Mr. CURTIS of Nebraska. They have felt that their prices should come up? Mr. PARKINSON. Definitely. Mr. CURTIS of Nebraska. Are you able to state if the tax is reduced whether or not the price of cigarettes will be reduced? Mr. PARKINSON. I am not able to state that. Mr. CURTIS of Nebraska. That is all, Mr. Chairman. Mr. MASON. Mr.Chairman? The CHAIRMAN. Mr. Mason will inquire. Mr. MASON. If H. R. 1 were passed, Uncle Sam would let me have, personally, something like $300 or more to spend on myself and my family, instead of him taking it at that 10 or 11 percent that is in Mr. Rhode's bill. And if I had $250 or $300 more each year to spend on myself or my family, and if I were a smoker, would I not use part of that money to increase my smoking allowance? Mr. PARKINSON. I am sure you would. Mr. MASON. Then, so far as the economy of the Nation is concerned, what is the difference whether Uncle Sam takes that dollar and spends it for defense, or whether he leaves that dollar with me to spend for the many things that I want and need, and which my family needs. It would be the same reflection in the production, only it would be a production of different things rather than war materials, would it not? Mr. PARKINSON. If you had $300 more to spend, by virtue of a decrease in your personal income taxes, and you had not curtailed your appetite for cigarettes in the meantime, you wouldn't increase the consumption of cigarettes by virtue of the fact that you got an extra hundred dollars unless perhaps you were not in an income bracket that allowed you to smoke all you wanted to smoke beforehand. Mr. MASON. Yes; I understand that. But I am talking about the average fellow. I just used myself as an example, and that is what it would mean to me if we passed that bill. I am always insisting that a dollar spent by the consumer will have just as great an effect upon our production economy as a dollar spent by Uncle Sam. It only means a difference in what that dollar is spent for. That is all, Mr. Chairman. The CHAIRMAN. We thank you very much for your testimony. (The following letter was received from Mr. Parkinson subsequent to his appearance:) Hon. DANIEL REED, NATIONAL TOBACCO TAX RESEARCH COUNCIL, INC., Chairman, Ways and Means Committee, House of Representatives, Washington 25, D. C. My Dear MR. REED: Since my appearance before your committee on July 29 to represent this organization in its petition for a reduction of the Federal excise tax on cigarettes to $3 per 1,000, I have been somewhat troubled in mind over the questions which were put to me by certain members of the committee then present. Before proceeding with a discussion of this matter, I should like to express to you my deep appreciation for the obviously fair manner in which you presided at the hearing and to assure that nothing I have to say is intended to be critical of those who put questions to me. You will recall that at this particular hearing there were beside yourself only four members present. The formal statement which I read and left with the committee speaks for itself as to the merits of our appeal for a tax reduction. The facts therein stated will, I am sure, stand the test of inquiry. With regard to the questioning that followed the reading of my statement, I should like to make the following observations: (1) It was my understanding that the purpose of the instant hearings was aimed to the correction of inequities in the internal revenue laws. The statement of the council was prepared wholly with that in mind. Questions were addressed to me by members of the committee, however, which were predicated on the assumption that no Federal taxes could be reduced at the present time. Recalling your valiant efforts of some weeks ago to effect a reduction in the excess-profits tax and the fate of that proposal, I would not have had the temerity to appear before the committee urging a peremptory reduction in the cigarette tax. As I have said, our proposal was hinged on the palpable inequity of the present cigarette excise tax in the light of other excise tax provisions and contemplated a correction of this inequity at such time as the Congress was of a mind to comb out the inequities generally. (2) During my interrogating, questions were asked regarding the merit or propriety of a request for a tax reduction on cigarettes in the face of the fact that the demand for cigarettes by the Nation's citizens shows an ever-increasing volume. I did not deem it necessary, nor do I think the public in general would consider it imperative to adduce evidence to prove outright catastrophe to taxpayers in order to establish that a given tax provision is in need of correction. Must it be demonstrated that the cigarette excise tax in its present form threatens to put the tobacco farmers out of business, or to render insolvent the processors and distributors of cigarettes, or to undermine the budget of the average American family in order to present a meritorious case? In the formal statement of the council no attempt was made to show such baleful influences of the present tax. From the testimony of petitioners for relief in the case of certain other excise taxes, one notes from the record that such claims were made. Yet if unbiased inquiry is made into the causes of the declining fortunes of some of the interests affected, it will doubtless be found that tax policy is not the controlling factor. It is easy enough for some businessmen to lay at the door of tax policy the blame for economic misfortunes only remotely attributable to taxation. (3) One other question was asked me to which I am afraid my response was not as apt as it might have been. One of the members of the committee noted that the public had not appeared before the committee to petition for a reduction in the cigarette excise tax. I should have said in answer to this line of inquiry that the council was speaking on behalf of the general public interest in its petition for rate reduction. The American public which pays billions of dollars in excise taxes of one sort or another has very little knowledge of the burden of any given excise tax for the simple reason that such taxes are concealed and are just a part of the purchase price of the commodity by the time the commodity reaches the final consumer. A very burdensome tax, such as is the cigarette tax, is not registered in the mind of the consuming public. Moreover, because cigarettes represent a commodity of relatively low unit price, an excessive tax which adds only several cents to the consumer outlay at a given time is not regarded as being as oppressive as a relatively low tax on a commodity whose unit sales price runs into hundreds or thousands of dollars. The inequity of an excessive tax on a low-priced commodity is not mitigated because the consuming public fails to appreciate its magnitude. I write you at this length only with a view toward clarifying the responses, some of which I now regard as having been inadequate. At such time as the committee sits again to consider the merits of the various proposals which have been made for excise tax reductions, I would express the hope that you might see fit to give the committee the benefit of the views which I have here expressed. With best wishes, I am, Sincerely yours, F. M. PARKINSON, The CHAIRMAN. The next witness is Mr. Carl Carlson, on behalf of the Cigar Manufacturers Association of America, New York City. Mr. Carlson, will you give your name and the capacity in which you appear? STATEMENT OF CARL CARLSON, VICE PRESIDENT, CIGAR MANUFACTURERS ASSOCIATION OF AMERICA, NEW YORK CITY Mr. CARLSON. Mr. Chairman and gentlemen of the committee, my name is Carl Carlson, and I am an executive officer of Garcia y Vega, Inc., manufacturers of cigars since 1882. I am also a vice president of the Cigar Manufacturers Association of America, a trade association, national in scope, and whose members produce in unit and dollar volume well over 80 percent of the total production of cigars. Our association appeared before your committee in 1947 and in 1950 seeking a reduction and revision of excise taxes on cigars. It again appeared in 1951 in opposition to an increase in the tax rates on cigars proposed by the then Secretary of the Treasury. Your committee was so impressed with the adverse conditions prevailing in the cigar industry that in 1950 it recommended a substantial reduction in cigar excise-tax rates, and in 1951 rejected the recommendation of the Secretary of the Treasury for increased taxes. When we appeared here on each of those previous occasions, we stated that conditions in the cigar industry were bad. They are still bad. As revealed by a recent report of the Federal Trade Commission, the rate of return, after taxes, on stockholders' investments has steadily declined since 1947. For a 10.2 percent rate of return in 1947 it dropped to 5.6 percent in 1951. The 9 reporting companies whose composite rate of return is reflected in these reports produced more than one-half of the industry's entire output, so that it is a fair conclusion that these 9 companies represent the largest of the 1,763 cigar manufacturers in the continental United States. More significantly, the Federal Trade Commission survey reveals that of the nine reporting companies, the smaller ones have been hardest hit during these postwar years. The 5 smallest of these 9 reporting companies with a return of only 4.5 percent in 1949, their best year, dropped to 3.1 percent and 2.9 percent respectively in 1950 and 1951. It must follow that the rest of the cigar industry which is not included in this report and which are predominantly small cigar manufacturers experienced a similar uneconomic rate of return on their investments. A further evidence of the depressed plight of the cigar industry, of the 10,000 or more cigar manufacturers in business in the continental United States in 1926, the Commissioner of Internal Revenue reports that only 1,763 remained by the end of 1951. A study of this report points up that the mortality rate has been greatest among the smaller manufacturers, that is, those with sales of less than $50,000 per year. Of these smaller manufacturers of whom there were over 3,000 in business in 1941, the year immediately prior to the enactment of the tax measure for which we now seek relief, almost half had been forced to close their factories by the end of 1951. When we were here in 1947 and again in 1950 we did not plead for outright repeal of excise taxes on cigars. We do not now ask for outright repeal, but renew our request for an easing of the inequitable and burdensome excise tax which for so many years has hampered our industry and prevented it from adjusting itself to a peacetime economy. When Secretary Morgenthau appeared before your committee in March of 1942 seeking additional wartime revenues, he requested $13 millions annually in addition to the prewar return of approximately $13 millions, in effect doubling the then existing tax revenue from the cigar industry. Instead of an additional $13 millions per year in war revenue, that wartime tax schedule of 1942 has yielded more than $30 millions additional revenue during each of the postwar years. Thus, instead of approximately $26 millions per year in revenue requested from this industry, we have ben paying more than $43 millions per year since the end of the war. Instead of doubling the prewar revenues, the wartime tax schedule has more than tripled them. We cannot adjust our price structure to the present economy if we must continue to pay oppressive taxes. We do not ask to go back to the tax schedule which yielded approximatel $13 millions in 1941. We ask merely that we be not compelled to pay more than was requested, an additional wartime revenue by Secretary Morgenthau in 1942. We are willing to pay the $26 millions annually which we should and would have been paying if the Treasury's mathematical error had not been made back in 1942 by a hastily drawn inept tax schedule. When your committee voted a tax reduction in 1950, it said: The rate reduction provided for cigars, in your committee's bill, will increase cigar sales relative to other tobacco products or at least aid the cigar industry in maintaining its present relative position. Gentlemen, the reasons which compelled you to take that action in 1950 still prevail today. Thus in 1952 the revenue collected on cigars was 241 percent greater than it was in 1941, although the number of cigars sold in 1952 was only 3 percent more than 1941. During the same period, our cigar leaf-tobacco costs increased 169 percent and our labor rates 138 percent. These rising costs of materials and labor, coupled with an excessive tax burden, continue to squeeze the industry's narrow margins, preventing any adjustment in its price structure. Further evidence of the depressed condition of the cigar industry is indicated by the long-term downtrend in the per capita consumption of cigars. The United States Department of Agriculture recently released figures for the years since 1920 and stated: *** during the past three decades, cigar consumption has not kept pace with the population growth. These figures reveal that although cigar per capita consumption recovered slightly during the past 4 years, it was nevertheless lower in 1952 than it had been in any prewar year except the depression years of 1932 and 1933. We submit, gentlemen, that a reduction in cigar excise taxes is imperative and unless relief is granted promptly the damage to the economic stability of the industry, as well as to its future, will be irreparable. Before I conclude, I should like briefly to point out the inequity of the present tax schedule. It was enacted without regard to the economic needs of this industry. It is an unrealistic schedule, disregarding the pricing practices of the industry, with the result that the tax rates now imposed bear no relationship to the retail price of a cigar. For example, the 3-for-25-cents cigar is taxed at a rate of 12 percent; the 20-cent cigar at 72 percent; and the popular-priced 10-cent cigar at 10 percent. We have devised, we believe, a more equitable form of taxation which has received the endorsement of the farmers, the leaf packers, the manufacturers, the distributors, the retailers, and the suppliers of our materials, and which we submit for your consideration. You will find our proposed tax schedule attached to the summary now before you and it will also be incorporated in the brief, which I understand we will be permitted to file with the clerk on or before August 6. May I assume we have the committee's approval to so do? Mr. SIMPSON (presiding). You have. (The summary and brief referred to follow :) CIGAR INDUSTRY'S STORY AT A GLANCE-CIGAR MANUFACTURERS ASSOCIATION OF AMERICA, NEW YORK, N. Y. 1. THE PRESENT TAX ON CIGARS IS EXCESSIVE (a) It has exacted revenues vastly in excess of that anticipated when enacted as a wartime measure in 1942. (b) The Secretary of the Treasury in 1942, estimated his proposed revision would yield additional revenue of approximately $13 million annually; a doubling of the prewar revenue. Instead of doubling it has resulted in a tripling of the industry's tax burden-yielding approximately $43 million annually instead of the $26 million anticipated. 2. THE CIGAR INDUSTRY'S HEAVY TAX LOAD HAS DEPRESSED ITS PROFIT MARGINS TO UNECONOMIC LEVELS The rate of return on stockholders' investments in the cigar industry have declined steadily since 1947, according to the Federal Trade Commission. From 10.2 percent in 1947 to 5.6 percent in 1951 with the greatest burden falling on the smaller companies whose best year, 1949, showed a return on invested capital of only 4.5 percent. And this has since declined to 2.9 percent in 1951. 3. SMALL BUSINESS IN THE CIGAR INDUSTRY HAS BEEN HARDEST HIT Of more than 10,000 cigar manufacturers in business in 1926, only 1,763 remained by the end of 1951. In 1941 there were over 3,000 cigar manufacturers whose sales were less than $50,000 annually. But by the end of 1951 nearly half of them were forced to close their factories (Internal Revenue Bureau). 4. THE CIGAR INDUSTRY CANNOT ADEQUATELY ADJUST ITSELF TO PRESENT CONDITIONS WITHOUT A LESSENING OF THE TAX LOAD Greater sales are required to obtain a fair return on invested capital. Rising cost of materials, labor, transportation, etc., continue to squeeze the already narrow margins. Increased sales are impossible without a tax reduction. 5. TAX REVENUE HAS INCREASED MORE THAN ANY OTHER MAJOR COST ELEMENT IN A CIGAR Compared with 1941, tobacco increased 169 percent in 1952; labor rates in. creased 138 percent, and revenue taxes increased 241 percent. Despite these tremendous increases, the cigar industry has been unable because of consumer resistance to adjust its prices with the result that net earnings have diminished to uneconomic levels. 6. THE CIGAR INDUSTRY IS NOT KEEPING PACE WITH UNITED STATES ECONOMY Comparing 1952 with 1941 consumer's dollar expenditures for cigars increased 96 percent while expenditures for durable goods increased 174 percent, and nondurable goods 170 percent. Disposable income of consumers in the United States rose 155 percent. But a proportionate share of this income was not expended for cigars. 7. PRESENT TAX STRUCTURE HAS RESULTED IN SERIOUS DISLOCATIONS The present tax schedule now in effect is inequitable and has resulted in serious dislocations between price brackets. It has little relationship to the retail price of the product. The tax rates ranging from 4 percent to 25 percent. |