In conclusion, it seems to me that the voicing of your own particular ideas of budget reform as a corrollary of the overhauling of the tax system has pointed the way toward another equally desirable objetcive-the reduction of the Federal budgeting process to a governance of law, rather than leaving it to the whimsey of a few men or, as far as the average citizen is concerned, the deep mystery of inexplicable columns of figures.

Sincerely,

HENRY H. FOWLER.

The CHAIRMAN. The next witness is Mr. George S. Jones, Jr., and Mr. Rudy Berg, on behalf of Air-Conditioning and Refrigeration Institute.

We are glad to see you gentlemen here. Will you give your names and the capacities in which you appear.

STATEMENTS OF GEORGE S. JONES, JR., AND RUDY BERG, ON BEHALF OF AIR-CONDITIONING AND REFRIGERATION INSTITUTE

Mr. JONES. Mr. Chairman and gentlemen of the committee, my name is George S. Jones, Jr. I am managing director of the Air-Conditioning and Refrigeration Institute. There are some 160 members of our organization. Practically all manufacturers in our industry are included in this membership. Among them are those older and larger companies whose names have always been associated with the increasing importance of air-conditioning and mechanical refrigeration in this country. But by far the larger number are properly identified as smaller manufacturers. We appreciate this opportunity to bring to your attention certain comments on the excise tax as it applies to our industry.

These comments are the result of studies made by our excise-tax committee, several members of which are here tonight. The chairman of that committee will present our opinions and recommendations.

May I present that chairman, Mr. Rudy Berg, of Copeland Refrigeration Corp., Sidney, Ohio.

Mr. BERG. My name is Rudy Berg. I am chairman of the excisetax committee of Air-Conditioning and Refrigeration Institute. Our most pressing problems center in section 3405 (b) of the Internal Revenue Code, which imposes a manufacturers' excise tax of 10 percent on certain component parts of household-type refrigerators and freezers. The complete refrigerators and freezers are taxed under section 3405 (a).

We are of course citizens as well as manufacturers, and fully appreciate the magnitude of your talk in arriving at the most productive and equitable sources of revenue. It does seem to us, however, illogical to single out for application of a consumption tax, which taxes are of course passed on to the purchaser, a product which has contributed so much to the health standards of our Nation. In this connection may we point out that Canada, which has had extensive experience with commodity taxes, has for some time recognized that special consideration should be given to refrigerators, stoves, and washing machines. In September 1950, in response to the Korean situation, Canada imposed special excises at the rate of 15 percent on most household appliances, but not including refrigerators, stoves, and washing machines. In 1951 these taxes were increased to 25

percent, and tax at the rate of 15 percent was placed on the 3 items mentioned, but in 1952 the latter tax was entirely removed.

We hope that the Congress will find it unnecessary to continue a special tax on refrigeration, which cannot, we submit, today be classed as a luxury. If you find it impossible to remove this tax at this time then our specific suggestion is as follows:

We recommend elimination of the tax imposed by section 3405 (b) on designated component parts of household refrigerators and freezers. We make this recommendation because this tax is not only inequitable but also because its collection involves an uneconomical expenditure of time, effort, and money by the Government and by the taxpayer. As you are aware, component parts of a manufactured product are normally taxed as part of the end product when it is sold; and the bulk of the parts we are talking about here are sold tax-free under exemption certificates, by the parts manufacturers to the manufacturers of refrigerators and freezers. In the Revenue Act of 1951 this exemption was extended to sales to wholesalers or jobbers for resale to manufacturers. Also, if a refrigerator or freezer part fails within the period of the applicable warranty, and is replaced by the parts manufacturer, no tax applies. Further, all sales of parts to the State or Territorial governments, including the District of Columbia, or for export are exempt. The scope of the tax is accordingly so limited as to result in relatively little revenue; but the problems involved in its collection are many and complex.

We believe that experience is now adequate to show that this tax cannot be administered without a heavily disproportionate amount of time, effort, and expense on the part of both the Treasury and the industry. In the first place, as I have said, the tax does not apply to sales of parts to another "manufacturer" or to a wholesaler for resale to a "manufacturer." Under certain circumstances it becomes necessary for a manufacturer or other supplier of refrigeration equipment to assume responsibility for the exempt status of a purchaser who purports to be a "manufacturer" and accordingly claims to be entitled to purchase tax-free. In view of the inevitable breadth of definition of a "manufacturer" [see regulation 46, sec. 316.4], it is frequently difficult to tell when the purchaser of a component is entitled to this exemption.

For example, at what point does a serviceman, who is installing refrigeration equipment, become a manufacturer by reason of "combining or assembling two or more articles," or otherwise? The industry is constantly faced with this and similar problems growing out of the necessary exemption of sales to another manufacturer. In addition, an immense amount of paperwork is involved in administering the exemption certificates involved under this and other types of tax-free sales.

In the second place, the tax applies to certain specifically named. component parts which are "suitable for use as parts of or with household-type refrigerators or quick-freeze units of the kind described in subsection (a). This limitation is necessitated by the fact that only household-type refrigerators or freezers are taxed under subsection (a) of section 3405. As the Internal Revenue Service will testify, the term "suitable for use" has resulted in a long series of rulings on particular types of equipment, and on lines of individual manufacturers; and it will, of course, continue to do so if the tax is continued.

For example, on August 24 there were 14 such rulings issued by the Treasury. I will delete some portions of this in deference to your time. All told, it seems no exaggeration to estimate that the tax on component parts has resulted in far more administrative cost to the Internal Revenue Service and the industry than the revenue which has resulted. We respectfully urge that you consult in this regard the officials of the Service who deal with these problems day by day.

In addition, an even more serious defect in this tax is in the competitive inequities which it causes. One manufacturer may consider that his product is not "suitable for use" in household-type refrigerators, and collect no tax on it; while another manufacturer may conclude otherwise with respect to a similar and competing product. There have been, and now are, many such situations resulting in serious discrimination.

For example, one inequity-this time between industries-would be eliminated by ceasing the present double taxation of used parts traded in for rebuilt parts. This can be accomplished by adding at the end of section 3405 (b) the following:

In determining the sale price of a rebuilt refrigerator component there shall be excluded from the price in accordance with regulations prescribed by the Secretary, the value of a like component accepted in exchange.

Under existing law, if a used part is repaired and returned to its owner there is no excise tax because there is no sale. Frequently, however, for efficiency and in order to save the customer the time the part would be out-of-use during its transit time and repair, an identical rebuilt part is immediately exchanged for the old part, plus cash covering the difference in value. In that case the tax is applied, not only to the cash payment, which is correct, but also to the value of the old part traded-in. This is plainly wrong, we submit, for several reasons. In the first place, a direct repair job is not taxed. Why should the tax be imposed on what is essentially a more efficient method of accomplishing the same result? Secondly, the tax has already been paid on the original sale of the old part, except of course on exempt sales, and to include its present value in the tax base is. obviously double taxation: indeed there may be triple, et cetera, taxation involved if the part in question is later resold.

The possible loss of revenue would, accordingly to the best estimates we have been able to obtain from the industry be well under $100,000 annually. We feel strongly that the combined cost, to the Internal Revenue Service and the industry, of collecting this part of the tax, is in excess of this amount.

Similar problems for the automotive industry were met in the Revenue Act of 1951, section 481 (d), amending section 3403 (c) of the code, by providing that in determining the sale price of a rebuilt automotive part there shall be excluded the value of a like part accepted in exchange. This provision was first recommended by the staff of the Joint Committee on Internal Revenue in connection with the Revenue Act of 1950. We know of no reason why the same relief should not be accorded to the refrigeration industry.

Gentlemen, I could give you, if you had the time, many other instances of the inequities of this tax.

We submit that so long as we must endure the inequity of selective excise tax, the logical point to tax parts of end-products is all at one.

37746-53-pt. 4-46

time in the sale of the end-product. We think it is clear that the attempt also to tax such parts separately, results in serious inequities and costs more than it is worth. We therefore ask that you recommend repeal of section 3405 (b).

The CHAIRMAN. We thank you, gentlemen, for your appearance and your fine presentation of the subject. It will be very helpful to the committee.

Mr. BERG. Thank you, sir.

Mr. JONES. Thank you, Mr. Chairman.

The CHAIRMAN. The next witness is Mr. John E. Furlong, president, National Piano Manufacturing Association of America, Inc. We are very glad to have you with us this evening. Will you give your names to the reporter.

STATEMENTS OF JOHN E. FURLONG, PRESIDENT, AND H. R. RINEHEART, SECRETARY, NATIONAL PIANO MANUFACTURING ASSOCIATION OF AMERICA, INC.

Mr. FURLONG. My name is John E. Furlong. This is Mr. H. R. Rineheart. I am vice president of Winter & Co., piano manufacturers, and president of the National Piano Manufacturers Association of America. Mr. Rineheart is secretary of our association.

The National Piano Manufacturers Association of America is a group composed of 23 piano manufacturers who produce approximately 8712 percent of the pianos made in the United States, plus the principal suppliers to the piano trade.

I appear before you to request that the present 10 percent excise tax be removed from pianos. This request is made for the following

reasons:

1. Pianos are sold primarily for educational purposes and the tax is, therefore, a tax on education.

2. Owning and learning to play the piano is not a luxury but a part of the American way of life.

3. The reasons for the original imposition of this tax no longer exist. 4. The piano industry is a small industry which has never fully recovered from the effects of the depression following World War I. The essentiality of musical education has long been recognized by American educators. Such training is now required in public and parochial schools, and is provided on a much larger scale through practice and private instruction in the home.

In this the piano is the basic musical instrument.

The American Music Conference, a nonprofit organization for the advancement of music and music education, is chiefly responsible for the significant and rapid development of keyboard experience which is generally taught with a paper piano keyboard such as I have in my hand and one of which I should like to give to each of you gentlemen if I may.

The CHAIRMAN. We will be very glad to look them over.

Mr. FURLONG. These are used in thousands of elementary schools in the United States to instruct students by class method the basic fundamentals of music. The greatest living authority on the subject is Dr. John C. Kendall, vice president of the American Music Conference, formerly president of the Music Educators National Conference

and formerly director of music education for the Denver Public Schools. We quote from Dr. Kendall's report to the National Piano Manufacturers Association on June 9, 1953:

Basically all music education is founded upon the knowledge that can be gained from the study of the keyboard. In the keyboard-experience program, the emphasis is no longer based upon developing piano soloists although we know that as a result of this basic training many children will find it desirable to carry on with their piano experience. In this program the entire class of children are given keyboard lessons as a part of the music-education program, the keyboard work being offered in lieu of the regular vocal class, 1 or 2 days a week. In these classes every child is given an opportunity to actually play the piano sometime during the day and play upon silent keyboards during the rest of the lesson. This plan has proven popular with teachers, supervisors, and general administrators.

In addition, here is a practice piano keyboard which is very similar to a real piano keyboard and which is made by the same company which manufactures keyboards actually used in pianos.

The CHAIRMAN. Can you play that?

Mr. FURLONG. No, sir. But it is, in effect, the keys that go into a piano, other than the interior mechanism of a piano.

Under present law, such keyboards are not subject to the excise tax and rightly so, because they are a tool of education. When such a keyboard is built into a piano and used for the same purpose-education-it is subject to the tax if that piano is used in the home.

That our Government recognizes the fundamental need for pianos in education is indicated by a letter attached as exhibit I, addressed on May 21, 1952, by T. L. Roswell, Associate Director, Division of Civilian Education Requirements, Federal Security Agency, to Harry J. Holbrook, Director, Consumer Durable Goods Division, National Production Authority.

This letter, I might interject, has to do with copper. But the theory and thinking behind it applies.

(The letter referred to follows:)

Mr. HARRY J. HOLBROOK,

EXHIBIT I

MAY 21, 1952.

Director, Consumer Durable Goods Division,

National Production Authority,

Washington 25, D. C.

DEAR MR. HOLBROOK: It has been brought to the attention of the Office of Education that the manufacturers of pianos are experiencing difficulty because they are being scheduled a considerably smaller percentage of copper than steel in proportion to their base-period consumption.

Since there is no satisfactory substitute for copper in manufacturing certain strings used in the piano, this policy has the effect of reducing production to the lower percentage allowed under the copper allocation and is having an undesirable effect upon the educational program of the Nation. Therefore, it is deemed desirable that careful consideration be given to modifying the policy under which allotments of copper are made to the manufacturers of pianos. It appears that a percentage of copper equal to that of steel, in proportion to the base period of consumption, is essential.

Recent surveys have established the fact that more than 85 percent of all pianos are used for educational purposes. In this country the prevailing practice has been for the student of piano to start his training in the home through the medium of a private instructor. Each year more emphasis is placed on group instruction in the schools. It is also necessary for the student to have a practice instrument in his home if he is to make satisfactory progress in the field of music.

The piano is recognized as the basic instrument for all instruction in music.