Governor MARTIN. I will have to rely on your report on that. I have not examined the list of cosponsors.

I understand that there are no others from North Carolina, other than the principal sponsor, who have cosponsored it at this point. Mr. RANGEL. Do you support this concept in terms of the Congress providing some protection to the growers?

Governor MARTIN. Mr. Rangel, the problem that I have with that is that it would contemplate that the 16-cent tax would be left at 16 cents, or that the 2 cents would be an additional tax over and above the 8 cents to which the sunset provision would return us, presumably on October 1, 1985.

I am not here to advocate additional taxes on this product, and therefore, my position is a very simple one: to let the sunset provision apply, let the sun set, and roll that tax back to 8 cents so that this additional burden that was singled out for cigarettes would be relieved.

Whatever level of tax is imposed, if you were to ask me "would I want 2 cents of that, or more or less, to be used to assist the beleaguered farmers in our State and other tobacco-producing States,' of course I would say, yes, they have a very severe problem.

And whatever level of tax is imposed and for whatever uses it is employed, it would seem to me to be fair that a part of that be used to assist them out of the proceeds of whatever level of tax you

have.

Mr. RANGEL. I understand and support your position.

It was not my understanding that the legislation was presuming anything, that the tax would increase or remain locked into place. They are saying, if you have to have a tax, that they want 2 cents of that tax set aside for tobacco growers.

Governor MARTIN. Yes; and in fact, if the tax were rolled back to 8 cents, that would still apply.

So we would say that because our tobacco farmers and the cigarette industry are the source of these revenues, that at least their problem should be addressed out of some part of whatever tax is levied.

Mr. RANGEL. I do intend to have hearings on this matter, and I appreciate your view on it.

Would anyone like to offer an additional view?

Governor MARTIN. I think I can make clear, we are not advocating any additional tax, Mr. Chairman.

Mr. RANGEL. I think I understand that.

My question merely was, if you are going to have a tax, do any of you object to 2 cents of that tax being allocated to helping the tobacco industry? Thank you.

Mr. GIBBONS. Mr. Ford.

Mr. FORD. Thank you very much, Mr. Chairman.

I, too, would like to welcome our former colleague, Governor Martin, back to the committee. I thank you for your testimony, and also the North Carolina delegation.

Excise taxes on tobacco has been something that we have discussed as members of this committee, and, Governor Martin, it was not long ago that you were part of this committee when we dealt with the excise taxes. We were able to have good dialog and good discussion before the committee.

We know about the sunset. Hopefully, we can move into this tax package and do it in a fashion that we will not affect your State and the industry as a whole.

But you do know that we are in fact looking for revenue. We are going to have to say to all of those who are out there that we are talking about fairness, and whether or not there will be any excise taxes beyond 8 percent, we don't know.

But, hopefully, we will still have convincing arguments like you have made and other members of this delegation as well as other witnesses before the committee.

Governor MARTIN. I thank my former colleague.

I recall well the sense of responsibility the members of this committee have to take. The point that you make about treating us fairly rather than singling us out is well taken.

At the time the tax was imposed, there was a drop in cigarette consumption. Those for whom the costs are very closely marginal are the ones on whom it impacts—and Mr. Rangel raised their concerns very well-the poor.

Mr. FORD. My other colleague, Mr. Rose, is not at the table, but I see him over to the right.

Mr. GIBBONS. Mr. Pease, do you have questions?

Mr. PEASE. No.

Mr. GIBBONS. Mr. Crane.

Mr. CRANE. I have just a question.

I, too, want to welcome our distinguished former colleague back, and the remainder of the delegation here from North Carolina.

Last year, I remember reading about another problem that you folks in North Carolina had, and that was with textiles and the importation through deceptive means of finishing products in one country and coming in under another quota if they hadn't fully utilized their quotas.

At the time, Hong Kong was irate over an ITC effort at cracking down on Hong Kong engaging in this practice, and they said they were going to boycott tobacco purchases.

Did they go through with that, do you know?
Governor MARTIN. I don't know that they have.

Mr. CRANE. The reason I ask that question

Governor MARTIN. They are still importing considerable textile products into our country.

Mr. CRANE. I am curious, because we have those hearings going on right now, too, and it looks like there will be an effort made to be more restrictive on the importation of foreign-produced textiles.

I am wondering if you anticipate any kind of retaliation by any of our trading partners abroad by attempting to implement what Hong Kong threatened to do, at least last year.

Governor MARTIN. I can say that you always have to anticipate that there is that possibility.

Indeed, within our own country there are many of us who feel like it may be time for us, out of a sense of reciprocity, to retaliate against some unfair trading practices that are directed against so many of our products.

We would only seek to be treated in a fair way as opposed to being the only open market in the world, and that is a point of view that is important in this country, particularly with regard to

textiles and apparel, automobiles, computers, and other products. There is always that possibility, and that threat is always going to be handled.

We are asking, with regard to quotas, instead of having Hong Kong administer the quota, that the U.S. Department of Commerce ought to administer it so all countries are treated fairly, so that the quotas are not violated year after year, as they have done.

Imports have gone up much faster than the quotas allowed. It means that enforcement of the quotas is full of holes.

Mr. CRANE. I was hit with that question of how you reconcile that potential conflict, and I didn't have the answer.

As we get further into discussions this year of potential restrictions on imported textile items, I would hope that we might be graced by your presence again to help us through that sticky wicket.

Governor MARTIN. Thank you. I intend to be here for that pur

pose.

Mr. MCMILLAN. There was an interesting and brief response to Mr. Crane's question. I visited perhaps the newest and largest cigarette plant in the world, 2 million square feet, in Winston-Salem, NC, and all the machinery going into that plant is made in West Germany.

Mr. GIBBONS. On that note, we will excuse the panel.

All of us have to go vote. The meeting will resume as soon as Mr. Jones returns, and Mr. Kornegay is the first witness.

If Mr. Kornegay would move forward, we would be happy to start as soon as Mr. Jones returns.

Mr. JAMES JONES [presiding]. We will resume the hearing.

Our next witness is from the Tobacco Institute, Mr. Horace Kornegay.

STATEMENT OF HORACE R. KORNEGAY, CHAIRMAN, THE

TOBACCO INSTITUTE

Mr. KORNEGAY. Thank you very much, Mr. Chairman.

At the outset, I would like to announce that I will have accompanying me two of my colleagues from the Tobacco Institute, senior vice president Robert Lewis, and one of our consultants, Dr. Willian Prendergast.

Mr. Chairman, also, I, in the interest of time, have somewhat abbreviated the statement that I am going to make. I request permission to have my full statement appear in the record, and also any exhibits that, as we go through this, may be of interest to the committee, that they be included in the record.

Mr. JAMES JONES. It will be included in the record. And we welcome you back to the committee.

Mr. KORNEGAY. I am Horace R. Kornegay, chairman of the Tobacco Institute, a trade organization of 12 companies which manufacture tobacco products.

I appreciate deeply this opportunity to appear and testify before the Ways and Means Committee.

As we all know, in 1982, the Congress enacted a temporary doubling of the Federal excise tax on cigarettes and provided that this addition to the basic tax would sunset on September 30, 1985. You

are today considering whether to permit this decision to remain unchanged.

We should be clear at the outset that to legislate any rate above 8 cents is to raise taxes.

As the distinguished majority leader of the U.S. Senate recently and succinctly said, "The law says the tax will go to 8 cents this fall. If we change the law, we raise taxes, pure and simple."

The next paragraph in my statement was written in contemplation that Chairman Rostenkowski would be presiding.

I do commend the committee, commend the President, and commend Mr. Rostenkowski as chairman of the Ways and Means Committee, for the statesmanlike response that he gave to the President's reform tax program that he announced recently.

With that, let me move on and say that at a time when this committee is seeking to make the tax system more fair, it would be strangely inconsistent to increase the tax borne by one-third of the adult population who chose to smoke while no comparable tax burden is shared by consumers of other products.

At a time when this committee is seeking to make the tax system more neutral, it would be unneutral to raise a tax that singles out one industry.

At a time when this committee is seeking to promote economic growth, it would be antieconomic growth to use the taxing power to raise costs, reduce sales and eliminate the jobs, and other economic benefits the tobacco industry would provide if it were taxed on the same basis as other industries.

At a time when this committee is seeking to make the tax system less burdensome on the poor, it would be unfair to double the scheduled rate of a regressive tax that bears most heavily on those least able to pay.

Now, the burden of the cigarette excise tax on smokers with an income below $10,000 is five times as great as that on smokers with an income above $50,000.

The regressive effect of this tax is intensified because smoking is more prevalent among lower-income groups than among those in higher income brackets. This is a tax which is collecting a disproportionate share from the poor and from the lower-middle-class economic groups.

Regressiveness is by no means the only defect of the form of taxation you are considering today, Mr. Chairman. The selective excise tax has been subjected to strong criticism by economists.

No less an authority than the Assistant Secretary of the Treasury for Tax Policy, Ronald A. Pearlman, said last December:

You will not find any economist and you will not find me, defending excise taxes as anything other than revenue raisers. They are regressive. They are industry specific. They are unsound, in my judgment, from any economic or tax policy basis. I will not seek to defend them on any rational basis.

In view of its manifold defects, we urge that this form of taxation be used sparingly and kept at a very low rate.

The Federal excise tax should not be considered in isolation from other forms of taxation imposed on the producers and the users of tobacco by government at all levels. The tax burden on this industry and its customers is mammoth in comparison with that borne by other businesses.

The magnitude of this burden has been established in a study by Chase Econometrics. It finds that, when all major taxes paid by all levels of government are taken into consideration, 48 percent of the price paid by smokers for smokeless and tobacco products ends up in the hands of Federal, State, and local tax collectors.

I see my time has expired. Would you like for me to conclude? I have about 2 more minutes.

Mr. JAMES JONES. Go right ahead.

Mr. KORNEGAY. Thank you very much.

In considering whether to increase the scheduled cigarette excise tax after October 1 of this year, your committee should make its decision mindful of the entire excessive tax burden borne by those who choose to smoke.

Obviously, the States which rely heavily on tobacco taxes are greatly affected by any decision that you make on Federal tax. There is a widespread attitude among State officials that a higher Federal tax poaches on a field which belongs to them.

Between 1951 and 1982, the Congress respected the primacy of the States in this field of taxation. The Federal excise tax remained at 8 cents while the States raised cigarette taxes frequently and substantially.

In three decades, State revenues from this source rose from $465 million annually to more than $4 billion, which was almost a tenfold increase. During this period, States increased the tax rate on cigarettes by 440 percent.

Fifteen States-this point was already brought out by one of the members of the committee this morning-15 States, anticipating that the temporary added excise tax on cigarettes would sunset this year, provided for an increase in their cigarette taxes.

Were the Congress to reverse its decision on the Federal tax, the effect would be disruptive on State revenues. Those States, which have taken such action contingent on sunset, can justifiably complain that they have been victimized by a change in Federal policy.

Mr. Chairman and members of the committee, let me invite your attention to the plight of the tobacco farmer. The Federal tax increase was imposed at a time when the problems of the tobacco farmer were mounting.

Between 1978 and 1982 chronic adversity in this section of agriculture was manifested by a steep reduction in the number of farms producing tobacco in several States, and I have a list of them here in my statement which we can all see.

In 1983, the year that the Federal tax increase became effective, the tobacco farmer suffered a decline of one-third in the cash value of his crop.

Mr. Chairman, the tobacco farmer is hurting. I trust that the Congress, in its concern to help the agricultural community in general, will not ignore the tobacco farmer. I hope this committee will ask whether a 16 cent Federal tax on cigarettes helps the farmer. In 1983, some 710,000 jobs were involved in producing and distributing tobacco products and an additional 1.6 million jobs depended on the spending of workers in the tobacco industry. Tobacco accounted directly for $31.5 billion of the gross national product and indirectly for an additional $50.6 billion.