the taxed commodity they have given up. (Resources onwers also share some of the burden because the tax lowers the value of the inputs they supply to the production process). The excise tax thus misallocates resources in the economy, imposing a deadweight cost on society. Unlike the revenues raised by the tax, these deadweight costs are not merely transferred from the private sector to the government. Rather, they represent a permanent reduction in society's welfare. REVENUE PROPOSALS It should be apparent that the federal excise tax on cigarettes cannot be justified on the basis of fairness or as an efficient method of raising revenues. Yet, we continually hear proposals for increasing, or in the case at hand not reducing, this levy. Most recently, proposals have been advanced to delay the promised reduction in the excise to 8 cents and use some or all of the revenues for financing federal healthcare programs such as Medicare. The justification is as follows: There is a fiscal crisis-a spending program is in danger of going broke. Someone makes a formative judgement that individuals should not be smoking anyway. In addition, smokers are in the minority; the majority can impose its will. The logic of retaining a "temporarily" higher cigarette tax thus becomes compelling revenues will be maintained, a valuable spending program will be saved, and "bad" behavior will be discouraged at the same time. A more positive analysis of such proposals suggests that the main effect of financing government spending with an excise tax on cigarettes is to transfer wealth from those individuals at the lower end of the income distribution to those at the middle and upper end. Indeed, some estimates would lead one to believe that the degree of regressivity in the tobacco and other excise taxes is sufficient to offset the progressiveness of the personal income tax, making federal taxes on individuals roughly proportional overall. When these inequities are considered along with the deadweight welfare losses I mentioned earlier, it becomes apparent that whatever revenues are raised by the federal excise tax on cigarettes comes at a fairly high social cost. One of the most superficially appealing arguments that has recently surfaced is the idea that smokers should pay more of the costs of publicly-funded healthcare programs because they allegedly benefit more than nonsmokers from the services so provided. Advocates of such "user fees" typically contend that there are social costs associated with smoking, including lost work time due to illnesses said to be related to smoking, costs incurred by Medicare and other programs in treating such diseases, and so forth. Such allegations are misleading because they confuse private costs and social costs. If smokers indeed face increased health risks, individuals bear the related costs in the form of reduced wages and higher insurance premiums. To also count these costs as social costs represents simple double counting. To conclude my remarks, Mr. Chairman, let me reiterate my support for sunsetting the 1982 cigarette excise tax increase. Returning the tax to 8 cents per pack will be an important step in the tax reform process. Thank you for the opportunity to appear here today. STATEMENT OF HON. NORMAN D. SHUMWAY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA Mr. Chairman and Members of the Committee, I am pleased that in the midst of the debate on tax reform that you have allowed time to discuss the several different revenue proposals. I appreciate this opportunity to share my views on the extension of the cigarette excise tax which is scheduled to be reduced from 16 cents per pack to 8 cents per pack on October 1, 1985. This topic is very timely in light of all the debate on deficit reduction and the overwhelming need to balance the federal budget. On January 30th of this year I introduced H.R. 844 in response to the reports projecting the insolvency of the Medicare Hospital Insurance Trust Fund in the near future, and the lowering of the cigarette excise tax instructed by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). My bill would continue indefinitely the cigarette tax at its present 16 cent level, and would grant authority to the Secretary of the Treasury to transfer that revenue to meet any anticipated insufficiency in meeting the needs for financing payments from the Hospital Insurance Trust Fund each month. The excise tax on cigarettes is not a new idea, but has been in practice since the Civil War. Since that time, it has been raised periodically. In 1951 it was set at 8 cents per package and remained so until 1982 when it was temporarily raised to the current level of 16 cents per package. However, even by doubling the excise tax, the amount of increase was still below the 1951 level in real terms. There are many reasons to maintain the current excise tax level, the foremost being the health risks associated with smoking. The medical evidence on smoking, which was sparse when the tobacco tax was first established, now firmly substantiates that smoking is harmful to personal health. The Surgeon General reports that over 350,000 Americans each year, or almost 1,000 every day, die of cigarette smoking. Smoking causes 80 percent of all lung cancer deaths, one-third of all heart disease deaths, and 80 to 90 percent of all emphysema and chronic bronchitis deaths in this country. The Surgeon General has also found that smoking during pregnancy significantly increases the change of premature birth, lower birth weight, and sudden infant death syndrome. It is important to note that H.R. 844 is not a tax increase but would merely retain the current level. Therefore, there would be no need for a transition rule as there would be no new changes to be adopted by those effected by the excise tax. The only change from the status quo would be application of the revenue. Currently monies raised by the cigarette tax are deposited into the general treasury. Revenues collected under the newly permanent excise tax would be earmarked for appropriation to the financially troubled Hospital Insurance Trust Fund (Medicare Part A), which helps pay hospital bills of the elderly and disabled. This part of Medicare is financed primarily from payroll taxes paid by workers and their employers. In fifteen of the last seventeen annual long-term projection the Board of Trustees of the Health Insurance Trust Fund has reported that the program would be in a deficit condition on average over the next 25 years. Also, the Congressional Budget Office has predicted that unless Congress acts to increase program revenue or reduce outlays, or both, the Hospital Insurance Trust Fund will become insolvent in 1994. The immediate cause of this problem is that the cost and utilization of medical care services under the Hospital Insurance program have been increasing much more rapidly than taxable earnings in the economy generally. Moreover, this trend is expected to continue into the foreseeable future. The Department of Health and Human Services has also recommended that the cigarette tax revenue be earmarked for the Hospital Insurance Trust Fund to help offset the cost of smoking for the Medicare program. It is estimated by the National Center on Health Statistics that the annual cost associated with cigarette smoking is about $41 billion in medical expenses and lost economic productivity. Certainly, some proportion of these health costs is borne by Medicare, and should be borne by those who cause these extra costs. In this sense, an excise tax earmarked for the Hospital Insurance Trust Fund would be a user fee upon those who are a proven cause of growing health costs. In conclusion, Mr. Chairman, I think that to allow the excise tax to be reduced from its current level would only add to our fiscal problems by reducing revenue. Also, the best time to plan for projected deficits in the Medicare program is now, before the problem grows worse. Many of our elderly have planned their future and placed their trust in Medicare and other like programs. I believe we have a responsibility to do something which will instill faith concerning the government's ability to meet its mandate for the elderly. One way that is fair and reasonable is to have those who, of their own volition, add to the tremendous cost of health care help defray some of that cost. This could be accomplished by extending the cigarette excise tax and earmarking it for the Medicare Hospital Insurance Trust Fund. I commend you and the members of the Committee for your efforts and look forward to the final outcome of this, and other similar hearings to follow. STATEMENT OF HON. GENE SNYDER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY While the reduction of the Federal budget deficit must indeed be a national priority such a reduction must not fall disproportionately and unfairly on a segment of the population that already bears a significant tax burden. In my opinion the proper purpose of taxation is to raise revenue in a way that encourges economic growth and equitably apportions the burden of supporting government. I agree with President Reagan, who said, "The taxing power of government must be used to provide revenues for immediate government purposes. It must not be used to regulate the economy or bring about social change. We've tried that, and surely we must be able to see it doesn't work." The tobacco industry and those who choose to smoke already bear an unfairly heavy tax burden. The Federal excise tax, in combination with State and local excise and sales taxes on cigarettes, amounts to nearly 35 percent of the average national retail price of the product. Repealing the legislated sunset provision would not be tax maintenance, but a tax increase. The law as it stands says the tax will go to 8 cents on October 1 of this year. If we change the law, we raise taxes, contrary to the promise made to taxpayers when TEFRA was enacted in 1982, and contrary to the Administration's position against any tax increases this year. The intent of the law raising the excise tax rate temporarily was to help reduce the Federal budget deficit. The tobacco industry and its customers have accepted this additional burden for two and one half years. It is our task now to keep faith with our constituents and allow the temporary excise to sunset. For these reasons I urge the members of the Ways and Means Committee to let the added 8-cent tax on cigarettes expire on schedule at the end of the current fiscal year. Hon. DAN ROSTENKOWSKI, STATE OF SOUTH CAROLINA, Chairman, Committee on Ways and Means, House of Representatives, Longworth House Office Building, Washington, DC. DEAR MR. CHAIRMAN: The farmers of South Carolina need your help. On behalf of the 27,000 South Carolinians directly and indirectly involved in the tobacco industry, I respectfully request that you and the other members of the Committee on Ways & Means reject an extension of the January 1, 1983, temporary increase of 8¢ per pack of 20 in the federal cigarette excise tax. To do otherwise is to continue the already onerous burden on South Carolina farmers. Mr. Chairman, the timing of the doubling of the federal excise tax could not have been worse for tobacco farmers. In 1983, when the federal increase became effective, the cash value of the tobacco crop declined by one-third. The years preceding the excise increase were extremely difficult ones for the tobacco farming community. Between 1978 and 1982, the number of tobacco farms in South Carolina decreased by 33 percent. Indeed, the wide extent of the crisis is reflected in the fact that the number of tobacco farms also dropped precipitously in other tobacco states: North Carolina (25 percent), Georgia (31 percent), Maryland (21 percent) and Virginia (18 percent). Even so, tobacco remains vital to the economy of these and other states. Tobacco is South Carolina's largest cash crop, with a 1984 cash value of nearly $200 million on sales of more than 1.7 million pounds. In that same year, tobacco generated $335 million in salary compensation. While tobacco farming is vital economically to my state and others of the Southeast (Florida, Georgia, Kentucky, Tennessee, and North Carolina), it should be noted that tobacco's contribution to the nation's agricultural economy is not limited to this region. Alabama, Arkansas, Connecticut, Illinois, Indiana, Kansas, Louisiana, Massachusetts, Missouri, New Mexico, Maryland, Minnesota, Ohio, Pennsylvania, West Virginia, and Wisconsin also have significant tobacco farming communities. Thus, it is clear that any decision to continue the increase of the cigarette excise tax rate will have far-reaching ramifications. The consumer, the retailer, the manufacturer, the wholesaler, the warehouseman, and the tobacco farmer will all feel the sting of the continued tax increase on this already highly taxed commodity. The effects of the doubling of the tobacco tax are still being felt by tobacco farmers. In 1983, there was a 5-percent drop in U.S. cigarette consumption. This reduction was a direct result of the cigarette tax hike. Consequences for the farmer were disastrous, coming in the form of a loss of 42 million pounds in the use of domestic leaf. This translated into a loss of $74 million to U.S. tobacco growers in 1983 alone. A similar loss was recorded in 1984. To a farming community already in distress, such huge losses only compound the economic problem. South Carolina farmers are aware of the need to reform the current American tax structure. Indeed, statements on the subject by you and the President were encouraging. However, I hope you agree that such reforms must be fair; they must favor economic growth; and they must ease, not increase, the burden on our most depressed economic groups. Mr. Chairman, an extension of the 8¢ increase of the federal cigarette excise temporarily implemented in 1983 would make a mockery of those goals. Any excise tax should be a measure of the very last resort. Excises hurt the economy. We have seen this in South Carolina. The excise caused cigarette prices to go up and sales to go down. Consumers are hurt, business and farm interests suffer, and workers' wages, even their jobs, are jeopardized. Finally, cigarette and other excise taxes are regressive. They certainly hit the “little guy” hardest. Those at the lower end of the economic ladder pay much larger percentages of their earnings than do those at the upper levels. Mr. Chairman, South Carolina's tobacco farmers are laboring under conditions not seen since the Great Depression. To continue the 1983 eight cent increase of the federal cigarette excise past the October sunset date would serve to further weaken the already tenuous position of the tobacco farmer-in South Carolina and throughout the country. I urge you and your fellow Committee members to reject an extension of the temporary increase in the federal cigarette excise tax rate. With kind regards, Sincerely, D. LESLIE TINDAL, Commissioner. RESOLUTION ADOPTED BY THE SOUTHERN ASSOCIATION OF STATE DEPARTMENTS OF Agriculture at Annual Meeting in Memphis, TN, JUNE 19, 1985 Whereas, the Congress has imposed a temporary eight cents (8¢) per package excise increased tax on cigarettes, and Whereas, the said temporary increased excise tax is scheduled to "sunset” on October 1, 1985, and revert to its previous level, and Wheras, this is a very discriminatory and regressive tax paid by a disproportionate class of consumers and Whereas, the members of the Southern Association of State Departments of Agriculture, representing the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia, and Puerto Rico and the U.S. Virgin Islands, wish to protest the imposition of the said temporary increased tax; now therefore, be it. Resolved by the members of the Southern Association of State Departments of Agriculture, That they do hereby recommend to and urge the Congress to allow this temporary eight cents (8¢) cigarette excised tax to "sunset" on October 1, 1985, as scheduled and revert to its previous level. RESOLUTION BY THE SOUTHERN TOBACCO & CANDY ASSOCIATION Whereas, the Congress has imposed a temporary eight cents (8¢) per package excise increased tax on cigarettes, and Whereas, the said temporary increased excise tax is scheduled to "sunset" on October 1, 1985, and revert to its previous level, and Whereas, this is a very discriminatory and regressive tax paid by a disproportionate class of consumers and Whereas, the members of the Southern Tobacco & Candy Association, representing wholesale tobacco distributors in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia, wish to protest the imposition of the said temporary increased tax, now therefore, be it Resolved by the members of the Southern Tobacco & Candy Association, That they do hereby recommend to and urge the Congress to allow this temporary eight cents (8¢) cigarette excise tax to "sunset" on October 1, 1985, as scheduled and revert to its previous level. Done in convention assembled this 16th day of June, 1985, at Little Rock, Arkan sas. Hon. DAN ROSTENKOWSKI, TRAVEL AND TOURISM GOVERNMENT AFFAIRS COUNCIL, Chairman, Committee on Ways and Means, Longworth House Office Building, Washington, DC. DEAR MR. CHAIRMAN: Pursuant to the Committee's June 19 hearings, the Travel and Tourism Government Affairs Council appreciates the opportunity to express its views, for the record, on the U.S. Customs Service user fee proposal. Efficient and expeditious Customs clearance is of critical importance to our industry. For some time we have been concerned, and have repeatedly so testified, that the flow of these visitors has far surpassed the ability of Customs inspectors to process them. We thus applaud the Trade Subcommittee of your Committee which has recommended not only the restoration of 887 positions slated for elimination but the addition of 800 new positions. Though we are acutely aware of the exigencies imposed by budgetary constraints, we believe that the Customs fee proposal falls unfairly, inappropriately and arbitrarily upon the travel industry and international visitors. 1. THE FEE PROPOSAL IS UNFAIR AND ARBITRARY BECAUSE THE "SERVICE" CONFERS NO BENEFIT UPON THE "USER" Congress provided guidelines for the imposition of user fees in the Independent Offices Appropriations Act of 1952. Title V provides that: "... Government activities resulting in special benefits or privileges for individuals or organizations be financially self-sustaining to the maximum possible extent"; and Regulations prescribing fees be as nearly uniform as practicable"; and Fees be fair and equitable, taking into consideration direct and indirect costs to the Government, value to the recipient, public policy or interest served and pertinent facts." In 1959, a Circular was issued by the Bureau of the Budget (now the Office of Management and Budget) which attempted to interpret the 1952 Act for the agencies, and advise them with respect to its implementation. "Where a service (or privilege) provides special benefits to an identifiable recipient above and beyond those which accrue to the public at large, a charge should be imposed to recover the full cost to the Federal Government of rendering the service. For example, a special benefit will be considered to accrue and a charge should be imposed when a Government-rendered service: (a) Enables the beneficiary to obtain more immediate or substantial gains or values (which may or may not be measurable in monetary terms) than those which accrue to the general public (e.g., receiving a patent, crop insurance, or a license to carry on a specific business); or (b) Provides business stability or assures public confidence in the business activity of the beneficiary (e.g., certificates of necessity and convenience for airline routes, or safety inspections of craft); (c) Is performed at the request of the recipient and is above and beyond the service regularly received by other members of the same industry or group, or of the general public (e.g., receiving a passport, visa, airman's certificate, or an inspection after regular duty hours).' 66 Interpreting the Act in a 1975 case (FCC v. New England Power Co.) the Supreme Court held that no charge should be made for services rendered when the identification of the ultimate beneficiary is obscure and the service can be primarily considered as benefitting broadly the general public." Moreover, as the President affirmed in his 1983 budget message: "In cases where the general public is the recipient of the benefits of a federal program, rather than a clearly identified group, users fees will not be imposed." More recently, in a 1985 report, the General Accounting Office (GAO) found with regard to Customs user fees: "GAO does not believe there is merit in assessing user fees for the formalities that are not voluntary because these formalities protect the nation as a whole." Quite simply, the proposed fee does not consitute consideration for a "service": (1) which provides a benefit to the user above and beyond that which accrues to public at large; (2) provides business stability or assures public confidence in the business activity of the beneficiary; or (3) is performed at the request of the recipient. . Moreover, in addition to the three quarters of a billion dollars in federal revenue directly derived from foreign visitors, the Customs service brings in over $20 in revenue for each dollar it spends. Clearly, Customs activities are more than self-sus |