In the matter of raising public revenue you gentlemen are expert and with its problems you are thoroughly acquainted. Some of you have a background of many years experience in this important field of public service and for months on end these problems have had your prolonged thought and earnest consideration. On the recommendation of President Eisenhower, the Congress has embarked upon studies which involve consideration of the possibility of eliminating waste and duplication in tax assessment and collection and the problems of finance and Federal-State relations which attend them. Some States including my own State of New York are engaged in companion studies to the end that methods more scientific, fair, and reasonable for the allocation of tax bases to the respective levels of government may be agreed upon and adopted. In addition, such private agencies as the Government Research Foundation, Inc., the establishment of which was announced on April 23, 1953, by Mr. Nelson W. Rockefeller, Chairman of the President's Committee on Governmental Organization, are similarly engaged.

We believe that all these studies are justified, that they have been well conceived and are properly oriented. We hope confidently that the results will be immensely valuable and will justify the long hours of painstaking investigation and conscientious study being made by you gentlemen and your colleagues as well as by your counterparts in State service.

We understand that you as members of the Ways and Means Committee and, indeed as Members of the House of of Representatives, have no positive responsibility for liquor control, as such. Nor does the Federal Government have any such responsibility except as to "dry" States. By the adoption of the 21st amendment the people of this country relieved the Federal Government of all such responsibility with the exception noted and reassigned it to the several States.

At that point in the history of our country three centuries of experimentation in the regulation and restriction of the alcoholic-beverage business had attained the status of tragic failure. Violations of the National Prohibition Act were rampant, prosecutors were refusing to prosecute open-and-shut cases, grand juries were refusing to indict, and petit juries to convict violators of whose guilt there was abundant proof, and judges in various ways were seeking technicalities and other loopholes to justify the discharge of defendants and dismissal of charges.

Consumers were being blinded, crippled, and killed by the concoctions of underworld denizens, public officials were drinking "wet" and voting "dry," and the country was held up to ridicule before the world for its hypocrisy, dedication to crime, and puerile unwillingness to face facts.

Public service was polluted and defamed, the taxpayer was oppressed with the burden of maintaining a large enforcement army while the traffic produced no revenue to the Government, the dignity of the courts was impaired, and disrespect for law was fashionable. Gangs of abandoned characters had established themselves in the liquor traffic and had exercised discipline and control therein through intimidation, coercion, extortion, bribery, assault, kidnaping, and murder. In short, the era then ending was one of hypocrisy, violence, lawlessness, national tragedy, and disgrace.

It is easy to understand the then prevailing feeling of relief in official Washington and its disposition to close the book on the subject at the end of that chapter in order that it might be filed away in the innermost recesses of remote archives. The essay of the Federal Government into this sphere of activity had shown the problems involved to be so completely beyond its capacity to handle that it emerged from national prohibition with its prestige badly damaged, its authority flouted, and its dignity seriously compromised.

Under the 21st amendment the individual States reacquired the duty of regulating the alcoholic-beverage business and of solving the manifold problems that accompany it. To the extent that they have adopted systems, methods, and techniques of control that are in substantial conformity with the thinking of their people, the task of administration and enforcement presents no such overwhelming problem as did national prohibition to the Federal Government. Yet, even under the most favorable circumstances liquor-control administration and enforcement are difficult and involved and rest heavily, I assure you, upon the States.

It has been well said that "the public interest requires strict compliance with rigid standards of alcoholic-beverage control by a respectable and law-abiding

industry, under a sound law administered by an able and upright ABC agency supported by an informed and understanding public opinion." 1 A prerequisite of such control is the subjection to its jurisdiction and sanctions of all phases and every element of the business of manufacturing, distributing, and selling alcoholic beverages. To the extent that any phase or element of the business operates beyond the pale of control, candor requires the admission of the failure by Government successfully to do its job. Any circumstance or condition which contributes to the creation or support of such outlaw operation should themselves be suspect as antisocial, in our judgment.

We have strong feelings on this point. This is true largely because our experience and studies convince us of the impelling necessity of making repeal succeed and the realization of the danger that through a avoidable error and overconfidence it may fail. We all know that to some of our fellow citizens the adoption of the 21st amendment in and of itself was the solution to the problems of control and that to others the establishment of State control agencies with the power to administer what appeared to be sound control programs justified the discontinuance of public interest in those problems.

No student of history has any such silly illusion. They know that no difficult, complex, and ancient social problem can ever be solved by the simple expedient of exacting a law or amending a constitution. But many of our people and some officials of Government, too-are perfectly willing to consign the problems of liquor control to the liquor commissions with never a thought of the interrelationship of those problems with other functions of Government. When Government attempts to solve such problems as these it should do so by coordinating all its interested agencies to assure their cooperation and their working in harmony and unison toward the attainment of their common purpose.

Let there be no mistake about the responsibility for the adoption and functioning of liquor-control programs: It belongs to the individual States, and they accept it.

Yet we liquor-control administrators know that we cannot do the job alone. We see it, I believe, in its true perspective and perhaps more poignantly than anyone else, we recognize as indispenable the support of our efforts by an informed and understanding public opinion. We are realistic rather than defeatist when we foresee failure unless public opinion can be kept on the side of law observance, and behind law enforcement. For that alinement and support, gentlemen, there is neither an acceptable substitute nor a feasible alternative. We shall look in vain should we seek either in our efforts to make repeal work.

A favorable posture of public opinion may not be taken for granted, nor may its continued existence be assumed where it is shown to exist. Unless the control program makes alcoholic beverages reasonably available for the temporate use of consumers and at prices they are able and willing to pay we shall inevitably lose public confidence and support. Taxes on alcoholic beverages which are so excessive as to cause public resentment create a condition tolerant of the bootlegger, the moonshiner, the speakeasy operator and their outlaw businesses.

2

There is nothing new, novel, or unique in the present position of the national conference. The propositions that we now advance have been stated with clarity and conviction by authorities on liquor control during the past two decades. A congressional resolution in 1933 decided that "taxes on alcoholic liquors as well as license fees upon the traffic in such liquors, should be so devised as to promote temperance and at the same time discourage illicit trafficking in such beverage." " A legislative commission of the State of New York recommended that: "In relation to the amount of license fees to be fixed by law, the commission believes that high fees will induce unauthorized traffic in alcoholic beverages, and increase the number of unlicensed places where such beverages may be purchased and consumed on the premises. Such tendency will be materially reduced if the measure of taxation fixed by the State is not excessive." In the leading work on liquor control at that time it was clearly and concisely stated that "the primary objective of (liquor) taxation should be social control not revenue. Taxes should be levied not with the idea of filling

1 Alcoholic Beverage Control-An Official Study, issued by the Joint Committee of the States To Study Alcoholic Beverage Laws in 1950 (p. 65).

2 Commission on Conflicting Taxation, joint hearings on tax on intoxicating liquor before the House Committee on Ways and Means and Senate Commission on Finance, 73d Cong., interim 1st and 2d sesss., 1933 (p. 244).

The New York State Commission on Alcoholic Beverage Control Legislation-First Report, February 15, 1933 (p. 9).

the Public Treasury at whatever cost to public morality and efficiency, but as a method of reducing the consumption of alcohol." Later in the same work the authors boldly asserted: "The fundamental objective (of liquor taxes) should not be revenue but rational and effective social control. While this is not inconsistent with extensive revenues, we believe that liquor taxes should be levied first of all, because the taxes will help to make the liquor controls more successful, not because the Treasury needs funds. The fundamental motives should be broadly social, not narrowly fiscal." "

In his foreword to Toward Liquor Control, John D. Rockefeller, Jr., a total abstainer who sponsored the study, made the following comment on the author's work. "The report regards liquor taxation, as it should be regarded, primarily as a helpful factor in forwarding those objectives (the abolition of lawlessness and the development of temperance), and only incidentally as a means of producing revenue."

The leading authority on liquor control of the era of repeal was in the opinion of many, including your witness, the late Mrs. John S. Sheppard. In an article written by her in 1933, she expressed her conviction that: "The bootlegger and speakeasy will not be driven out of their trade by any system of control that leaves them a chance at lucrative returns. The problem of eliminating them is closely related, therefore, to the question of taxation of alcoholic beverages." Shortly after repeal, on July 26, 1934, to be exact, Joseph H. Choate, Jr., Director of the Federal Alcoholic Administration urged the reduction of all revenues on liquor in these words:

"We could well afford a present reduction in revenue in order to destroy our greatest source of lawlessness. To cheapen the legal supply, taxes, tariffs, and license charges ought all to be reduced." $

Thirteen years later, in a scholarly treatise, Randolph W. Childs warned: "The history of liquor xation shows that if taxes are raised to a point where there is a great differential between the selling price of the legal product and the cost of the illegal product, the large-scale illicit operator will again enter the field as he did in the prohibition era."

In 1950 the relationship between taxation and control was identified in a report approved by the control administrators of 44 States and the city of Baltimore thus:

"The collection of revenue from the alcoholic beverage business must be considered and treated as a subordinate interest of government and the control by the State of the alcoholic beverage business to prevent socially undesirable conditions must always prevail over revenue considerations. Increases in the amount of taxes levied on alcoholic beverages are inconsistent with control objectives if they tend to increase the illegal participation in the manufacture, distribution and sale thereof." 10

Every authority on liquor control with whose opinions we are familiar believes that excessive taxation will adversely affect it and that unless adjusted reasonably and seasonably will undermine control and defeat its purposes. This it will do, firstly, by encouraging and supporting the illicit liquor business through the tremendous differential in cost between the legitimately produced, taxpaid beverage and the illicity produced, non-tax-paid product. This will lead to disrespect for law and disdain for government. Secondly, the policy of fostering control by restricting participation in the liquor business to those who are honest, honorable, and respected business people will be vitiated by a tax-collecting policy which labels them tax goats and their customers second-class citizens, deserving punishment in the form of discriminatory taxation. In short, any tax which destroys a lawful business or fosters its illegitimate competitor is unwarranted, unj st, and unrealistic.

The relationship between excise taxes on liquor and liquor control is, we have said, close and intimate. Both are governmental functions which if properly alined and coordinated, can support and facilitate each other, and which if

4 Toward Liquor Control, by Fosdick & Scott. 1933 (n. 19).
Toward Liquor Control, by Fosdick & Scott, 1933 (pp. 118-119).

Former member of the New York State Commission on A'coholic Beverage Control Legislation (1933-34); and former member of the New York State Liquor Authority (1934-50); chairman (1930-38), New York State chapter of the Women's Organization for National Prohibition Reform.

New York Times, October 22, 1933.

Speech delivered before Governors' Conference, Mackinac Island.

Making Repeal Work, by Randolph W. Childs, executive director and counsel, Pennsylvania Alcoholic Beverage Study, Inc. 1947 (p. 191).

10 Alcoholic Beverage Control, an Official Study, supra (p. 56).

37746-53-pt. 4—41

not so alined and coordinated can be mutually frustrating. The collection of excise taxes from the liquor business is not inconsistent with the purposes or functions of control. If imposed with prudence and not with the intention of producing all the revenue that can be extracted regardless of the social implications and consequences, it can be a useful tool of control. Indeed, so much is the taxing of liquor considered a control instrument that 19 of our member States make such taxing a control function to be performed by their liquor-control agencies.

The Congress of the United States, as we view its powers under the Constitution, can completely hamstring the efforts of the States to regulate the alcoholicbeverage business by the imposition of excise taxes which divert consumers from legitimate to illegitimate alcoholic beverages. The States on their part have the constitutional power to nullify the efforts of the Federal Government to raise revenue in the way of excise taxes on the alcoholic beverage business by suppressing entirely the manufacture, distribution, and sale of alcoholic beverages. These two plenary constitutional powers can be brought into hostile juxtaposition to the detriment of either or both. While constitutionally equal, the relative potential of each of these powers to affect the other is disproportionate because while the threat to liquor control posed by excessive excise taxes is real, ominous, and potent that presented by the power of the States to suppress the alcoholic beverage business is academic only. The people of the United States, whose will in the final analysis is the supreme law of the land, will not accept, support or tolerate the interference with their personal habits, customs, and rights implicit in the suppression of the liquor business.

Let us face this situation squarely and honestly. The demand for, and consumption of alcoholic beverages antedate recorded history. Their use is a folk way of the American people. The States cannot suppress it by repressive legislation. You at the Federal level are equally powerless. Neither State nor Federal Government can force public acquiescence or compliance with law in derogation of custom and habit. The wise lawmaker knows that law is the result of the creative impulse, not of the individual lawmaker or lawmaking assembly, but of the special needs, special opportunities, special perils, and special misfortunes of communities and nations. Custom slowly compels formal law, it has been said, to conform to its abiding influence and law can extend but very little beyond the limits fixed by custom.

Laws can divert consumer demand from alcoholic beverages licitly produced and taxpaid, to those made without legal sanction and without payment of any tax. But laws cannot eliminate the demand nor can they prevent its satisfaction so long as the law of fermentation operates and such ingredients as sugar and corn are in good supply. Should we divert the demand from lawful to unlawful channels we set the stage for the return of those conditions which characterized national prohibition and which spelled out official corruption, widespread crime, human tragedy, and national shame. We are dealing with a social problem of explosive potential the present handling of which can affect the national welfare for years to come.

Should those of us in public service to whom the public rightfully looks to protect its interests temporize with or disregard this problem while the underworld moves in to capture and control a substantial part of the distilled spirits business we shall be unworthy of our trust. The use of the empirical method of determining how much tax revenue can be extracted from the liquor business before it creates an outlaw industry operated by organized rackets, and criminal syndicates is foolhardy beyond description. It cannot be rationalized with a true perception of the importance to the people of our country of effective liquor control or with a prudent regard for its successful administration. It is a reckless gamble with the public welfare at stake and is tantamount to an invitation to social calamity of awesome proportions.

With the history of prohibition before us we know precisely what happens when criminal syndicates operate an outlaw liquor business. We know, too, that once that condition exists reduction of tax as a remedy will be too little and too late. Governmental incompetence will then have been conclusively shown. None among us may then find refuge in the excuse that he did not expect those consequences because we have lessons of history to clear, too plain, and too recent to ever be misunderstood. Recovery will then require decades of intensive and at times tragically disappointing effort and a forthright acceptance of the principles we now espouse.

The people repealed prohibition to restore respect for and obedience to law and to promote temperance. They did not repeal it to raise revenue. Liquor

control systems and programs were formulated and adopted to attain the same ends and the collection of revenue is but a single and subordinate part of those programs. We think that there is reason to believe that the Federal Government has lost sight of these important facts and that in its efforts to forget its sorry experiences with prohibition it has ignored the influence and effects of its revenue measures on the liquor control programs of the States. This oversight can lead to a devastating invasion of State's rights and in the name of 97 million American citizens we here and now respectfully urge that you review carefully and sympathetically the position of the national conference. The criterion of the propriety of any tax on the liquor business is, we submit, its position with reference to the law of diminishing returns as to liquor control not as to revenue. If the tax promotes control it is sound and proper; if it weakens control it is unsound and improper.

We have the finest form of government ever conceived by the mind of man. It is the most efficacious that human ingenuity has ever devised for providing the greatest good for the greatest number. Yet, like all human institutions it has limitations and it depends for its success on those who direct it. We may rightly expect from government a type of public service featuring efficiency, harmony and coordination where and to the extent that those characteristics mark the conduct and performance of duty of those in whose judgment and discretion the powers of that government repose.

Government is the organ of society to make operative the will of the people. In our Federal system there are a division of powers and an assignment of functions among Federal, State, and local governments which our people intend and expect to best serve their common interests. The curse of jurisdiction-a necessary evil to be sure-is its tendency to result in various echelons or agencies of governments working at cross purposes with one another. Our intelligence rebels at such anomalies and our national economy can ill afford such profligate waste of public funds.

We believe that we have made an objective and accurate presentation of our case. We trust that you will find it as meritorious as we find it compelling. Our convictions are firm and deep and we agree fully with the President of the United States who at Seattle, Wash., on August 4, 1953, told the governor's conference: **** unless we preserve in this country the place of the State government, its traditional place, with the power, the authority, the responsibilities and the revenue necessary to discharge those responsibilities, then we are not going to have America as we have known it; ***"

I shall now rest our case with an expression of our appreciation of your courtesy and our assurances of respect and esteem.

The CHAIRMAN. The next witness is Mr. John W. Hardy, National Alcoholic Beverage Control Association.

Mr. Hardy, if you will give your name and the capacity in which you appear, we will be glad to hear you.

STATEMENT OF JOHN W. HARDY, MEMBER, ALCOHOLIC BEVERAGE CONTROL BOARD, COMMONWEALTH OF VIRGINIA

Mr. HARDY. Mr. Chairman and gentlemen of the committee, my name is John W. Hardy. I am a member of the Alcoholic Beverage Control Board of the Commonwealth of Virginia, chairman of the executive committee of the National Alcoholic Beverage Control Association and chairman of the Joint Committee of the States to Study Alcoholic Beverage Laws. I am appearing before this committee as spokesman for the Virginia Alcoholic Beverage Control Board and for the National Alcoholic Beverage Control Association, by direction of this association while in session at Miami Beach, Fla., on November 1952.

The National Alcoholic Beverage Control Association was organized in 1938 for the purpose of maintaining a high standard of administration of alcoholic beverage laws and to cooperate with all States and Federal Government relative to the control, sale, and taxation of alcoholic beverages.