Under the House bill the gross budget losses are (in round figures) in fiscal year 1966 $2.2 billion, in fiscal year 1967 $3.7 billion, and in fiscal year 1968 $4 billion. The losses under the President's program would have been the same in fiscal year 1966, and slightly smaller in fiscal year 1967 and fiscal year 1968.

Excise tax reduction will mean that there is this much more disposable income of consumers and businesses. As this is spent, there will be increased income taxes and more disposable income for further respending, again increasing income tax receipts.

To properly assess the excise tax reduction, we should take into account these feedbacks of increased collections under other taxes. On this basis the expected net budget impacts of the House bill and the President's program are:

In the long run the net revenue loss after feedback will be about onehalf of the gross loss.

This excise tax reduction can have an important strategic effect in maintaining the upward thrust of the economy. It is well known that a decline in the pace of our economy, leading possibly to a recession, can cause a major decline of revenues. Federal revenues declined in the recession of 1958 and in the recession of 1960. They did not decline during the period of the major income tax reduction in 1964–65.

Let me turn now to the specific matter of the net budget deficit. In January of 1963 it was anticipated that the budget deficit for the fiscal year 1964 would be $12 billion. In the end a number of circumstances, including the combination of improving economic conditions resulting from both the anticipation and enactment of the Revenue Act of 1964 and firm expenditure control, brought this figurə down to $8.2 billion.

In January of this year the budget deficit for fiscal year 1965 was estimated to be $6.3 billion. Thanks to continued expenditure control and substantial improvements in revenue collections, it was announced late in April that the deficit was likely to be $5.3 billion. Now as a result of additional information, we anticipate that the deficit for fiscal year 1965 will be reduced to $4.4 billion. Of this $1.9 billion reduction in the deficit below the January estimate, $500 million represents reduced expenditures, and $1.4 billion represents increased revenues. It may be that by the end of the fiscal year the expenditure figures will show further reductions but it is too early to hazard any hard estimate.

In January the budget estimate of the deficit for the fiscal year 1966 was $5.3 billion. At that time we were contemplating an excise tax reduction program of only $1.75 billion. Since then we have revised upward our estimate of revenues under the income tax by $1.6 billion. We have also recommended the enlarged excise tax reduction program

which will involve for fiscal year 1966 a net budget loss after feedback of $1.8 billion. This is larger by $0.6 billion than the net budget loss that would have occurred under the original $1.75 billion program contained in the budget message. This additional revenue reduction of $0.6 billion combined with the expected increase in receipts of $1.6 billion still leaves a net improvement in receipts of $1 billion.

At this time, the Bureau of the Budget continues to expect expenditures for fiscal 1966 to be approximately the same as they were estimated to be in the January budget.

There have been some increases due to increased defense operations in Vietnam, but these have been matched by economies elsewhere. The prospective improvement in the deficit figure is, then, this increase of $1 billion in receipts which would reduce the deficit to $4.3 billion-slightly below the $4.4 billion now anticipated for fiscal year

1965.

The question could be raised, "Would the deficit in fiscal year 1966 be lower by $1.8 billion if there were no excise tax reduction?" The answer would be "Yes" only if we ignore the strategic effect of the reduction, that is, if we ignore the particular contributions that the reduction will make to maintaining the expectation of growth, which is our basic defense against the development of recession. As I said before, deficits rise with recession but they can fall with responsible

tax cuts.

For the fiscal year 1967, assuming continued economic growth at the long-term trend rate, administrative budget revenues should increase by about $5 billion. This potential gain will be slightly offset by the fact that the January 1966 excise tax cuts will be in operation for all of fiscal year 1967 compared to only half of fiscal year 1966, and some further excise tax cuts will come into effect January 1, 1967. On the other hand, we will in fiscal year 1967 be realizing more of the economic feedback of the first two stages of the program. The added revenue loss of the House bill in fiscal year 1967 over fiscal year 1966 on a net basis will be about $0.4 billion. (Under the President's program, this added revenue loss in fiscal year 1967 would have been about $0.3 billion.) Roughly, we could thus put the potential revenue gain in fiscal year 1967 at $4.6 billion.

We do not know now what expenditures in fiscal year 1967 will be, but this potential revenue gain leaves considerable room for providing such increased expenditures as might be needed by a growing population and still achieving reduction of the budgetary deficit.

On this matter of expenditures, I would like to repeat the President's statement to the Ways and Means Committee, "I would like to make clear once again my strong determination to hold expenditures to the lowest reasonable levels." As you realize, expenditure control requires hard decisions and the determination to stand behind them. I believe that the administration has given ample evidence of this determination. Mr. Surrey is now prepared to present the administration's position on the specific tax reductions in the bill and the differences between the President's program and the House bill which center largely on the passenger car excise tax.

The CHAIRMAN. Thank you very much, Mr. Secretary. The Secretary has suggested that Mr. Surrey make the next presentation, at the end of which both the Secretary and the Assistant Secretary will be available for questions.

Secretary FoWLER. Yes, sir.

The CHAIRMAN. Is that agreeable to the committee?
Mr. Surrey.

STATEMENT BY HON. STANLEY S. SURREY, ASSISTANT SECRETARY
OF THE TREASURY

Mr. SURREY. H.R. 8371 can be described by saying that it repeals all of the excises except

Those which are intended to impose part of the cost of a particular Government service in the area thereof. This category includes the highway trust fund taxes, the tax on fishing equipment and certain firearms, shells and cartridges, and the tax on air passenger travel.

Those on alcohol and tobacco, which are traditional sources of revenue. As the House committee report indicates, the fact that these taxes may inhibit some choices is part of the reason that we have had them.

Those which are intended to be regulatory in nature, such as the taxes on certain firearms, wagering, coin-operated gaming devices, marihuana, and opium.

The bill makes these changes in a way that is fiscally responsible through staged reductions. Where postponement of purchases in anticipation of a reduction could be a potential problem, the reduction is scheduled for the first stage-July 1, 1965. The remaining part of the reduction is scheduled for January 1, 1966 (December 31, 1965, in the case of certain admission taxes and the cabaret tax). In the case of the two taxes where very large amounts of revenue are involved, telephone service and passenger automobiles, part of the reduction is staged through 1967-69.

In two industries where the effect on sales because of the anticipated reduction on July 1 might be a serious problem, passenger automobiles and air conditioners, the bill provides customer refunds to the original announcement date-May 15. In the other situations floor stock refunds are provided where considered appropriate.

An alphabetical listing of the present excise taxes and the indicated changes under the House bill and the President's program is attached

to this statement.

(The listing referred to follows:)

48-936-65--4

Excise tax program to be enacted in 1965 indicating differences between President's recommendation and H.R. 83711

1 The table does not deal with the user tax recommendations. In addition to the items in the table, the automatic reductions in present law respecting cigarettes, beer, distilled spirits, and wine are to be repealed, and the automatic reduction ir the case of the general telephone tax is postponed. (

2 The President recommended a Jan. 1, 1966, effective date; this was advanced to Dec. 31, 1965, by the House.

Let me turn now to the few instances in which the House bill differs from the President's program. The President recommended that the passenger automobile tax be reduced by half, from 10 to 5 percent, in reductions staged 3 percent on July 1, 1965, 1 percent on January 1, 1966, and 1 percent on January 1, 1967. The revenue obtained from a tax at a 5-percent rate is $950 million, at 1966 levels of income. This tax is efficient to collect. It is not regressive. It falls upon an item without close substitutes. Most important the revenue is large.

The House bill provides that the entire tax be phased out by January 1, 1969; 3 percent on July 1, 1965, 1 percent January 1, 1966, and 2 percent on January 1 in each year 1967, 1968, and 1969.

We believe, however, that only 5 percentage points of the automobile tax should be removed, and 5 percentage points left in effect, in accordance with the President's recommendation. This will allow future Congresses to consider whether to reduce the automobile excise tax below 5 percent.

Postponing the decision with respect to this remaining 5 points of the automobile excise tax until the future is the course of fiscal prudence. In the judgment of the administration it is unwise to enact now large tax changes to come into effect 3 and 4 years in the future. It is impossible to forecast the economic situation that far ahead. The prudent course for the Nation is to stay with the President's program. One cannot foretell just what tax requirements for responsible fiscal policy will be in the fiscal years 1967, 1968, and 1969, depending as they do on expenditures, receipts, and the economic situation. In fact, one cannot tell just what expenditures will be forced upon us by the automobile itself. How much will we have to spend to deal with such problems as highway safety, air pollution, and automobile graveyards? The other differences in the House bill from the President's recommendation are relatively minor, and we concur in the House action. The House bill would retain the tax on lubricating oil so far as it applies to highway users. This would be done by repealing the present tax on cutting oil and by providing refunds for use of lubricating oil in other than highway vehicles. The proceeds of this tax, $50 million, would be put in the highway trust fund.

The remaining difference in the House bill deals with the automobile parts and accessories tax so far as it applies to parts which are primarily designed for trucks. The President recommended retention of this 8 percent tax as it applies to parts which are not suitable for use in a passenger automobile. The problem here is that some large components of trucks are subject to a 10-percent tax if they are installed by a truck manufacturer on a new truck. This 10-percent tax on trucks, which is part of the highway trust fund is not changed by this bill. If no parts tax applied, there would be a considerable incentive to install the part later as an accessory. Retaining the tax for truck parts and accessories will avoid aggravating this problem. The House bill places this truck parts tax, which amounts to about $20 million, in the highway trust fund, along with the basic tax on trucks. Finally, I want to say a brief word about the matter of effective dates. The Ways and Means Committee went extensively into this problem, as its report indicates. It considered the potential postponements of sales and came to the same conclusions that we had reached, after the extensive discussions which trade associations and individual firms had with the Treasury and with the staff of the joint committee. Two industries thought this sales postponement problem was serious. In automobiles the tax involves a larger dollar amount. Postponement of a purchase until after July 1 would bring the buyer close to the new model year when he might decide to wait until fall. This could result in a significant loss of sales for the current model year and perhaps even some permanent loss of sales.