The CHAIRMAN. We welcome our first witnesses, representing the administration, who will appear today and tomorrow. The public witnesses will be heard beginning on Monday, September 14.

Secretary Kennedy, Chairman Train, Under Secretary Veneman, and Dr. Heffner, we welcome you to the committee and you may proceed with your statements. The Chair recommends that the panel be permitted to present their entire statements first, to be followed then by questions from the members.

Secretary Kennedy, you are recognized to open the program this morning.

STATEMENT OF HON. DAVID M. KENNEDY, SECRETARY OF THE TREASURY; ACCOMPANIED BY JOHN S. NOLAN, ACTING ASSISTANT SECRETARY, TAX POLICY DIVISION

Secretary KENNEDY. Mr. Chairman, members of the committee, the President has recommended three tax measures which deserve your immediate consideration—

A tax on lead additives used in the refining of gasoline;

An acceleration of the required time of payment of gift and estate taxes; and

A 1 year postponement of scheduled reductions in the automobile and communications services excise taxes.

This tax on lead additives in gasoline is an essential step at this time to deal with our increasing problem of pollution. The other measures are principally short-term revenue-raising measures, although the acceleration in payment of estate and gift taxes also permanently improves the operation of the estate and gift tax laws, by giving the Government, subject to reasonable limitations, more current use of its tax revenues.

I will describe each of these measures separately.

TAX ON LEAD ADDITIVES

One of our greatest national concerns at the present time is the preservation and improvement of our environment. We must stop further deterioration in environmental conditions, particularly in the most vital element of all-the air we breathe. We must insure that our air remains clean and fit then for human use. This is an obligation we have to future generations as well as to ourselves.

One of the largest contributors to air pollution at the present time is the internal combustion engine in our automobiles. The administration has established a priority program to reduce this air pollution. Our recommendation of a tax on lead used in gasoline additives is a vital element of that program.

The need for this tax is immediate. Gasoline refiners use lead additives to obtain higher octane ratings at the lowest cost. Because of these additives, lead compounds are discharged into the air in the exhaust fumes. The presence of these compounds in the environment is dangerous, both for the present as well as for the future. This tax will impose an economic penalty on the use of such additives which will permit unleaded gasoline to be produced and marketed at a price competitive with leaded gasoline of similar octane rating. This, in conjunction with other steps being taken, will reduce the use of these additives.

At the present time, lead components account for a major portion of the solids contained in exhaust fumes. Public health scientists are becoming increasingly concerned that the presence of these compounds in the air we breathe is damaging to human health. Furthermore, research is developing convincing evidence that the small particles serve as nuclei or surface catalysts for the formation. of the smog which is choking so many of our major cities and which itself is a major health hazard. Furthermore, lead is not the only major pollutant in automobile exhaust. Auto exhaust also contains afterproducts of the internal combustion itself-hydrocarbons, carbonmonoxide, and oxides of nitrogen. These along with lead, are the source of smog.

The Federal Government has been working closely with the automobile industry to develop major solutions to the problem of air pollution. One element of the program is to adopt engine designs in new automobiles which will operate on lower octane gasoline. Since lead is added to increase octane, abatement of the octane race makes it feasible to begin now to reduce and eventually eliminate the lead in gasoline.

An equally important element in the program is a requirement that automobile manufacturers build into their new automobiles, beginning with 1975 models, devices to eliminate the noxious elements in the exhaust the hydrocarbons, carbon monoxide, and oxides of nitrogen. Thus, stringent standards for automotive emissions will go into effect at that time, and these can be satisfied only with emission control devices presently under development.

At the present time, there are no production-proven emission control devices, that will meet these standards. An important device currently being developed by private industry to meet the standards, the catalytic reactor, could be destroyed by a single tankful of highly leaded fuel.

Accordingly, impending future needs require that at this time we create an effective incentive to industry to convert to the production of gasoline with little lead and in time no lead. Unleaded gasoline must be generally available in large quantity by midsummer of 1974, if the emission control standards program is to succeed.

Imposition of the tax will provide necessary assurance to the automobile industry that the fuels their products will require will be available. Decisions are currently being made concerning the design of the 1975 model year automobiles. Confidence that unleaded fuel will be available will permit firm conclusions to be made as to incorporation of catalytic reactors or other such devices. In addition, during the intervening years, limited user testing of various engine and emission control designs will be a vital element in the eventual development of the best overall system. This entire program of development to reduce air pollution from the internal combustion engine will be greatly facilitated if the auto industry knows with certainty that unleaded fuel will be generally available by the time their 1975 model automobiles are in production.

The gasoline refining industry requires at least 2 years' leadtime before decisions to make significant alterations or expansion of refining facilities can be put into effect. This expansion and alteration will be necessary to insure the availability of sufficient quantities of leadfree fuel.

We recognize that some companies have recently made such fuels available on a limited basis. However, the quantities available are in fact quite limited in relation to our total gasoline requirements. This tax will provide reasonable economic pressure to assure that a complete_conversion takes place on a reasonable basis over a period of time. It is important that this industry recognize the seriousness of this effort and the Government's complete dedication to achieving the goal. Enactment of this tax will adequately signal our intentions in this respect.

Adoption of the tax, coupled with suitable regulatory requirements as to fuel composition, as also proposed by the President, is the most appropriate way of achieving the objective of removal of lead from gasoline.

Imposition of the tax will complement regulatory requirements as they come into existence by creating an immediate economic incentive to switch to low leaded and unleaded gasoline.

The amount of the tax is set so as to minimize any cost advantage as a result of the use of lead. By making it possible for refiners to effectively market unleaded and low lead gasoline, the tax will create a competitive situation causing refiners to convert to such output. Competitive pressures in this regard already are in evidence, undoubtedly influenced by anticipation of the imposition of the tax.

The proposed rate is sufficient to induce refiners to increase their production of 91 octane unleaded fuel and 94 octane low-lead fuel within the limits of present octane production capability.

This coincides with the automakers' announcements that their 1971 model cars will operate on such a fuel. The result of the tax will be to assure the availability of fuels which minimize lead use as quickly as conditions allow and to assure general availability of leadfree gasoline by midsummer of 1974.

In addition to the benefits described above, enactment of the tax may well have a beneficial effect for the average motorist in reducing his maintenance costs. Large amounts of lead compounds can cause rapid deterioration of muffler and exhaust systems. Lead deposits also foul ignition systems and other internal engine parts.

Elimination or reduction of lead may therefore lead to operating economies for every motorist. These economies will help overcome any increase in gasoline prices resulting from the inability of refiners to use lead to achieve the desired octane levels.

In summary, adoption of the tax at this time is vital to our attempt to reduce some air pollution immediately. Furthermore, it will assure significant future improvement, thus reducing a health danger and minimizing smog conditions. It will cause gasoline refiners to begin conversion to low lead and eventually nonleaded fuel so that there will be assurance of incorporation of effective pollution control devices in the 1975 automotive models. Finally, we believe that it will stimulate research and development of even more effective pollution control systems by providing assurance that nonleaded fuel will be generally available in the near future.

We recommend a tax of $4.25 per pound of lead in lead additives used in gasoline. The tax should be imposed on sales of the lead additives by manufacturers and importers. The tax should become effective as of October 1, 1970. A floor stock tax would be imposed on all inventories of lead additives held by persons other than manufacturers or importers on that date.

To prevent undue hardship on smaller refiners, we recommend that in the case of any corporate group, additives containing up to 1 million pounds be freed of the tax in its first full year of operation. This amount should be decreased at the rate of 200,000 pounds per year so that the tax will be fully in effect in 1976.

If the tax is made effective on October 1, 1970, as we recommend, it will result in a revenue increase of $1.1 billion in the fiscal year ending June 30, 1971.

ACCELERATION IN GIFT AND ESTATE TAX PAYMENTS

The President has recommended that the collection of estate and gift taxes be accelerated in order to provide approximately $1.5 billion in additional receipts for fiscal year 1971. We have submitted to Congress full details for implementing the President's proposal.

Our proposal would require the filing of the gift tax return and payment of the tax on a quarterly basis on the last day of the month following the end of the calendar quarter in which the gift was made. This will not be a burdensome requirement. Timing of gifts is at the donor's option, and gifts made during any calendar quarter are readily identifiable. At the present time, a substantial majority of donors make all their gifts in a single calendar quarter of any year; thus it is expected that few additional gift tax returns will be required under the quarterly system.

Our original proposal would also require the payment of an estimated estate tax 7 months after death. This recommendation has generated considerable interest and controversy. Representatives of the Trust Division of the American Bankers Association and the Tax Section of the American Bar Association have proposed an alternative under which there would be no estimated tax requirement. Instead, the time for filing the estate tax return and paying the estate tax would be changed from 15 months to 9 months after death. An accompanying change would shift the alternate valuation date from 1 year to 6 months after death. The alternative proposal also calls for speed up in the auditing of Federal estate tax returns and the release of fiduciaries other than the executor from personal liability for the tax.

The alternative proposal would also change the holding period rule so that any property included in the gross estate which is sold within 6 months after death would be given long-term capital gain

treatment.

This alternative proposal is designed to reduce the time necessary to complete administration of estates due to tax considerations. By requiring the filing of the estate tax return and payment of the estate tax 6 months earlier than under present law, the alternative proposal should normally shorten the period of estate administration by at least 6 months. This would represent a major improvement in our legal system.

This alternative proposal has received widespread endorsement from various bar associations, professional fiduciaries, and other taxpayers and their representatives.

After study, we have concluded that this alternative is preferable to our original proposal for an estimated estate tax, and accordingly we now recommend the principal features of the proposal to you for adoption.

We have some minor modifications in the specific proposals of these groups and we are submitting for the record at this time a draft bill incorporating our recommendations for adoption of the alternative proposal.

An important feature of the proposal is a speed up in the time of auditing Federal estate tax returns. While this cannot be reflected in the draft legislation, we are prepared to make changes in the Internal Revenue Service's audit procedure in order to shorten the time now required to complete audits of estates. These steps will reduce further the time necessary for the administration of estates.

A major advantage of the alternative proposal is its simplicity when compared to the proposal for estimated estate tax returns. No additional return would be required; the time for filing the final return would merely be shortened.

In order that this proposal achieve its primary revenue-raising purpose, it is absolutely essential that it be made effective so as to require the filing of the estate tax returns of decedents dying prior to September 30, 1970, no later than June 15, 1971, or 9 months after death, if later.

Returns of decedents dying after September 30, 1970, will be required to be filed 9 months after death. In the case of persons dying before September 30, 1970, there is no unfairness in shortening the 15 months' period under existing law. None of these estates will be required to file returns less than 9 months after the decedent's death. Notice of our intention to seek this type of legislation was first announced to the public in April 1970.

This recommendation will result in a revenue increase of $1.5 billion in the fiscal year ending June 30, 1971.

EXCISE TAX EXTENSION

The existing budget situation and economic outlook require continuation of the present 7-percent excise tax on automobiles and 10percent excise tax on telephone services through calendar year 1971. These taxes at present levels have played an important part in the anti-inflation program, and the scheduled reductions of these taxes would seriously weaken the program which has proven so successful in recent months. Thus, it is proposed that all scheduled reductions of these taxes be deferred for 1 year, and that their repeal be deferred until December 31, 1974.

The recommended extensions of present levels of excise taxes will prevent a revenue loss of $650 million in the fiscal year ending June 30, 1971, and $1,250 million in the fiscal year ending June 30, 1972. At this time Chairman Russell E. Train of the Council on Environmental Quality, Under Secretary John G. Veneman of the Department of Health, Education, and Welfare, and Dr. Hubert Heffner, Deputy Director of the Office of Science and Technology, will present their statements with respect to the tax on lead used in gasoline additives. Following their statements we will all be available to answer questions on the lead tax. Members of my staff and myself will answer questions on the estate and gift tax acceleration and the excise tax extension.

Thank you.