone knows, would be a violation of the antitrust laws. Even if it were lawful for breweries to enter into such an agreement, there are economic forces at work which would defeat such a plan. The most powerful of these is the desire of the beer wholesaler and retailer to be financially successful. Beer wholesalers and retailers, generally speaking, are also small-business men who are being squeezed between the rising rice of beer and the refusal of the consumer to pay more for this product. If this tax proposal were adopted, there is no question but that beer wholesalers and retailers would demand that the windfall be passed on to them. They would play 1 brewery against another until everyone, in order to hold on to his business, would pass on the 141⁄2 cents per case. The only ones who would not pass on the 14% cents are the large brewers. When the maximum any brewery could pass on-$200,000 annually-is divided by the sales of the large brewery, the amount per case is too small to pass on. For example, a brewery selling a million barrels annually could pass on only about 1% cents per case. Unquestionably, the large brewery will keep the $200,000 and probably use it for advertising purposes. It is of little interest to me what the large breweries would do if this tax proposal were adopted. We are concerned with what the small breweries with which we compete would do and what we would be forced to do to meet competition. Our company, unlike some medium-size breweries, is surrounded by small competitors. Within a radius of 100 miles there are 6 breweries each of which sells less than 100,000 barrels annually. These breweries, whether or not they wanted to, would be forced to cut their prices 141⁄2 cents per case. Our brewery would then be in the position of having to meet a price cut subsidized 100 percent by the Federal Government while any price cut we could make would be subsidized to the tune of 34 cents per case or only a 22-percent subsidy. A 200,000-barrel brewery could reduce its price 74 cents per case; a 300,000-barrel brewery, a little less than 5 cents; and a 400,000 barrel plant, a bit more than 3 cents. One doesn't need a crystal ball to realize what this tax proposal would do to our company as well as to all breweries from about 150,000 to 500,000 barrels. We would be forced out of business; but those of us who are strong enough financially would probably hold out long enough so that we would take many small breweries down with us. Price wars would be going on constantly and the large regional brewers would undoubtedly be forced into the battle for business. It would be a sad day for the brewing industry if this tax proposal ever goes into effect. It should be borne in mind that the competitors of the small brewery in order of competition are: (1) other small breweries; (2) medium-size breweries; (3) large local and regional breweries; and (4) national shipping breweries whose products are sold at a premium price. There are, of course, exceptions. When a small brewery is isolated, his chief competitors are probably the large regional breweries and the national shipping breweries. There are only a few such cases. In view of the foregoing, it is difficult to understand one of the reasons advanced by the proponents of this proposal. In effect they say that the small brewer would be helped by this tax because the Federal Government now receives a smaller percentage of the price of the national premium-priced beers than it does of the price of the beers of the small breweries. How this proposal would give the Federal Government a higher percentage of the price of the premium-priced beers is not explained. Nor is it explained how, if it did give the Federal Government a higher percentage of the price of the national brands, this would help the small brewery. If the proponents believe that small brewers would be helped if the percentage of their price that goes to the Federal Government in taxes were lowered, that can be accomplished by the simple means of raising prices. It does not appear to me that a change in the method of imposing an excise tax on beer will help the small brewer. To the contrary, I can see nothing but harm coming from the proposal to tax the first 100,000 barrels sold annually by each brewery at $2 less per barrel than the additional sales. Nevertheless, I am convinced that Federal tax policy can and should be revised to help small brewers as well as all small business. These ideas are not new but I respectfully suggest that you recommend to the House the following: 1. All companies be permitted to write off or depreciate equipment, either new or used, as rapidly as the company desires. This would encourage modernization of plants. 2. Reduce the corporate income-tax rate at least on the first $25,000 of net income, and also on the next $75,000 if possible. And, to increase the overall consumption of beer which would be most beneficial to small breweries, especially those who are not making money, reduce the Federal excise tax on beer from its present level of $9 per barrel to $6 per barrel, its pre-World War II rate. At the very least, the rate should be allowed to revert to its pre-Korean war level of $8 per barrel on July 1, 1958 in accordance with the law. Thank you, Mr. Chairman and members of the committee, for this opportunity to present my views. STATEMENT BEFORE SUBCOMMITTEE ON EXCISE TAXES OF THE HOUSE COMMITTEE ON WAYS AND MEANS BY LAWRENCE S. MARTIN, SECREtary-Manager, NATIONAL ASSOCIATION OF FROZEN FOOD PACKERS, DECEMBER 3, 1956 Mr. Chairman and Members of the Committee, the undersigned, Lawrence S. Martin, secretary-manager of the National Association of Frozen Food Packers, appreciates the opportunity to make this statement to your committee in behalf of the association in connection with your study of certain excise taxes on transportation. The National Association of Frozen Food Packers is a voluntary nonprofit association organized for the purpose of promoting and protecting the interests of the frozen-food industry. Its membership represents substantially 80 percent of the frozen-food packers of the United States with headquarters office located in Washington, D. C. Its members' packing plants are located throughout the United States and are engaged in processing, selling, and shipping frozen foods, with distribution nationwide. Frozen-food production has doubled in the past 5 years and conservative projections indicate a 300-percent increase within the next 10 years. About 55 percent of the 4,750 million pounds current annual production of frozen foods moves by rail. Because of the highly perishable nature of frozen foods, they move in refrigerator cars and so incur charges for protective services as well as line-haul charges. The 3-percent tax on transportation of property is a heavy and unjust burden on the frozen-food industry. The tax is assessed on both charges for necessary protective services and on line-haul charges. In reality these taxes are taxes on food. This excise tax is both inequitable and discriminatory. It is inequitable because a producer situated a great distance from a given market pays a larger tax on his total transportation charges and is thereby forced into a much higher cost position than the producer who is situated nearer that market-although the products of both may bring the same prices when they reach the market. It is discriminatory in relation to other excise taxes in that they are levied on production and distribution of food rather than luxury items. This tax must be repealed. The transportation excise tax was originally imposed as a wartime expedient, and justification for its continuance no longer exists. On the other hand, a 10year series of a dozen rate increases raised freight rates to a level of more than 70 percent of that of 1945-and two more increases are now pending. This has naturally greatly increased transportation taxes paid by shippers. These added costs are injurious to not only packers and consumers of frozen foods, but to farmers who raise the raw materials for this industry. The cumulative effect of this tax renders it even more harmful in that levies on frozen-food transportation charges include taxes paid on transportation of not only basic raw materials but on all materials and equipment used in growing, harvesting, and processing these commodities. These taxes result in further inequities and harmful effects upon the economy of the United States in that they are assessed upon transportation charges without reference to current market value of the goods undergoing transportation. In other words, this added transportation cost must be incurred without regard to the price which may be obtained for a given commodity. In this situation, the grower and packer receives less for his product while the consumer pays more for essential food. In view of the facts set out above, speaking in behalf of our industry and its trade association, I earnestly solicit the intercession of your great committee in bringing about the abolition of this most burdensome, inequitable, and unwarranted tax. Respectfully submitted. LAWRENCE S. MARTIN, Secretary-Manager. STATEMENT RE TRANSPORTATION TAX BY THE NATIONAL ASSOCIATION OF REFRIGERATED WAREHOUSES As operators of public refrigerated warehouses, our more than 500 members have an important interest in and play a vital role in America's great distribution system. We have been described as its keystone. |