DISCUSSION

Excise taxes are imposed upon cigars, cigarettes, and cigarette papers and tubes manufactured in or imported into the United States. In general, the manufacturer or importer is liable for these taxes when the products are removed from the factory or released from customs custody. The rate of tax imposed on small cigarettes (weighing no more than 3 pounds per thousand) removed from bonded premises before January 1, 1983 and after September 30, 1985 is $4 per thousand, which is equivalent to a tax of 8 cents per pack of 20 cigarettes. The rate of tax imposed on large cigarettes (weighing more than 3 pounds per thousand) is $8.40, which is equivalent to a tax rate of 16.8 cents per pack of 20 cigarettes. The Tax Equity and Fiscal Responsibility Act of 1982 temporarily increased the rate of tax on small cigarettes to $8 per thousand, which is equal to a tax rate of 16 cents per pack. Similarly, the rate of tax imposed on large cigarettes was temporarily increased to $16.80 per thousand, which is equal to a tax rate of 33.6 cents per pack. These temporary increases are scheduled to expire on September 30, 1985.

Excise taxes on tobacco discriminate against consumers who prefer to spend a portion of their incomes on these products. Moreover, the excise taxes on tobacco are regressive because low income individuals spend a larger percentage of their income on these products than wealthier individuals. According to the 1980-81 Consumer Expenditure Survey Diary Data, tobacco expenditures are 2.4 percent of income for the quintile of the population with the lowest income, but are only .4 percent of the income for the quintile of the population with the highest income.

In addition, state and local governments currently impose excise taxes on cigarettes. In 1984, revenue from these taxes equalled $4.3 billion. To the extent that higher Federal taxes on tobacco products reduce tobacco consumption, they could restrict the ability of such governments to raise revenue from these sources.

In summary, the Treasury Department favors the scheduled termination of the temporary increase in the excise taxes on tobacco products on September 30, 1985. This concludes my prepared remarks on the cigarette excise tax. I would be happy to respond to your questions.

Chairman RoSTENKOWSKI. Thank you, Mr. Secretary.

Let me ask you a question, Mr. Mentz. As I understand it, the administration has made a recommendation on the Superfund. Is that an extension of the tax, or is that an increase?

Mr. MENTZ. Well, the administration's proposal on Superfund links the tax and the users, or the persons creating the pollutants, and it is a tax specifically on the persons who are causing the environmental damage.

Chairman ROSTENKOWSKI. Mr. Mentz, does the Superfund tax expire?

Mr. MENTZ. That is right, it expires October 1, but there are proposals to extend it.

Chairman ROSTENKOWSKI. The Superfund expires October 1. This cigarette tax expires October 1. You suggest that we increase taxes if we extend the cigarette tax. Are we increasing taxes if we extend the Superfund tax?

Mr. MENTZ. I think the administration's view on that, Mr. Chairman, is that the Superfund tax is specifically linked to the persons who are involved in the environmental damage, and for that reason the administration supports an extension of the Superfund tax, as has been testified before.

Chairman ROSTENKOWSKI. As I understand it—you correct me if I am wrong-your Superfund proposal is not just an extension of the present tax. There is also an increase in the tax. So an extension of the cigarette tax does not increase taxes. But extending the Superfund tax does.

Mr. MENTZ. And indeed in the Senate Finance Committee, there is even a broader general tax that is a value-added tax that has been proposed. That is opposed by the administration.

Chairman RoSTENKOWSKI. You are also aware, Mr. Mentz, that your Superfund proposal contemplates a threefold increase in taxes, as opposed to just an extension of present law.

Mr. MENTZ. Yes, I am.

Chairman ROSTENKOWSKI. Are there any further questions?

Mr. DUNCAN. The Superfund actually expires in October, the tobacco tax doesn't expire in October. There is a difference. One just reverts-the increase expires but the-the tobacco tax doesn't expire completely but the Superfund does.

Mr. MENTZ. Yes. And in order to continue the Superfund Program, it is absolutely necessary to have a

Mr. DUNCAN. I just wanted to make the point that reverting back to the 8 cents, that continues that tax, but the Superfund is different.

Thank you, sir.

Mr. MENTZ. That is right, the 8-cent tax is the tax that goes into the general revenue.

Chairman ROSTENKOWSKI. Are there any further questions?

Mr. STARK. Are you aware of a Congressional Research Service study done in June of this year that indicates a great number of States already have passed legislation? Arizona, Maryland, Montana, New Mexico and Utah, and have active increases in the tax conditioned on the Federal decrease, and that many other States are either in the process of planning that or already have statutory language which allows that to happen automatically?

Mr. MENTZ. Yes, Mr. Stark, I am aware of that.

Mr. STARK. I would like, Mr. Chairman, to ask unanimous consent this study by the Congressional Research Service be made part of the record.

Chairman RoSTENKOWSKI. Without objection.

[See p. 583 for CRS study.]

Mr. STARK. AS I understand your reply to the chairman, the differences in the symmetry between the Superfund nonreduction and the cigarette tax nonreduction is that Superfund is a specific users fee dedicated to a particular purpose. Is that correct?

Mr. MENTZ. Essentially.

Mr. STARK. So that if we dedicated the 8 cents on the cigarette tax to the Medicaid trust fund, we would then have symmetry, would we not?

Mr. MENTZ. You might have symmetry, you would also have an objection from the administration.

Mr. STARK. We are used to that. But symmetry and an objection or objection and no symmetry-thank you.

Chairman ROSTENKOWSKI. Mr. Pease will inquire; then Mr. Campbell.

Mr. PEASE. Thank you, Mr. Chairman.

Mr. Secretary, are you aware that even if the budget resolutions in the House and the Senate as passed by those bodies are approved, the conference is successful and the savings envisioned by those resolutions is accomplished there will still be Federal deficits over the next 3 years of $460 billion? Are you aware of that?

Mr. MENTZ. I am acutely aware of it, Mr. Pease.

Mr. PEASE. At the same time, the administration is willing to give up the revenue from a cigarette tax that would otherwise expire this October?

Mr. MENTZ. I don't regard it as giving up the revenues. Current law provided for a limited increase of the cigarette excise tax, which is to expire. I don't consider it a give-up of revenues for the tax to go back to where it was for many years. I think your question more properly is, should we increase the cigarette excise tax in order to do something about the deficit? I think the administration's position on that is no.

Mr. PEASE. Well, the chairman has led us through the reasoning before, that the current tax is 16 cents, and if it is 16 cents after October 1 that is not an increase, but as you can see is an increase over what it would be if the Congress did not act.

It just seems to me, Mr. Secretary, if you will permit me, that the administration is carrying its "no new taxes" position to ridiculous extremes. It is willing to tolerate deficits of $460 billion over the next 3 years, and yet maintain the position that you have advanced this morning.

Chairman ROSTENKOWSKI. Mr. Campbell will inquire.

Mr. CAMPBELL. Thank you, Mr. Chairman.

I want to go back just a minute to the user fee which you talked about, which was Superfund, which would relate more or less to a gasoline tax used for highways because it is a direct linkage.

And I guess if we were going to pursue the line of questioning that Mr. Stark started and that was to-it would be all right on the cigarette taxes if you earmarked it, I guess if we followed that we would be talking about the indirect linkages. We would have to take the next step and say we would have to take a wine tax and put it on and earmark it for alcoholism and so forth.

Do you draw that same kind of distinction, that we are really having a user fee on a Superfund or highway and on the other we are going to an indirect linkage if we try to earmark those?

Mr. MENTZ. That is a distinction, and I think any linkage between a cigarette excise tax and let's say a cancer program or a heart program is really a very indirect linkage. The linkage is so indirect that it is really meaningless in that obviously people get cancer who don't smoke and people who smoke don't always get cancer, so that is the distinction that I was talking about.

Mr. CAMPBELL. If we did start down that road we would have to go over because we are raising drinking ages in the country and we are worried about death on the highways, alcoholism and the tremendous amount of money we are spending, we would have to go back and link beer and taxes in the same context.

Mr. MENTZ. That is where the logic leads you, and I think that is the deficiency of the logic.

Mr. CAMPBELL. Thank you.

Mr. PEASE. Would the gentleman yield?

To go back to the Superfund, to try to continue this analogy, the Superfund taxes on feed stocks, especially aluminum, copper, that sort of thing. There is only a very indirect relationship to the purposes for which the Superfund funds are used. Superfund funds are cleaning up past hazardous waste sites which may have nothing to

do with the copper or other feed stocks which are being taxed for the Superfund.

So if you are talking about objecting to the cigarette tax continuation on the basis of tenuous relationships, you are really making a very, very subtle distinction, it seems to me; one almost without meaning.

I thank the gentleman for yielding.

Mr. CAMPBELL. I thank the gentleman.

I guess he has come out very strong for a waste end tax in the context of that, but I do think that there is a difference here, and I think that it is very important that we distinguish between the

two.

I thank you, Mr. Secretary.

Mr. MENTZ. I just want to say I agree it is not a perfect linkage, Mr. Pease, and I am not claiming that it is. Basically I am saying there is some nexus in that feed stocks are kind of the basic building blocks of what ultimately-is what the Superfund is all about trying to clean up.

Chairman RoSTENKOWSKI. Mr. Pickle will inquire; then Mr. Matsui.

Mr. PICKLE. Mr. Secretary, I have always felt that tobacco, like other products, ought to share a reasonable portion of the tax load, and we always are faced with trying to decide what is that reasonable amount.

I am a bit shocked, though, at the openness of your position. It seems to me like you are just making an open invitation to raise cigarette taxes to about 35 cents a pack. I have also heard it rumored here in the last few months that a Senator from North Carolina had things wired down at the White House, where you weren't going to get any increase in tobacco. It looks to me like maybe those rumors were right. I would say that you better be prepared to alert your White House-if the President vetoed the tax, would it go up to 35 cents a pack?

Mr. MENTZ. I don't know. I would assume it would.

Mr. PICKLE. I might find out.

Chairman ROSTENKOWSKI. Mr. Matsui will inquire; then Mr. Jones.

Mr. MATSUI. Thank you.

Mr. Secretary, you people are about to lose one of your supporters on tax reform. We are going to have a revenue loss on tax reform, about $12 billion the Secretary of Treasury has acknowledged. We know we have the completed contract rule we are going to have to deal with. That is $8 billion. The effective dates of the benefits and burdens of the Reform Act will create another $12 billion shortfall, plus we understand from the economists that there is a plus or minus $50 billion shortfall or surplus per year beginning 1990.

So we are going to have to come up with some revenues. There is no question about it. I want to understand your position and the administration's positions. In the context of tax reform to try to raise revenues in order to deal with the revenue neutral issue, you are saying you are not willing under any circumstances to extend the tobacco tax 16 cent rate at this time. Is that my understanding?

Mr. MENTZ. At this time the administration's position is it is not supportive of a proposal to increase the rate on the tobacco tax from 8 to 16 cents. When you get into tax reform and you got a whole bunch of other issues involved and revenue problems, I don't know where we are going to be, what the revenue situation is going to be. I am not prepared to address where the administration would be at that time, but I am telling you where we are today. Mr. MATSUI. Mr. Secretary, the purpose of these hearings is to discuss user fee revenue proposals in the 1986 budget and other revenue measures in the context of the tax reform package, and you are saying you are discussing it in terms of the extension but you are not discussing it in terms of the tax reform package users at this time?

Mr. MENTZ. That is right. This testimony is not on tax reform, it is just on user fees and cigarette excise tax.

Mr. MATSUI. But you will be willing to consider it in the context of tax reform then?

Mr. MENTZ. If someone proposes it. The administration is certainly not proposing it.

Mr. MATSUI. I would just have to-in my opinion, I would have to reiterate Mr. Pickle's comments, this is a political decision on your part. I am sorry you are handling it this way.

Mr. GIBBONS [presiding]. Any other questions or observations?

Mr. JONES. I wanted to ask about a Social Security recommendation in your budget proposal. I understand if it were adopted as part of the budget reconciliation we might consider it in the total tax reform package. It deals with the collection of FICA taxes from State and local governments.

As I understand it, the States now are the administrative apparatus for collecting FICA from State and local governments. Your proposal would be to have FICA taxes from State and local governments paid directly to the Federal Government, the same as business deposits. I wonder if you are really serious about that, and have you thought through whether or not the administrative apparatus of the Social Security Administration can handle the deposits of 70,000 State and local government entities, particularly in light of the fact you are trying to terminate 16,000 Social Security workers?

Mr. MENTZ. Well, you are correct, that is the proposal. The proposal is to switch the administration over so that the Internal Revenue Service would administer it. I guess, Mr. Jones, you are raising a question of administrability, which I really am not qualified to respond to you.

Mr. JONES. Would the IRS representative be available to do that later? Will he be qualified to deal with that?

Mr. MENTZ. I assume that he will.

Mr. JONES. All right. I will save the questions for him.

Mr. MENTZ. I am going to lay it off on him.

Mr. JONES. Thank you.

Mr. DAUB. A couple of things. First let me say I don't want to link budget issues and responsibility with tax reform at all, and think maybe the administration indeed is taking the right approach, just out of a precaution for that very problem.