bill, H.R. 1577, which contemplates port user fees at astronomical levels. We have previously made these views clear to the Public Works and Transportation Committee and the Merchant Marine and Fisheries Committee.

This statement will first, briefly describe the vital role liner carriers play in our port communities and in the conduct of our nation's commerce, and then explain more fully our general opposition to port user fees and our particular opposition to certain types of user fees which would unfairly focus on or greatly burden liner carriers.

BACKGROUND

Liner carriers play a vital role in the import and export commerce of this nation. By providing regularly scheduled service and accepting small as well as large cargoes, they provide virtually all of the export/import ocean carrier service utilized by small and medium sized businesses, as well as a great deal of the ocean service utilized by the largest companies. Further, liner carriers transport virtually every type of cargo.

In providing these diverse and necessary services, liner carriers generate very substantial employment and economic activity at ports. They have agents in ports; they own property in ports; and they extensively utilize the services of stevedores, longshoremen, and suppliers of commodities needed to operate ocean-going vessels with crew-such as fuel, food, and other supplies. Liner carriers thus contribute very significantly to the overall economic welfare of the port community.

This was clearly illustrated in a recent study prepared for the Maryland Department of Transportation regarding the port of Baltimore. According to that report general cargo (the type of cargo carried by liner carriers) was responsible for 50 percent of the port related jobs while comprising only 21 percent of the port's overall cargo tonnage. General cargo generated 31.8 jobs per 10,000 tons in Baltimore in 1980; the comparable figure for dry bulk cargo was 4.9 tons.

Liner carriers operate vessels (primarily containerships and similar vessels) which usually draw 30-35 feet of water. While some of the newer liner vessels draw closer to 40 feet of water, to our knowledge even the most modern and largest liner vessels on order do not require as much as 45 feet of water. So, while testimony on part legislation presented to various Congressional Committees in past years is replete with statements to the effect that U.S. ports are not dredged to depths (greater than 45 feet) which can accommodate a new generation of large bulk cargo vessels, we emphasize today that there is no such imbalance between the dredged depths of our nation's port system and the operation of modern containership.

In short, our nation's port system, dredged to present depths, does and will, for the presently foreseeable future, enable liner carriers to serve the shipping public and the entire nation. This is not to say that liner carriers oppose new port improvement projects. However, if the price of port improvements, particularly very deep draft (over 45 feet) dredging, is "user" fees on liner carriers, we would rather do without.

GENERAL OPPOSITION TO PORT USER FEES, PARTICULARLY FOR THE FINANCING OF

GENERAL CARGO PORT PROJECTS

We believe that the benefits to the nation which result from channel and harbor dredging at ports (both improvement and maintenance dredging) are so considerable, in terms of facilitating exports, imports, and job development, that it is fully appropriate to continue to wholly fund these dredging projects from existing Federal revenue sources, rather than from user fees. We all understand that import and export goods carried by ship, no matter how quantified, have a major impact on our daily lives. In our view, it is because port activity and international trade are so tied to the economy of the nation as a whole (and this is the case now more than ever before) that the statutory policy of the Federal Government has always been, until now, to supply 100% of the funding for dredging projects.

It is particularly appropriate to maintain this policy with respect to improvement and maintenance dredging at general cargo ports (those dredged to depths no greater than 45 feet). This policy properly would be coninued under the leading port bills currently pending in the House of Representatives, H.R. 6 and H.R. 45. The House Committee on Public Works and Transportation clearly justified this position in its report last year on H.R. 3678, the predecessor to H.R. 6, when it said (H.R. Rep. No. 616, Part 1, 98th Cong., 2d Sess. 5 (March 8, 1984)): “. . .the United States ports constitute an essential element of the Nation's transportation system, making possible the import and export of goods to the benefit of the entire population. The ports generate substantial revenues, including customs revenues as well as tax revenues

to the Federal Treasury. The benefits associated with ports are not port specific, nor are they specific to various regions of the courtry. For these reasons, the Committee has retained Federal involvement in the construction and maintenance of the general navigation features of general cargo ports, which are those ports having a depth of 45 feet or less."

Further, not only does the general populace benefit from Federal spending to dredge harbors, but, as noted in the Public Works Committee's report, the dredging of general cargo harbors and channels produces financial benefits for the government as well. A study prepared for the Department of Commerce 2 found that, due to the depressing effect of user fees on overall economic activity in ports and other affected communities, the imposition of port user fees could result in a net loss to the U.S. Treasury; at a minimum the amount of any user fees collected would be significantly offset by reductions in other revenues. We certainly agree that user fees would have negative effects on economic activity, and thus believe that claims that user fees would help reduce the budget deficit are highly suspect.

Also with respect to the deficit, it is clear that the dredging of harbors has not been in any way a cause of our nation's budgetary problems. We understand that total Army Corps of Engineers expenditures for improvement and maintenance dredging of harbors and channels serving ocean commerce will approximate $502 million in FY 1985. The comparable figure for FY 1980 was $408 million. Thus, considering inflation, this program has experienced a decline in real terms in recent years.

In short, we believe that the national economic benefits which stem from general cargo port activity are a compelling reason for Congress to reject proposals which would authorize port user fees on liner carrier vessels. Moreover, we reject the notion that the budget deficit compels the Congress to adopt unwise and radical changes in our nation's system of port financing. Indeed, the depressing economic effect of user fees, which in turn reduce various tax and customs revenues, could offset or outweigh any budget gains to the Treasury from user fees.

Thus, we strongly support H.R. 6 and H.R. 45 and are unalterably opposed to the Administration's bill, H.R. 1577.

PARTICULAR OBJECTIONS TO CERTAIN TYPES OF USER FEES

If the Congress should, despite our objections, choose to impose fees (or authorize them), we want to make clear our particular objection to certain fee approaches which would focus unfairly on or greatly burden liner carriers.

ANY FEE SYSTEM WOULD RESULT IN UNFAIR SUBSIDY OF BULK CARRIERS IF LINER CARRIERS HAVE TO PAY FOR DREDGING TO DEPTHS GREATER THAN 45 FEET

As liner carrier vessels do not draw 45 feet of water, any legislation which imposes or authorizes dredging fees on liner vessels should preclude liner carriers from paying for dredging to depths greater than 45 feet. Absent such a provision, no fee system would be a true "user fee" system. Instead, the system would produce the extremely unfair result of liner vessels subsidizing bulk carrier vessels because liner vessels would be paying towards dredging to depths needed only by bulk carriers. The Administration's bill is objectionable to the liner carrier industry in part because it does not preclude such unfair subsidy of bulk carriers by liner operators. Thus, we are concerned that, under that bill, local ports would attempt to tax liner carriers for projects to dredge harbors to 50 or 55 foot depths, depths which are simply not needed by liner vessels.

Our fear is not hypothetical. Last year several ports specifically testified before the Congress that they should be able to impose user fees on liner carriers to finance the local share of the cost of dredging to depths not needed by liner vessels. Specifically, the ports suggested to the Congress that the entire port community, and even importers and exporters located far from ports, would benefit from very deep dredging projects (greater than 45 feet). Thus, the ports continued, if there is less than 100% Federal financing for these very deep draft projects, all members of the port community should be subject to taxation to support those projects. The particular "benefits" that were alleged to accrue to liner carriers from dredging to depths greater than 45 feet were employment and other increases in economic activity in the community and safety benefits.

2 Bushnell, Pearsall, and Trozzo, "Economic Effects of Levying A User Charge To Finance Harbor Maintenance, Summary Report," Sept. 16, 1983.

We completely disagree that dredging to depths greater than 45 feet is required to meet any safety needs in ports. Coast Guard regulations already address safety considerations.

More importantly, it is clear that the possibility that a very deep draft dredging project would generate wide economic benefits in a community is not an argument for a user fee on liner carriers. Instead, it is an argument for 100% governmental funding. If the economic effects of a project in a community are expected to be significant and general, the local government should pay for it, expecting to gain a financial return from the increased tax revenues generated by the additional activity. Thus, allegations of broad economic benefits appear to us to avoid, rather than answer, the question of whether liner carriers benefit from deep draft dredging.

Simply, Mr. Chairman, the ability to identify truly specific benefits is what makes a "user fee" a "user fee". And, if specific benefits cannot be identified as accruing to a person from a project, it is unfair to tax that person for the project any more than the general public is taxed for the project. Sometimes the line between beneficiaries and non-beneficiaries, between direct beneficiaries and indirect beneficiaries, is hard to draw. However, Mr. Chairman, the line between dredging to depths greater than 45 feet (needed only by super colliers and large oil tankers) and the depth requirements of liner vessels (30-40 feet), is clear and easy to draw. Thus, if any user fees are to be imposed, the Congress should draw that line and not provide localities (or the Corps) license to conclude that vessels drawing 35 feet of water use depths greater than 45 feet, license which the Administration bill would improperly provide, but which H.R. 6 and H.R. 45 would properly deny.

WE PARTICULARLY OPPOSE AD VALOREM FEES AS UNFAIR AND INEQUITABLE

If liner carriers are to pay fees towards harbor dredging, those fees should not be calculated with reference to the value of cargo on board, but instead should be based on tonnage.

Liner carrier cargo, whether containerized, ro-ro, or break bulk, consists in very large part of finished and semifinished goods with per ton values many times that of bulk commodities. For example, we have estimated that liner cargo in many U.S.foreign trades has an average value of at least $3,500-$4,000 per ton. In contrast, the price of a ton of coal in recent years has been approximately $30, often less. Thus, the burden of any port "user" fee on vessel operators based on value of cargo would fall very heavily and disproportionately on liners carriers. One liner carrier vessel would be asked to generate more in user fees as 100 comparably sized coal colliers. This clearly unfair result illustrates that the value of cargo has no causal relationship to the demand a vessel places on a port with respect to channel or harbor depth; that is strictly a function of the tonnage or draft of a vessel. Consequently, adoption of an ad valorem scheme of port user fees would simply result in the subsidy of bulk carriers by liner carriers.

Further, the Administration has recognized that ad valorem fees raise serious legal and administrative problems. Thus, in testimony before the House Merchant Marine and Fisheries Committee on March 12, Acting Assistant Secretary of the Army Dawson said (page 4 of prepared statement): "In addition to the problems associated with determination of the value of cargo, the General Agreement on Tariffs and Trade permits imposition of new fees commensurate with the cost of services rendered. Fees based on the cargo value would be very difficult to defend."

Thus, if the Congress should, despite our objections, enact legislation authorizing the imposition of fees on liner carriers, that legislation should explicity preclude imposition of ad valorem fees on vessel operators, a preclusion not contained in the Administration's bill.

WE PARTICULARLY OPPOSE FEDERAL USER FEES

As explained above, the benefits of economic activity at ports serving ocean-going vessels are so broad that port dredging, particularly general cargo port dredging, should be fully Federally financed. If, however, it is detrmined that some portion of the costs of port dredging should be paid from sources other than Federal revenues, the Congress should supplement Federal revenues by requiring partial funding of projects by other governmental entities (states and localities), not by imposing Federal fees on private parties. Moreover, if Federal legislation should authorize local governments to impose fees to recover their share of project costs, it should not require that the state or local share be derived from port user fees. The appropriate state or local governmental entity should be able to make its own determination as to whether, in the interest of promoting its port and its state and local economy, it

would raise the non-Federal share of project costs in whole or in part through other

revenues.

Under such a statutory scheme, if local government authorities consider that a port dredging project is not so worthy as to deserve full support from general revenues and general taxpayers, but must be supported, at least in part, by port users, the decision by a port to have a project go forward would be subject to marketplace restraints. Specifically, if there is no demand by a class of port users in connection with such a project, the port would face some risk of lost patronage from those users. Thus, if a user fee at a port were so high as to actually reduce vessel patronage there, the vessels no longer calling at that port would not have to pay a fee at all-a result which we consider to perfectly reflect the notion of "user" fees.

By contrast, under a Federal fee system such marketplace forces would not come into play; equal fees would be in place at every port. A Federal fee system, by preventing liner carriers from "voting with their feet," creates a very high risk that liner carriers will have to subsidize dredging of ports they do not use. We note that H.R. 1577 contemplates local, rather than Federal fees, and in that regard it is less objectionable to us than it would be if it called for Federal fees.

SUMMARY AND CONCLUSION

In summary, liner carriers are opposed to the imposition of port user fees to finance harbor dredging (both improvement and maintenance dredging), particularly the dredging of general cargo port projects (projects to depths no greater than 45 feet). Moreover, while we generally oppose dredging fee proposals, some such proposals are far more objectionable-and out and out unfair-to liner carriers than others. In particular, if fees on vessel operators are to be authorized to finance dredging to depths greater than 45 feet, such fees should not be imposed on liner carriers since they do not need those depths. Also, any fee system should prohibit ad valorem user fees on vessel operators and reject a Federal fee system in favor of a system which authorizes, but does not require, local fees.

Finally, taking these factors into account, we obviously strongly oppose the Administration's bill (and related budget proposal) and strongly support H.R. 6 and H.R. 45 as introduced.

That concludes our statement, Mr. Chairman, and we thank the Committee for the opportunity to submit it.

STATEMENT OF HON. THOMAS J. BLILEY, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

Thank you for permitting me to address this Committee on the question of whether the temporary increase in the cigarette excise tax should be extended.

I am opposed to continuation of the 16-cent tobacco excise rate. When Congress doubled the tax to that level, in January 1983, it was intended as a temporary meas

ure.

Right now, when the clearly-stated goal of Congress is to make our tax system more equitable, when campaign promises carried the message that there would be no more tax increases, any action to extend this unfair, inequitable tax is certainly counter to that intent.

The tobacco industry, its workers, and other industries which are linked to tobacco through products and services they provide, have already been hit hard by the temporary increase in the federal excise tax.

Tobacco is certainly vital to the economic growth of the area in Virginia which I represent. Last year, cigarette shipments out of Richmond equalled more than $4.1 billion.

The 56,000 Virginia residents who earn their living through tobacco industry operations and supplier industries spent about $1.3 billion on food, clothing, housing and other services during 1983. These expenditures were distributed across business payrolls throughout the state, and these non-tobacco firms employed about 92,000 workers to meet all of the consumer demands.

The point is driven hope perhaps most emphatically by some Richmond workers, who have taken to stamping their checks at local stores with the message: "This is tobacco money!"

Needless to say, anything which diminishes that tobacco money-the income of my constituents-is of great concern to me. And the temporary increase in the cigarette excise has already had a major negative effect on tobacco industry employees and their families.

Since that tax doubled, cigarette sales have fallen in Virginia by nearly five percent. As a result, state excise and sales tax collections have decreased by a similar amount. This results in lower profits for retail store owners and wholesalers, but it also means less money available to the state for services to its citizens.

I realize the impact of this excise on the tobacco industry and its workers may not be of the same importance to you as it is to me. But you should also consider the fairness of a tax in determining policy. And this tax-like other product-specific taxes-defies any economic definition of fairness.

When a person is asked to pay more taxes than his fellow citizens because he uses a specific product, yet receives no extra services for this money-that is unfair.

In addition, the cigarette excise can serve as an economic model of regressive taxation. When a poor person must pay ten times greater a percentage of his income in taxes on the same product as a rich person-that is unfair.

If fairness is indeed our goal, we must keep our promise to the public and refuse to increase taxes that his hardest those least able to afford them. We must say no to continuation of the current cigarette excise tax rate.

STATEMENT OF THOMAS E. BORCHERDING, PROFESSOR OF ECONOMICS, CLAREMONT GRADUATE SCHOOL AND RESEARCH ASSOCIATE, THE CLAREMONT CENTER FOR ECONOMIC POLICY STUDIES, CLAREMONT, CA

Honorable members of the Committee on Ways & Means, my name is Thomas Borcherding. I am Professor of Economics at the Claremont Graduate School and Research Associate in the Claremont Center for Economic Policy Studies, both located at the Claremont Colleges of Claremont, California. I am submitting my own views as a professional economist with a specialty in public sector economics.

I am addressing my comments specifically against the extension of the cigarette excise tax of 16¢ per package, scheduled to return to 8¢ October 1st. It is my opinion that there are several demerits to this excise tax, and, in fact, all excise taxes that cannot be shown as offsets to social, as opposed to private, evils.

In particular, I will offer three arguments against the cigarette tax that apply even at the lower 8¢ per pack rate and hold more strongly at 16¢. These relate to its inequity, its inefficiency and its fiscal secretiveness. As to its inequity, two points need to be made. First, all studies with which I am familiar show that excises are regressive, falling relatively harder on lower income households than on wealthier ones. In fact, Brookings scholar Joseph Peckham argues that the progressive structure in the federal tax schedules is more than offset by the regressive elements in the overall tax framework.1 Excise taxes are one of the several contributors to this source of inequality.

For example, the date revealed that persons earning $7,000 or less per year are half again more likely to smoke than persons earning $25,000 or more. Save for the elderly, the percentage of smokers as a proportion of various age-income groups declines steadily as income rises.2 Lower-income individuals are hardest hit.

This unfairness is even more evidenced when smoking within occupational groups is examined. According to one highly cited study, blue-collar workers are more likely to smoke than those in white-collar jobs and in the professions. To illustrate, garage laborers, cooks, and pressmen are three times more likely to be cigarette users than electrical engineers. Finally, the data show that among workers, Blacks and other minorities are more likely to smoke than whites.3

It is unfortunate that nowhere can I find excises discussed in the various versions (three volumes worth) of the Department of Treasury's tax reform proposals. It does not seem in keeping with the spririt of the first part of the original November 1984 Treasury reform study, titled, "Tax Reform for Fairness," to spend untold time and political energies attempting to make the corporate and personal income tax more equitable while simultaneously maintaining a large series of regressive excises.

In fact, as a matter of legislative philosophy it seems to me that to tax any narrow characteristic within a population smacks of class discrimination. With middle- and upper middle-class citizens choosing to smoke less and less-even to the point of personally discriminating against smokers-the cigarette excise is clearly

1 "Who Paid the Taxes, 1966-85?" (Washington, D.C.: The Brookings Institution, 1985).

2 National Health Interview Survey, National Center for Health Statistics. The survey was conducted during the last 6 months of 1980.

3 T. Sterling and J. Weinkam, "Smoking Characteristics by Type of Employment," Journal Occupational Medicine 18 (1976): 743-54.