Mr. BYRNES. Let us get it clear. You have no objection to the law as it is today?

Mr. HECKERT. We have only objection to this, that the special fuel requirements of 4041 (b) require proplusion, where insofar as diesel fuel is concerned the word "propulsion" is not in the law. Now, the Treasury Department has equated the two and has equated really diesel to propulsion and has now requested that the word "propulsion" be taken out.

Presently there is pending before the Treasury Department a change in the regulations, which we have requested, which has not been acted upon, which would clarify this.

Mr. BYRNES. But you are using diesel.

Mr. HECKERT. No, sir. We use special fuel. It is interchangeable. The unit may not be interchangeable insofar as you can use one and then the other, but you can use special and diesel fuels to do the same operation.

Mr. BYRNES. You do use a special fuel, as I understand it, rather than diesel.

Mr. HECKERT. Yes.

Mr. BYRNES. Then you run into this problem you are talking about, unless you have two separate power units.

Mr. HECKERT. It would work both ways, sir, whether diesel or special. The Internal Revenue Service has said if you used diesel and two motors, you are nontaxed. If you use special and two motors, you are not taxed on the on-site. If you use special and one motor, you are taxed on-site and when you are on the highway. The same in the case of diesel fuel, except for the built-up units, which are not considered highway motor vehicles.

The CHAIRMAN. Any further questions?

Thank you, gentlemen, all three of you, for coming to us with this problem.

Mr. Cubicciotti?

If you will please identify yourself for the record, we will be glad to hear you, sir.

STATEMENT OF RUDOLPH CUBICCIOTTI ON BEHALF OF AMERICAN PETROLEUM INSTITUTE, NATIONAL PETROLEUM REFINERS ASSOCIATION, AND PENNSYLVANIA GRADE CRUDE OIL ASSOCIATION

Mr. CUBICCIOTTI. Mr. Chairman and gentlemen, my name is Rudolph Cubicciotti, and I am vice president and general manager of Sonneborn Chemical & Refining Corp., a division of Witco Chemical Co., with headquarters in New York City.

The CHAIRMAN. Will it be possible for you, if we permit you to put your entire statement in the record, to conclude in the 10 minutes we have allotted to you, sir?

Mr. CUBICCIOTTI. Definitely so. I was going to ask that permission, Mr. Chairman.

The CHAIRMAN. Without objection your entire statement will be included in the record.

Mr. CUBICCIOTTI. Very good.

I am here on behalf of the American Petroleum Institute, the National Petroleum Refiners Association, and the Pennsylvania Grade

Crude Oil Association to advocate the repeal of the Federal excise taxes on lubricating and cutting oils.

First I think it is essential to the points I would make about these taxes that we put them in their proper historical perspective. Nothing can serve this purpose better than to quote the following statement made by Treasury Secretary Andrew Mellon when he opened this committee's hearings on a new tax bill back in 1932:

We are in the midst of a grave emergency. It is essential to raise additional revenue, not just to cover current expenditures but to maintain unimpaired the credit of the U.S. Government. This last object is of paramount importance to every citizen in the land. It is an indispensable step in our progress toward recovery.

According to the then committee chairman, the purpose of that tax bill was to raise additional revenue to meet the fiscal emergency at the bottom of the great depression.

This was 32 years ago, when so many excise taxes-including the one on lubricating oils went on the books. It is understandable that Congress-under the pressures then existing was looking at just about every commodity or service under the sun as a possible source of revenue. The lubricating oil tax and many of the other excises imposed then were undoubtedly adopted only because of the gravity of the times and the need for immediate action-circumstances that did not provide time to weigh tax theory and proper fiscal policy.

The pressures that precipitated these actions are no longer with us. The economic climate today is such that the present Congress is able to consider tax matters with care, and, in fact, is doing so at these hearings. Now that the goal is attainment of equity, balance, and soundness in the excise tax structure, it is certainly appropriate that we take a good, hard look at the lubricating oil tax.

Rate history of the tax: Briefly, the rate history of the lubricating oil tax is this.

When first imposed as an emergency relief measure in 1932, the rate was 4 cents a gallon. It was raised a half cent in 1940 and then 12 cents more in 1942 to 6 cents-to help finance our national defense and war effort.

In 1954, the tax on oil used only in metal cutting operations was reduced to 10 percent of the manufacturer's selling price. This ad valorem rate was changed in 1955 to the present per gallon rate of 3 cents.

Now, according to the background material that I've studied on this question, it was the original intent of your committee in 1932 to apply the tax only on grades of oil suitable for use in internal combustion engines. However, to reduce the oportunity for tax evasion, the law finally enacted applied to all oils used for lubricating purposes. If they are to be used for nonlubricating purposes, the tax does not have to be paid on these oils if an exemption certificate is supplied to the manufacturers.

Quantities of oil sold: Sales of lubricating and industrial oils in 1962 the latest year for which Bureau of Census figures are available totaled 2,357 million gallons. More than one-half of this, 1,201 million gallons, was for industrial use-825 million gallons of which was sold for lubricating and cutting purposes and the balance for processing, testing, and other nonlubricating uses. In addition to those

oils sold for industrial purposes, 1,106 million gallons were sold for automotive use and 50 million gallons for aviation use.

Basic objections to the lubricating oil tax: Now there are a number of objections that can be raised in regard to the particular tax here under consideration. They are so fundamental and so important that, had the Congress in 1932 not been faced with the pressures of the situation then prevailing, I am sure it would have developed them fully in its deliberations and, regardless of the revenue needs of the times, would not have enacted this tax.

The first objection relates to the method of imposing the tax on lubricating oil-namely when lubricating oil is used as a lubricant it is taxed; but when the very same product is used for some other purpose, it is exempt from the tax. In effect, then, this is not a tax on a commodity per se, but rather a selective tax on certain of the uses made of that commodity. We frankly know of no sound and equitable theory of taxation which could be employed to support such a basis of taxation.

What makes the lubricating oil tax even more inequitable is the fact that this particular use of oil that has been singled out for taxation is one which is so vital to the running of our industrial complex and, indeed, our entire mechanized society. For, what we are taxing is man's only means of combating a natural law-friction-that has always been and continues to be a problem to man in his never-ending struggle to raise his productive capacity and thereby improve his standard of living. Thus, it is the removal of or at least the reduction of friction that is being taxed.

Discovery of the use of lubrication to combat friction was one of the great milestones in man's early struggle to acquire more of the necessities, comforts, and conveniences that have always been latent in his environment and awaiting development.

Industrialization as we know it today could not have developed had man not discovered the principle of lubrication. Nor could our great ability to produce be long sustained were we to cease to apply that principle.

The use of oil to reduce friction has been so long an essential part of man's productive efforts and has been so rewarding in material advancement that it has become almost instinctive in the human race. It seems that in taxing such a use we are far astray of sound taxing policy.

Another objection to the lubricating oil tax is that it is not a tax based on the ability to pay as with income taxes or the ability to buy as with the excise tax on luxury products. Neither is it a tax imposed to discourage consumption as with some excise taxes. Nor is it a tax with a special user benefit since the revenue from it goes into the general fund. This tax is only what it was meant to be when it was passed—a revenue raising measure to help meet a dire fiscal emergency. The tax therefore should now be removed. The emergency which brought it into being has long since passed into history.

The importance of lubricating oil is made clearer when we note some specific examples. Its use is absolutely indispensable in all mining operations, in the production of electric light and power, in construction, metal working, processing of textiles, manufacturing automobiles and machinery, as well as every other field of industrial endeavor.

Similarly, lubricating oil is absolutely indispensable to the Nation's railroads, aviation, marine, and trucking industries.

What is true of the mining, manufacturing, and transportation industries in this respect is equally true of agriculture. Most of the Nation's 4.5 million farm families own and operate tractors and a wide assortment of power equipment that require lubricating oils.

Department of Agriculture studies show that about half the motor trucks and about one-third of all passenger automobiles are owned and operated by the rural population in this country. This group, numbering about 54 million and representing approximately 30 percent of the total population, lives on farms or in rural communities having a population of less than 2,500. In most cases these people depend upon the motor vehicle as their sole means of transportation and the principal means of transporting their products to market.

An additional tax to the motorists: Mention of the extensive use of the automobile and the truck by the American farmer brings us to the subject of the American motorist in general. Taxes start for him with the 10 percent manufacturer's excise tax that is included in the cost of his new car and, from then on, there is hardly anything he can buy to put in or put on his car that doesn't have an excise tax included in the cost. The heaviest burden of all is the gasoline tax, which, including State and local taxes, averages out to the equivalent of a 50 percent sales tax.

Of course, many taxes that fall on motorists go toward highway purposes. But highway users bear a burden of almost $2 billion a year in special Federal taxes that go into the general fund; and this is over and above the ordinary general taxes they pay along with all citizens.

Problem of administering the tax: Finally, the tax on lubricating and cutting oils presents some problems of administration.

First of all, there is no single, isolated, highly individual product called lubricating oil, sold only for that purpose and used only for that purpose. The term "lubricating oil" covers a wide range of products, many of them quite versatile and usable in a variety of ways that have nothing to do with lubrication.

Our big administration problem stems from these lubricating oils that industry uses for nonlubricating purposes since sales of such oils require exemption certificates. Oil manufacturers must process and retain, and the Government must check mountains of these documents, which we obtain from customers to cover the various exempt uses allowed by law, regulations, and rulings. Oil companies literally have millions of these certificates in their files.

A distributor or wholesaler or any other intermediary between the manufacturer and the actual user of the oil also must handle all of this paperwork. This adds up to a lot of administrative expense for the businessman and a big auditing job for the Internal Revenue Service both of whom, in this instance, are charged with tax enforcement.

The businessman is responsible, as the code says, to use "reasonable diligence" to make sure that all exemption certificates are valid. I assure you that the business people involved are carrying out this responsibility to the best of their ability. But it is a fact that neither they nor the Internal Revenue Service with its limited staff could possibly

check every last exemption certificate and follow up to be sure that the oil purchased under it is used in the manner in which the buyer said it would be used.

Summary: Now, in closing, I think I could do no better by way of summation of what I have said here today than to quote from a paper submitted earlier in these hearings by Prof. John F. Due, of the University of Illinois. Under the title "Criteria for Evaluating Possible Reductions in the Federal Excise Tax System," Professor Due includes the lubricating and cutting oil taxes in a group that he thinks deserves "top priority for repeal."

Of the lubricating and cutting oils excise he says:

A portion of this tax rests upon industrial firms and other business enterprises, and is subject to the usual objections to excises which enter into business costs.

In his paper Professor Due listed various reasons why he included the lubricating oil and certain other taxes in a group he believes deserves priority for repeal. The following are two of the characteristics that Professor Due thinks make the lubricating oil tax, the cutting oil tax, and some other excises entitled to first priority for repeal:

1. Primary impact on business costs: Any excise of this character should be repealed, regardless of other characteristics, since they lack any justification whatever in terms of usual standards of taxation.

2. Major difficulties of enforcement and compliance: Considering the limited justification of excises at best, it is obviously objectionable to retain in the tax structure those excises which are incapable, by their nature, of effective administration without unreasonable cost.

Professor Due's statement, I think, serves as expert testimony in support of the arguments we have presented here in advocating that the excise taxes on lubricating and cutting oils be repealed.

I have appreciated the opportunity of appearing before you today. Thank you.

The CHAIRMAN. We thank you, Mr. Cubicciotti, for coming to the committee.

Any questions?

Mr. SCHNEEBELI. Generally, lubricating oil has two uses, industrial and motor vehicle. Are you recommending the elimination of the tax on both types?

Mr. CUBBICCIOTTI. On all, sir. The entire elimination of the 6-cent lubricating oil tax.

Mr. SCHNEEBELI. I think the main thrust of your argument is the elimination of the tax in the industrial area.

Mr. CUBICCIOTTI. That is true. But I was talking about the cost to industry. My full testimony in the record will show I was covering both subjects.

The CHAIRMAN. Without objection, your entire statement will be included in the record.

Mr. CUBICCIOTTI. Thank you.

(The prepared statement of Mr. Cubicciotti follows:)

STATEMENT OF RUDOLPH CUBICCIOTTI ON BEHALF OF AMERICAN PETROLEUM INSTITUTE, NATIONAL PETROLEUM REFINERS ASSOCIATION, AND PENNSYLVANIA GRADE CRUDE OIL ASSOCIATION

Gentlemen, my name is Rudolph Cubicciotti. I am vice president and general manager of Sonneborn Chemical & Refining Corp., a division of Witco Chemical Co., with headquarters in New York City. I'm here on behalf of the American