GENERAL REVENUE REVISION

MONDAY, AUGUST 10, 1953

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D. C.

The committee met, pursuant to recess, at 7 p. m., in the Ways and Means Committee room, Hon. Daniel A. Reed (chairman) presiding. The CHAIRMAN. The committee will come to order.

The committee will continue hearing testimony on excise tax rates for this evening. I notice there are 20 witnesses listed. In the interest of hearing each of those, it is requested that those persons testifying keep their presentation to a minimum.

The first witness is Mr. T. F. McMains, vice president, the Western Union Telegraph Co.

STATEMENT OF THOMAS F. McMAINS, VICE PRESIDENT AND ASSISTANT TO THE PRESIDENT, WESTERN UNION TELEGRAPH

CO.

Mr. McMAINS. I am Thomas F. McMains, vice president and assistant to the president of the Western Union Telegraph Co.

The CHAIRMAN. Pardon me if I make a preliminary statement, for the benefit of those who are present. Of course, we would like to have the whole 25 members here, but many of them are necessarily engaged in activities elsewhere and some of us are staying on. Whatever you present here, however, will go into the permanent record. Each paper will be carefully examined by the experts and read by us. So even though there are only a few of us here, you are not going to be neglected and your work is not going to go unnoticed.

You may proceed.

Mr. McMAINS. In order to conserve time, I will confine my oral testimony to the highlights, but if it is agreeable, I would like to have my statement filed.

The CHAIRMAN. Without objection that will be made a part of the record at the conclusion of your remarks.

Mr. McMAINS. I appreciate this opportunity to appear before the committee on a matter of vital importance to the Nation's telegraph system. Telegraph excise taxes while representing less than onequarter of 1 percent of the total excise taxes collected by the Federal Government places the Nation's telegraph system at a serious competitive disadvantage with the tax-free and Government-subsidized airmail service.

This competitive inequity would be grave enough were it limited to the ironical fact that the telegraph company is compelled to aid in the

destruction of its own volume by exacting from telegraph users, through the medium of an excise tax on telegrams, an amount equivalent to a substantial part of the airmail subsidy.

Senate Report No. 53, presented on June 22, 1953, by the United States Senate Committee on Interstate and Foreign Commerce, reviewed in detail the situation of the Nation's telegraph system and declared:

The domestic telegraph business must fight three powerful competitive services, one of which it has no hope of ever meeting on equal economic terms through no fault of its own. That service is the domestic airmail, which is subsidized by the taxpayers of which Western Union is one, and which has made heavy inroads on long-haul message service.

Progress by the Nation's telegraph service, which is essential to the civilian economy and vital to the national security, is arrested by the steady attrition of telegraph volume. How serious this threat is may be judged by the fact that, as pointed out in Senate Report No. 53, previously mentioned, the number of public telegraph messages hanaled by Western Union declined from 194 million in 1945 to 130 million in 1952, a drop of 64 million or 33 percent. While there was a strike of telegraph employees in the spring of 1952, last-quarter figures for that year, when operations were normal, showed a volume decline of nearly 7 percent compared with the same quarter of 1951, and a drop of nearly 11 percent against the last quarter of 1950.

It should be noted that the continuing decline in telegraph volume, aside from its far-reaching and evermore serious consequence to the Nation's telegraph system, has already been a major factor in destroying the jobs of more than 23,000 telegraph workers.

The fact that the telegraph company provides the only service directly competitive with the tax-free and subsidized airmail cannot be overemphasized. In addition, other services in the regulated public utility field, such as gas, electricity, and water, bear no Federal excise tax, unlike the telegraph service. In effect, Western Union users are providing a subsidy for one of the telegraph company's major competitors the airmail, while at the same time the telegraph company is expected to compete with the world's largest corporation-the telephone company.

In considering H. R. 4473, Revenue Act of 1951, which was enacted into law by the 82d Congress as Public Law 183, the report of the United States Senate Committee on Finance stated:

Since World War II, telegraph service in the United States generally has been carried on at a deficit. In the forepart of this year, the service was operated at a profit, but wage adjustments which have recently been made have again placed telegraph service in a deficit position. By reducing this tax on a telegraph service, your committee anticipates that it will be possible to decrease the amount paid for telegraph messages, and that as a result the volume of business done will be increased and the profit position of the industry improved. Telegraph service not only is essential to the civilian economy but also is essential to national security * *

Public Law 183, as indicated, accordingly contained a provision reducing the telegram tax from 25 percent to 15 percent on November 1,

1951.

While the telegraph company's operations are presently producing a modest margin of profit, aided by the abnormal level of general business arising from the national defense program, the company is not enjoying and has not enjoyed a fair rate of return, as measured by

regulatory concepts. Western Union, during 1952, earned a return of less than 2 percent on its estimated rate base. While in that year the telegraph company's operating revenues were adversely affected by the strike, during 1951, when there was no interference with regular operations, the telegraph company earned a return of only 32 percent.

Western Union since World War II has spent over $100 million obtained largely from the sales of its real estate and other assets, and from depreciation allowances in an extensive mechanization and improvement porgram, which has doubled the peak World War II capacity of the telegraph system. But, despite every effort of management to better serve the Nation by improved and increased telegraph facilities to meet all civilian and Government needs in any emergency, telegraph volume continues to decline.

Senate Report No. 53, from which I have already quoted, stated, after examining volume, employment and other statistics covering the industry:

These are the pertinent facts gathered by your subcommittee. They make clear, your subcommittee believes, that under a continuance of existing conditions this vitally important communications serrvice, important to the carrying on of American business and even more important to the national defense is rapidly drifting toward trouble in spite of temporary improvements brought about by various emergencies and economy measures taken by the company.

The amount of telegraph excise tax collections, less than $22 million in 1952, and representing less than one-fourth of 1 percent of all Federal excise taxes, could have no substantial bearing on Government budget problems. But elimination of this volume-destroying tax would be a factor of major significance to the Nation's telegraph system, stimulating greater volume which the company urgently needs and is prepared to handle.

The elimination of the 15 percent excise tax on telegrams would by no means represent an equivalent loss to the Treasury. Of the total of $21,736,000 paid in domestic telegram taxes by telegraph users in 1952, nearly 80 percent represented taxes on business telegrams. Consequently $17 million of these excise taxes paid by telegraph users in 1952 represented deductible costs of doing business reflected in the users' income tax returns. Assuming these users had taxable income, and using the 52 percent tax rate applicable to corporations, and without considering excess profits taxes, nearly $9 million would have been payable by these business telegraph users in additional Federal income taxes if telegram taxes had not been applicable.

It is clear, too, that the prospect of larger Federal income tax payments by Western Union would be an important consideration with the improved volume likely to result from a reduction in the cost of telegraph service to the public.

The Nation's telegraph system has carried through an extensive nationwide mechanization program that has doubled its World War II capacity, to meet the requirements of the civilian economy and national defense in any emergency.

But, while other regulated public utility services like gas, electricity, and water are free from excise taxes, telegraph service bears a 15 percent Federal excise tax. This tax, by increasing the cost of the telegraph service to the public, drains off millions of dollars in

revenue urgently needed for the support of the national telegraph system.

It is respectfully submitted that it is in the public interest that the volume-destroying excise tax on telegrams be eliminated, to carry out the intent of Congress, as expressed in the Revenue Act of 1951, to reduce the cost of telegraph service so that the volume of business done can be increased and the position of this vitally necessary public service improved.

Western Union urges the complete elimination of the Federal excise tax on telegrams in the public interest, as well as the interest of 42,000 telegraph employees, 4,800 pensioners, and 20,000 stockholders. Thank you, sir.

The CHAIRMAN. Thank you very much.

Are there any questions? The Chair hears none.

(Mr. McMains' prepared statement follows:)

STATEMENT OF THOMAS F. MCMAINS, VICE PRESIDENT AND ASSISTANT TO THE PRESIDENT OF THE WESTERN UNION TELEGRAPH Co., RE TOPIC 40, EXCISE TAXES

My name is Thomas F. McMains. I am vice president and assistant to the president of the Western Union Telegraph Co. I appreciate this opportunity to appear before the committee on a matter that is of vital consequence to the Nation's telegraph system.

Telegraph excise taxes, while representing less than one-quarter of 1 percent of the total excise taxes collected by the Federal Government, place the Nation's telegraph system at a serious competitive disadvantage with the tax-free and Government-subsidized airmail service.

This competitive inequity would be grave enough were it limited to the ironical fact that the telegraph company is compelled to aid in the destruction of its own volume by exacting from telegraph users, through the medium of an excise tax on telegrams, an amount equivalent to a substantial part of the airmail subsidy.

But that is not all. Western Union, the only company providing a nationwide telegraph service, in so doing maintains hundreds of deficit offices. Yet, at the same time, millions of dollars in telegraph revenues needed to support this nationwide telegraph system are being drained off by the Federal excise tax on an essential utility service, which discourages the use of telegrams by increasing their cost to the public. It should be pointed out, too, that in sharp contrast with the subsidized airmail service, Western Union, until 1947, was itself required to subsidize the Government by handling governmental telegrams at discounts ranging from 20 to 60 percent of the rates charged the public. This subsidy amounted to $63 million over the years, an amount far greater than the company's entire outstanding debt.

Senate Report No. 53, presented on June 22, 1953, by the United States Senate Committee on Interstate and Foreign Commerce reviewed in detail the situation of the Nation's telegraph system and declared: "The domestic telegraph business must fight 3 powerful competitive services, 1 of which it has no hope of ever meeting on equal economic terms through no fault of its own. That service is the domestic airmail, which is subsidized by the taxpayers of which Western Union is one, and which has made heavy inroads on long-haul message service." On June 1, 1953, Secretary of the Treasury Humphrey stated before the House Ways and Means Committee:

"The wide variety of existing excise rates makes little economic sense and leads to improper discrimination between industries and among consumers. Specific proposals for a modified system of excise taxation will be included in the recommendations for tax revisions that will be submitted to the Congress next January."

We respectfully submit that this grave competitive tax inequity between the Nation's telegraph service, on the one hand, and the airmail service, on the other, produces just such a situation of improper discrimination as Secretary Humphrey proposes to correct. It is not alone a question of an inequity between two competing services and of only general concern to the public interest; rather, the continuing decline in the volume of telegraph business poses a problem of critical importance involving a question of fundamental national

policy-the preservation of the Nation's telegraph system under a competitively unfair tax policy.

TELEGRAPH VOLUME CONTINUES TO DECLINE

Progress by the Nation's telegraph service, which is essential to the civilian economy and vital to the national security, is arrested by the steady attrition of telegraph volume. How serious this threat is may be judged by the fact that, as pointed out in Senate Report No. 53, previously mentioned, the number of public telegraph messages handled by Western Union declined from 194 million in 1945 to 130 million in 1952, a drop of 64 million, or 33 percent. While there was a strike of telegraph employees in the spring of 1952, last-quarter figures for that year, when operations were normal, showed a volume decline of nearly 7 percent compared with the same quarter of 1951, and a drop of nearly 11 percent as against the last quarter of 1950.

Even in normal times, this decline in volume would be of major consequence, But these are not normal times. Since Korea, the requirements of national defense have kept the general level of production and business activity at an abnormally high mark. The continuing decline in telegraph volume, in a period of unprecedented general business activity, raises problems of major concern as to the further effects on telegraph volume of any drop in the general level of the national economy.

The Federal excise tax on telegrams is a factor contributing importantly to the declining telegraph volume, since it increases the cost of telegraph service to the public. This has long been recognized by the Federal Communications Commission, the Treasury Department, and by various congressional spokesmen. It should be noted that the continuing decline in telegraph volume, aside from its far-reaching and evermore serious consequence to the Nation's telegraph system, has already been a major factor in destroying the jobs of more than 23,000 telegraph workers.

OTHER REGULATED PUBLIC-UTILITY SERVICES BEAR NO FEDERAL EXCISE TAX

The fact that the telegraph company provides the only service directly competitive with the tax-free and subsidized airmail cannot be overemphasized. In addition, other services in the regulated public-utility field, such as gas, electricity, and water, bear no Federal excise tax, unlike the telegraph service. In effect, Western Union users are providing a subsidy for one of the telegraph company's major competitors-the airmail, while at the same time the telegraph company is expected to compete with the world's largest corporation— the telephone company.

TELEPHONE COMPANY'S RECOGNITION OF NEED FOR TELEGRAPH TAX DIFFERENTIAL At hearings in 1947 before the House of Representatives Ways and Meaus Committee, the representative of the telephone system, while advocating the repeal of all communications taxes, expressed the preference, if complete elimination were not possible, for primary relief in the local field. In discussing at that time the question of selective treatment for the telegraph business in the event overall elimination was not contemplated, the representative of the telephone company frankly recognized the problems of Western Union as warranting special consideration.

CONGRESSIONAL CONSIDERATION OF TELEGRAM TAX PROBLEMS

In considering H. R. 4473-Revenue Act of 1951-which was enacted into law by the 82d Congress as Public Law 183, the report of the United States Senate Committee on Finance stated:

"Since World War II, telegraph service in the United States generally has been carried on at a deficit. In the forepart of this year, the service was operated at a profit, but wage adjustments which have recently been made have again placed telegraph service in a deficit position. By reducing this tax on telegraph service, your committee anticipates that it will be possible to decrease the amount paid for telegraph messages, and that as a result the volume of business done will be increased and the profit position of the industry improved. Telegraph service not only is essential to the civilian economy but also is essential to national security ***.

"In a full year of operation it is anticipated that reducing the tax on domestic telegraph, cable, and radio messages from 25 to 15 percent of the charge will