In the farming and rural areas such as these, the telephone is an indispensible medium to obtain market quotations, summon the doctor and veterinarian, and call for help in case of fire.

I would not like to imply that there is an emergency in every telephone call, but it can hardly be denied that in every emergency the telephone plays a most important part.

Surely I am on sound ground in emphasizing as strongly as I can that the telephone serves a fundamental need in our society. Surely you should agree that the telephone service is not a luxury but is a business and social necessity to the people of the United States.

In the interest of justice and the removal of discrimination, we ask that the excise taxes in their entirety be removed from telephone service, both local and long distance.

The CHAIRMAN. I have noticed, and of course, this is my own country here, that you serve so many of these small rural communities where they have to stretch a good deal of wire to reach many of the farmers; is that not right?

Mr. NIXON. That is right.

The CHAIRMAN. And has the cost of your materials gone up, with labor going up?

Mr. NIXON. Yes, 3 or 4 times.

The CHAIRMAN. And yet your rates are regulated by the Public Service Commission?

Mr. NIXON. Yes. The company which operates in that territory, which, of course, is our company, has had one increase in rates in the last 30 years.

The CHAIRMAN. It is remarkable, I think, that you have been able to give such a fine service that your company has given under the circumstances.

We certainly thank you very much for your appearance.

Your statement, in its entirety, will be made a part of the record. (Statement referred to is as follows:)

STATEMENT ON BEHALF OF UNITED STATES INDEPENDENT TELEPHONE ASSOCIATION BY SAMUEL F. NIXON, PRESIDENT, CHAUTAUQUA & ERIE TELEPHONE CORP., WESTFIELD, N. Y.

My name is Samuel F. Nixon. I am president of the Chautauqua & Erie Telephone Corp., of Westfield, N. Y. I am appearing today before this committee in my own behalf and that of the United States Independent Telephone Association. I am a member of that organization's tax committee. The independent telephone industry serves approximately two-thirds of the geographical area of the United States through about 5,300 independent (non-Bell) telephone companies. Those companies as of December 31, 1952, had approximately 8,642,000 telephones and operated in 11,000 cities and towns, principally the smaller ones.

I would like to discuss with you today the discrimination occasioned by the excise taxes on telephone service and ask for their complete removal, both local and long distance.

The excise tax on telephone service is paid for by the telephone subscribers and that tax is collected, cost free to the Government, by the telephone companies as part of the telephone bill. Subscribers do not, generally speaking, differentiate between the charge for telephone service and the charge for excise taxes but merely look upon the bill for both the telephone service charge and the excise tax thereon as "the telephone bill."

Not long ago a prominent-rate-case attorney told me that many times he had asked witnesses to state the nature and extent of their telephone bill and what portion represented excise taxes and what portion the charge for telephone service. Many witnesses did not know the composition of the bill but knew only the amount of the total monthly charge for both telephone service and excise

taxes. Those witnesses were objecting to rate increases. In their opinion the telephone bill was already high enough. They apparently did not realize that all of the money called for by the telephone bill did not belong to the telephone company.

In a regulated industry such as the telephone industry the regulatory bodies fix the amount which may be charged for service. The consumer is concerned primarily with the total cost to him of obtaining service that is the cost of the service plus tax, if any.

The magnitude of the taxload of industry may be fairly determined by measuring the amount of taxes—that is, State, local, Federal income and excise taxes, which the consumer is required to pay to enjoy the product or service.

I have attached a chart to my statement for the purpose of illustrating the severity of the taxload carried by the telephone industry. The Federal income taxload of each industry has been listed as a percentage of its sales. You will see that the telephone industry carries a greater load than other industry, and sueprimposed on this load is an excise tax at top levels, estimated at 22 percent of the cost of telephone service. The imposition of a taxload at top rates on a service of an essential industry which is already taxed more heavily than many others is clearly a gross injustice and outright discrimination.

The telephone industry is very closely regulated and the amount which may be charged subscribers for service is fixed by regulatory bodies who determine what is a fair charge for services. In determining this fair charge among the many factors which are considered, probably the most important criteria are (a) a fair charge to the subscribers for telephone service; and (b) a fair rate of return to the shareholders.

These two factors are, to a great extent, interdependent. On the one hand the Commission must allow the company to earn a sufficient amount to accumulate the capital necessary to meet the demands for increased telephone installations and, on the other hand, must not charge the subscribers more than a reasonable amount for services rendered.

During the years of World War II, because of critical material shortages and priorities, the telephone industry, as many other industries did, curtailed their construction program to give only essential and necessary service. After the

war the pent-up demand for telephone service was unleashed and telephone companies found themselves in the position of being unable to install telephones as fast as requested.

During the first 2 or 3 years after World War II, in order to obtain funds to complete replacements and renewals for equipment which had not been replaced during war years, telephone companies, because of the limited supply of equity capital, were required to sell bonds, and greatly extend their debt capital during this period. It was not until sometime in 1948 or 1949 that telephone companies were able to finance constructed additions through sale of equity capital and thus finance their business on a sounder basis. During this period the industry sold securities comprised of bonds, preferred and common stock, and, as pointed out previously, constructed plant with the proceeds from those securities.

The excise tax during that period had little or no effect on the growth of the telephone industry because of the public's insistence on having telephone service as a necessary attribute of the American way of life, like running hot and cold water, gas, and electricity. As a matter of fact it is my opinion that only because of the essential nature of the telephone industry has it been able to bear the extremely heavy load of State, local, and Federal income taxes and the superimposed excise taxload at top rates.

However, we have now come to the point where this pent-up demand is lessening and the full impact of the excise tax will manifest itself. As this begins to take place the gross severity of the inequity of taxing telephone service at higher rates than nonessentials will progressively depress the normal expansion of our business and hamper us in obtaining capital for construction and continued improvement of telephone service.

You see, a utility like a telephone company has to compete in the money market with oil, manufacturing, and other utilities companies, and all others requiring capital. The excise tax tends to dry up the capital market by subtracting from the customer's spendable dollar, amounts which might otherwise be saved and invested in new capital, and also raises doubts in the minds of some investors as to whether an industry so very heavily taxed is truly a good investment.

It should be quite apparent that if the excise tax were removed the consumer would have an increase in spendable and savable income by that amount. It

has been pointed out to this committee in previous hearings that the Government recoups a great portion of this tax in other forms and would probably suffer no great loss of revenue from their repeal. The additional business generated from additional spendable income will produce additional income, and some portion of that additional income is recouped through income taxes. Therefore the Government would not lose all of the revenue now produced by the excise taxes on telephone service but would recoup a great portion of it through the income tax. It is hard for me to believe that local service should be taxed at the same high rate as cigars, cigarettes, and pipe lighters. And it is also more difficult to conceive that long-distance calls in excess of 24 cents should be taxed higher than cosmetics, toilet preparations, and jewelry. When a commodity or service becomes an accepted household and business convenience it is not a luxury. Some of the very essential uses of the telephone are so commonplace that the necessity escapes our attention, such as the making of emergency calls in the case of sickness, fire, or accident.

Many persons who are employed in jobs which are essential to our community life and who are required to report for duty on short notice are highly dependent on the telephone. These include police, fire, and utility employees. Not only in our everyday life is a telephone essential but a good businessman would not think of being without it. Commerce by telephone has become a major industry. Often when I look at television, particularly when in the New York area, 1 notice that merchandise is offered for sale and demonstrated. The viewers are asked to call a telephone number to place their orders. This method of merchandising brings the retail seller's merchandise into the viewer's living room where he may inspect the merchandise in the comforts of his own home. He may buy the merchandise by merely picking up the telephone and placing his order even though it may be long after the normal closing hours of retail stores.

I believe an examination of tax history since the round of the century will show that in each instance in which excise taxes on communications have been imposed such action has been taken purely as an emergency measure and the taxes have always been repealed when the emergency was over. There has always, up to this time, been recognition that telephone excise taxes constitute no part of the peacetime tax structure.

The excise taxes imposed during the period commencing in 1940 were restrictive taxes designed to reduce the use of the rroduct or services taxed, so that critical materials used in the manufacture of the product or in providing service might be diverted to purposes of war.

Today there is no need for any restriction. As a matter of fact, every endeavor of the country is to expand production, consumption, and use. The excise taxes on communication services are the only taxes levied upon regulated publicutility services, except transportation; and, even in the case of transportation, there is no tax levied upon short-haul commutation. There is no excise tax on gas, electricity, water, sewage, or heating service. We think it is a discrimination of the rankest sort to impose an excise tax upon telephone service. In the independent branch of the telephone industry, about 80 percent of our subscribers are residence subscribers, and in our branch of the business, operating in the small towns and rural areas as we do, the small cash income of many people is such as to make an excise tax on their necessary communication service one of great severity. In the farming and rural areas the telephone is an indispensable medium to obtain market quotations, to summon the doctor or veterinarian, and to reach the fire department.

In the interest of justice and the removal of a discrimination, we ask that the excise taxes in their entirety be removed from telephone service both local and long distance.

The CHAIRMAN. The next witness is Mrs. Sylvia B. Gottlieb, director, research department, Communications Workers of America. We are glad to have you here, Mrs. Gottlieb.

STATEMENT OF SYLVIA GOTTLIEB, DIRECTOR, RESEARCH DEPARTMENT, COMMUNICATIONS WORKERS OF AMERICA

Mrs. GOTTLIEB. I will do as the previous speakers have done, merely highlight the statement. With me is Mr. William Dunn, assistant to the president of the Communications Workers of America.

My name is Sylvia Gottlieb. I am and have been for the last 8 years research director for the Communications Workers of America, CIO, an organization that represents over 300,000 communications workers throughout the United States, the 3 provinces of Canada, and the Territory of Hawaii.

This is the first time since introduction of Federal telephone excise taxes that CWA seeks to go on record as favoring their elimination. Our testimony here today will be directed primarily to the interest we have in these taxes as workers in the telephone industry.

We are concerned about present and future effects of these taxes on use of telephone facilities and hence upon employment possibilities in the industry. It is not mere coincidence that CWA did not choose to testify on telephone excise taxes until this year, although taxes on toll calls date back to 1932, and taxes on local calls to 1941. We have kept in close touch with the situation in recent years, particularly during postwar years, and have not felt any necessity until this year to object to what are becoming unwarranted and economically unsound deterrents to telephone use not only by residential users of the telephone, but by business organizations as well.

In the atmosphere of total war, during which time current rates of taxes on telephones were introduced, when not only were revenues sorely needed but an almost equal necessity existed for discouraging use of already crowded telephone circuits, telephone workers and, in fact almost everyone, understood and accepted the need for substantial telephone excise-tax rates. We were beginning to be concerned with the failure of Congress to reduce or remove the taxes in 1948 and began to consider speaking about against that at that time. Beginning that year we witnessed serious decreases in telephone employment and even actual layoffs in the industry for the first time since the 1932 depression. However, subsequent events leading to the Korean war renewed the need for substantial taxes and even, to some extent, the need to discourage use of telephone circuits. Moreover, between 1948 and 1950 there seemed more pressing need for reduced taxation in other areas. These, as well as additional overall general economic considerations, influenced our decision not to take a position against telephone excise taxes at that time.

Previous speakers have gone into them at an earlier time. We will not repeat them at this time.

We might add, however, that we think it noteworthy that telephone calls are taxed at a luxury rate although many State governments and the Federal Government regard these same calls as public service and necessities where their continuance is threatened by economic activity on the part of telephone workers through their trade unions. While we agree with most of the above four well-known arguments against telephone taxes and find much wisdom in them, we feel they do not get to the heart of the problem; namely, they fail to examine the basic question of whether or not telephone excise taxes, in themselves, are good taxes. That is, are they socially and economically desirable and necessary?

In our opinion it is not adequate that a source of taxes merely be a lucrative one to justify it. Revenues lost through elimination of telephone taxes could be made up in many different ways.

The telephone sales tax, and we could properly label it a sales tax, in our opinion does not currently meet any of the above-described

standards of a good tax. It is a bad tax because it is a sales tax on a necessitous commodity. However, its most serious deficiency is couched in the effect it has had and will have on telephone usage and hence telephone employment during the periods when it is desirable to increase general business activity and employment opportunities.

It is our considered judgment that the next few years will be critical ones in the telephone industry from an employment standpoint. Local and toll-dial mechanization programs as well as the ultimate leveling off in telephone service demand must, of necessity, it appears to us, have profound and widespread effects upon employment in the tele phone industry.

It is not possible to show statistically that high telephone excise taxes discourage so many calls or the installation of so many telephones per year. It is not possible to determine precisely why people don't make telephone calls or why people don't install an extension phone or even the first phone.

However, we ask the committee to take into consideration that between 1948 and 1949 there was a substantial decrease in telephoneindustry employment. In Bell system telephone operating company subsidiaries alone there was a decrease of over 30,000 and in its Western Electric subsidiary there was a similar decrease. This overall 60,000 decrease in employment took place during a period of peak telephone usage. The 60,000 decrease in employment, a decrease of around 10 percent, took place during a year when the number of telephones increased from 31.4 million to 33.4 million when average daily telephone conversations increased from 125.3 million to 132 million. During the same year over a million people were waiting for telephone service and over 212 million were waiting for better service; that is, waiting to go from party to individual lines. A period, in short, of good telephone business. However, the rate of increase in business began to level off as the general economy began to level off.

This factor coupled with intensified local and toll-dial conversion programs of the Bell System and other telephone companies decreased employment opportunities in the industry. We think also that the high cost of telephone service-that is, basic rates plus Federal excise taxes-must have had some effect on the amount of telephone business and hence telephone jobs. While it is not possible to prove statistically, it seems only common sense to come to the conclusion that if certain types of telephone service were cheaper, particularly toll calls, many of us would use the telephone more often. Frankly, and we think this is important, CWA does not think that telephone excise taxes alone are the difference between good or bad employment opportunities in the telephone industry or in the economy as a whole. Attention will have to be paid to the problem simultaneously at many other levels of activity; however, we think this committee will want to take a look at any taxes which might have adverse employment effects on such an important and widespread industry.

We hope

It is for this reason we make our appearance here today. to alert you to the realization that the telephone excise tax is not currently a just or economically sound tax. We hope you will agree with our point of view and will further agree with our conclusion that this seems like a very good time to discontinue telephone excise

taxes.