represents a rate of 12.8 percent of the manufacturers' net price. The 10-cent cigar pays a much higher rate of 17 percent, but what is the logic to a lower tax of 11.2 percent on the 15-cent cigar? And that is an even lower rate than that on the 5-cent cigar, which is 12.8 percent.

Why should the 30-cent cigar and the 15-cent cigar pay exactly the same percentage rates, 11.2 per cent, while the 40-cent cigar pays a low 8.1 percent and the 20-cent cigar pays the higher 12.7 percent rate? What logic is there to the rates when arrayed in multiples of a dime each, as summarized at the top of page 8? There the tax rates jump about with no apparent logic.

The first column shows a 5-cent cigar pays 12.8 percent; the 15-cent cigar pays 11.2 percent; and the 25-cent cigar, 13.5 percent; the 35-cent cigar, 9.6 percent; and if you array them in multiples of 10 cents, starting with the 10-cent cigar, the rates run 17 percent, 12.7 percent, 11.2 percent, and 8.1 percent, as you go from 10 to 20 cents, to 30 cents, to 40 cents per cigar, and I might say you get equally illogical and equally inconsistent and arbitrary variances no matter what multiples you use.

The heart of the matter is there is no logical relationship between the selling prices of cigars and the tax rates levied on them except that the rates are regressive and, therefore, they are repugnant to the principles of equitable taxation.

The inequities detailed stem from the fact that the cigar tax is based on a bracket system. There is no longer any reason, however, why Congress should require the cigar industry to be taxed by means of brackets. When the use of stamps was required as evidence of tax payment, brackets were also necessary. Stamps are no longer required.

Why, then, should the cigar industry be saddled with an archaic system of tax brackets when the reasons for their use have long since passed?

We therefore urge this committee to recommend that, in place of the present system of cigar taxes based on brackets, all large cigars be taxed at 8 percent of the manufacturers net selling prices. tax would have the following advantages:

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First, the tax will be proportional; therefore, not regressive. Second, the tax will be uniform: therefore, fair to all concerned. Third, the tax will not be based on brackets; therefore, it will be less difficult to administer.

Granted that a uniform tax is preferable to a bracket system, the question might well be asked why the rate should be reduced to 8 percent instead of substituting the present average rate of 13.6 percent. In other words, why not accomplish tax reform without tax reduction?

I am sure that most members of this committee are familiar with the fact that in the field of taxation it is almost invariably the case that a tax reform measure must be accompanied by a tax reduction if new inequities are to be avoided. The cigar industry is no exception to this rule.

Let me detail our reasons for recommending a tax rate no greater than 8 percent, which represents a tax reduction of about 38 percent.

I think it is correct to say that it is not the intention of this committee to increase some cigar excise tax rates in order to equalize the rates now in existence. It is certainly not our intention, because this would involve giving tax reductions to some cigar manufacturers at the expense of other manufacturers whose rates would be increased. If there is to be tax reform, it is the position of our association that it is essential that any reductions incidental to such reform be granted to all cigar manufacturers and that they not be denied to any.

A glance at exhibit 4 makes it clear that any rate higher than 8 percent of the manufacturers' net selling price would result in very little tax reduction to cigar manufacturers whose major brands sell for 6 cents each. Moreover, to avoid any increase in cigar taxes, we also recommend that there be provision for maintenance of the ent maximum of $20 per thousand cigars. This maximum would affect only cigars retailing at more than 40 cents each, whose sales are negligible, and these would receive neither a tax increase nor a tax decrease.

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In summary, then, the tax reduction we request is moderate. Our proposal for tax reform by substituting an 8-percent manufacturers' excise tax with a $20 maximum per thousand cigars would cost the Treasury $19.7 million, or not quite 38 percent of the $52 million collected last year.

We believe our proposal for tax reduction to accomplish tax reform is a reasonable and sound program. It would be equitable to consumers as well as to all segments of the cigar industry.

Although we are not the only industry that is now paying excise taxes at World War II rates, we are not requesting outright repeal of

our excise tax as other industries have done. We have formulated our program in terms of the minimum tax reduction that will accomplish the long overdue reforms. The 8-percent rate we recommend is one that will give every segment of the industry a fair break and it will not increase any cigar manufacturer's excise taxes.

We are confident that when our proposal has been studied in detail this committee and the Congress will agree with the equitable and reasonable nature of our proposal.

Thank you, gentlemen.

The CHAIRMAN. We thank you, gentlemen, for bringing to the committee this information. It is very interesting, your analysis of the

effect of the tax.

Any questions of these gentlemen?

Mr. King.

Mr. KING. Gentlemen, is there a requirement that only tobacco be incorporated in the manufacture of cigars? Is there a statutory provision that prohibits adulterations?

Mr. SINGER. The statute now provides for a definition of cigars as a role of tobacco wrapped in tobacco.

Mr. KING. Only tobacco?

Mr. SINGER. Yes.

The definition of a cigarette is a roll of tobacco wrapped in paper or any substance other than tobacco.

The cigar definition, as I have indicated, requires that it be a roll of tobacco wrapped in tobacco.

Incidentally, when Dr. Weiner spoke of large cigars, Mr. King, the statute defines large cigars as those weighing more than 3 pounds per thousand.

The CHAIRMAN. Mr. Byrnes.

Mr. BYRNES. Mr. King raised a question.

There are some cigarettes that have a thin tobacco covering. Is that taxed as a cigarette or taxed as a cigar?

Mr. SINGER. There is a classification of little cigars as well as large cigars and the little cigars are cigars weighing not more than 3 pounds per thousand, and they likewise must be a roll of tobacco wrapped in tobacco; and as to the little cigar that you are referring to, this is wrapped in tobacco sheet.

Mr. BYRNES. What is the rate of tax on these small ones?

Dr. WEINER. Seventy-five cents per thousand.

Mr. BYRNES. The same as the cigarette?

Mr. SINGER. Less than the cigarette tax. It is 75 cents a thousand, as I recall, on little cigars.

The CHAIRMAN. Pardon me.

I think Mr. Byrnes is talking about little cigars such as Madisons, Trends, and things of that sort.

Mr. SINGER. That is what I am referring to. That is 75 cents a thousand.

Mr. BYRNES. Do they pay less tax than cigarettes?

Mr. SINGER. Yes; they do.

Mr. BYRNES. Just for the record, on cigarettes weighing 3 pounds per thousand, the tax is $4 per thousand and on the small cigars, the same weight, 75 cents per thousand.

Dr. WEINER. Mr. Chairman, I am sorry I didn't make it clear when I began my testimony, but I was referring in my testimony entirely to large cigars.

Mr. BYRNES. I understand.

Dr. WEINER. And not to the little cigars or to cigarettes or any other tobacco products.

Mr. BYRNES. While we had some cigar authorities, I thought we ought to find out about these small cigars that are comparable to cigarettes in many respects.

The CHAIRMAN. Any further questions?

If not, again we thank you, Dr. Weiner, and Mr. Singer, and Mr. Carlson.

Mr. SINGER. Mr. Chairman, I referred in my statement to the excerpt of the then Commissioner of Internal Revenue which is attached to my printed statement. May I assume that that will be part of the record?

The CHAIRMAN. Yes. Without objection, that will be included in the report.

That completes the calendar for today.

Without objection, the committee adjourns until 10 o'clock Monday morning.

(Whereupon, at 12:27 p.m., the committee recessed, to reconvene at 10 a.m. Monday, August 3, 1964.)

EXCISE TAXES

MONDAY, AUGUST 3, 1964

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
Washington, D.C.

The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth Building, Hon. Wilbur D. Mills (chairman of the committee) presiding.

The CHAIRMAN. The committee will please be in order.

Our first witness this morning is our colleague from Washington, the Honorable Thomas M. Pelly. Mr. Pelly?

If he is not here, our next witness is our colleague from California, the Honorable H. Allen Smith.

Mr. Smith, we appreciate having you before the committee this morning. We are always glad to have you. You are recognized. STATEMENT OF HON. H. ALLEN SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. SMITH. Thank you very much, Mr. Chairman. I am pleased to have this opportunity to express to the committee my opinion as to why I feel that the excise tax on telephone communications should be made a part of this study and that the tax, itself, should be eventually taken off.

I have introduced a bill which will reduce the tax over a period of years, 5 years until it will eventually be eliminated. I have prepared a short statement which I know the committee has in front of it. I know the committee members are familiar with it and have it.

I appreciate the opportunity to appear before the distinguished Ways and Means Committee today. The Ways and Means Committee is to be complimented for its constructive action in scheduling these hearings on excise taxes. This is certainly ground for hope that the comprehensive study you are making will result in long-needed revision of our excise tax structure.

I wish to discuss in particular the communications excise tax. The first Federal excise tax on communications was enacted as a wartime tax in World War I and repealed in 1924. These taxes were reenacted in 1932 to raise revenue during the depression. They were, however, at comparatively low rates and applied only to long-distance telephone, telegram, and leased wire services.

Then, as a result of World War II, the rates were greatly increased and for the first time the tax was applied to local telephone service. This was done largely to discourage the use of telephone service which was needed for the war effort, a reason for the tax which has long ceased to exist.

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The need of the Government for ever and ever larger tax revenues has kept the communications tax alive. Some similar taxes have been removed, such as the tax on electrical energy in 1951, the tax on transportation of property in 1958 and the tax on transportation of persons in 1962.

(A 5-percent tax remains on transportation by persons by air, but the committee has indicated this is considered compensation for use of airports and air navigational aids; i.e., it is now viewed as a use tax.)

The result is that communications is the only common carrier service which is taxed, but it is also the only service of any description subjected to an excise tax by the Federal Government.

Telephone service is more and more a necessity to everyone regardless of station in life. In my district in Los Angeles County of approximately 388,000 people there are more than 100.000 telephone customers. The communications excise tax is a burden on these people in two ways:

First, it increases the cost of their telephone service by 10 percent— a service they must have not only to carry on an ordinary community life but to cope with emergencies. I am informed that the 100,000 telephore customers in my district pay $175,000 each month in telephone excise or $2 million a year.

Second, it represents an added cost to everything they buy because businessmen at every level had to add the telephone taxes into their costs of doing business and recover it in the prices charged for goods and services.

The Joint Economic Committee recognized this in March 1963, in their report on the "January 1963 Economic Report of the President." They said:

There is unquestioned evidence to indicate that excise revenues are obtained in large part from low-income groups. Thus, a reduction in excises, when passed on in the form of price reductions, can benefit consumers even more than commensurate reductions in income taxes. From a stimulative standpoint alone, therefore, perhaps the strongest case for tax reduction can be made with respect to excise taxation. This is especially true since many of our present excises are imposed on goods that pass thruogh several succeeding levels of processing and marketing.

A a consequence, removal of excises may well result in reductions in final consumer prices by more than the amount of the excises. Furthermore, some of the present excises directly raise business costs-for example-excises on automobiles, business machinery, and telephone service—and thus affect final prices. The revenues derived from communications taxes have been incrossing on an average of more than $40 million a year from a little over $500 million in 1955 to over $900 million in fiscal 1964. Every efort to repeal the tax on telephone service has been met with the obiection that the loss of revenue of such large amounts could not be afforded.

This was the case 5 years ago when I introduced a bill to repeal the taxes on telephone service. It has been the case every year since, as the tax on local telephone service has been extended from year to year and suggestions for repeal of the remainder of the telephone taxes have been rejected. It was with this in mind that I introduced H.R. 8166. This bill proposes a gradual reduction of the tax by 2 percent each year with its complete elimination by the end of the fifth year. This is the least that should be done.