is done with the additional amount of money, whether it is passed on or whether it is kept by the manufacturer. Isn't it true that when this is passed on to the consumer that it has a greater multiplier effect upon the economy of the Nation than if it be retained by the manufacturer? Secretary FOWLER. That is the case, and we have a very distinct preference in these situations that the reduction be passed on to the consumer despite the fact that, as was observed, if they are retained by the company the Treasury might get a little bit better revenue in the short run. Senator HARTKE. Yes, in the short run. But it is not true that the Treasury would be better off if the manufacturers kept it. Secretary FOWLER. Over the long pull, no. Senator HARTKE. I hope we are going to be here for the long pull. Let me say one other thing. I am not asking really for a comment, but I thought this was a fine statement when you said that "we are now in a normal peacetime economy." Those are all the questions I have. The CHAIRMAN. The Chair would like to announce that several Senators who have not had an opportunity to question the Secretary-I understand the Secretary will be unable to be here tomorrow morning Secretary FowLER. Yes. The CHAIRMAN. So Mr. Surrey will be here, and we will have an open session for a short time. I do not think it will take long, but we want to give all the Senators a chance to ask more questions. Secretary FOWLER. I am very sorry I cannot be here. It is a competing request. The CHAIRMAN. We understand that. Just one moment. Senator Williams? Senator WILLIAMS. I have a question here Senator Carlson wanted to ask, and we will get it into the record today. Secretary FOWLER. Yes. Senator WILLIAMS. His question deals with the loss resulting from the Federal excise tax paid on gasoline because of leakage and/or spill age. This gasoline was not used in any way on our highways, but the Federal excise tax was paid on it. The State legislature in the State of Kansas passed legislation to refund the State tax on this gasoline. Now, Senator Carlson's question is how are these people who lose this gasoline through leakage and/or spillage supposed to get the Federal excise tax back? Would you have any objection to adding an amendment to this bill before us to take care of this situation now? If you want to provide an answer for that tomorrow it is all right with me. Mr. SURREY. All right. Secretary FowLER. All right, Senator Williams, we will answer that question tomorrow morning in executive session by Secretary Surrey. The CHAIRMAN. The committee will recess until 10 o'clock tomorrow morning. (Whereupon, at 12:40 p.m., the committee recessed, to reconvene at 10 a.m., Wednesday, June 9, 1965.) EXCISE TAXES WEDNESDAY, JUNE 9, 1965 U.S. SENATE, COMMITTEE ON FINANCE, Washington, D.C.. The committee met, pursuant to recess, at 10 a.m., in room 2221, New Senate Office Building, Senator Russell B. Long presiding. Present: Senators Long, Smathers, Anderson, Gore, Hartke, McCarthy, Talmadge, Williams, Morton, and Dirksen. Also present: Elizabeth B. Springer, chief clerk. Senator LONG. The commmittee will come to order. This session was called particularly because Senator Thruston Morton had some questions he wanted to ask of Mr. Stanley Surrey, and that being the case, I would recognize Senator Morton. Senator MORTON. Thank you, Mr. Chairman. This won't take long because I think we ought to get into the markup of this bill as soon as we can, for various reasons. It will stop a good deal of correspondence and telegrams and telephone calls going on. Mr. Surrey, I understand that the House-passed bill makes permanent the so-called Korean excise taxes in their application to alcoholic beverages and tobacco products. Is that correct? STATEMENT OF HON. STANLEY S. SURREY, ASSISTANT SECRETARY OF THE TREASURY-Resumed Mr. SURREY. Yes, sir. Senator MORTON. In the case of alcoholic beverages this was, in the case of distilled spirits, a dollar and a half increment per proof gallon. Mr. SURREY. Yes, sir. Senator MORTON. Which brings the present tax to $10.50 per proof gallon? Mr. SURREY. Yes, sir. Senator MORTON. What was the Korean markup in the case of tobacco or cigarettes? Mr. SURREY. It went up 50 cents a thousand, as I recall. Senator MORTON. Yes. That is correct. Now, these two industries are probably the most heavily taxed industries in the Nation. They are indeed the two most heavily taxed in the Nation. There are reasons for this and I won't quarrel with them or debate them. By their very nature they are required to carry very substantial inventories. These generate ad valorem taxes for States, local communities, school districts, and so forth. In the case of the whisky industry, they carry the product for 4 or more years in most instances, paying taxes all the time. Then they collect for the Government, pass on to the consumer the $10.50 per proof gallon which, of course, exceeds the total cost of the product in its manufacture, advertising, merchandising, and distribution. In many instances it exceeds the entire cost of the product including wholesale and retail markups. Of course, this tax indeed is marked up at the wholesale and retail level. Now, these two industries serve, of course, as the tax collector. I think it is somewhat unfair that they are required to pay the tax, in the case of the tobacco industry, an average of 22 days before they receive their money, and, in the case of the distilling industry, 44 days before they receive their money. Under the present regulations of the Alcohol Tax and Tobacco Tax Unit of the Treasury Department, the two reports are filed per month, one, I believe, on the 8th and one on the 27th, showing the amount that has been in the case of tobacco shipped, in the case of cigarettes, shipped, and in the case of distilled spirits, withdrawn from bond, in the preceding fortnight. Then they are given 3 days of grace before paying the tax. Assuming that the rate of withdrawal from bond was steady during the fortnight, that would be 7 or 8 days in one instance, and if a Sunday comes in, perhaps 4 days, so it would be about 11, at the most 1111⁄2 days. Now, the amounts involved are quite large, several hundred million dollars, I suppose. If you take the difference between the 1112 days that they are given after the withdrawal from bond, and the 55 days required to collect from their wholesalers, interest rates are fairly high, so the industry in the case of distilled spirits is paying interest to the banks at probably 412 to 5 percent on as much, I would say, as $200 million, if not more, because of the prepayment of taxes to the Federal Government. It is not quite as bad in the case of tobacco because they seem to get their money quicker. But I would hope, since this requires no legislation, that the Department would give serious consideration to amending this regulation. I realize that you are squeezed for money too, but here we are dealing with a bill reducing taxes, excise taxes in the area of several billion dollars, and it seems to me that this is the proper time to straighten out what to me is an inequity in requiring these heavily taxed industries to pay an excise tax which is in final essence a sales tax, long before they collect it. Would you have any comment on this? Mr. SURREY. Senator, the situation is one that the Treasury Department and the Internal Revenue Service are studying. As you indicate, this is really a historical situation. These two industries used to pay their taxes by stamp, and, therefore, had to pay immediately. As a result of legislation passed in the 1950's they were changed to a return basis which gave them some easier time for payment as compared with the stamp system, although not as easy as compared with the typical return system for other excises as you have pointed out. The taxable periods today are somewhat awkward because they run from the 9th through the 23d, and from the 24th through the 8th, and these periods don't coincide with any other reporting periods that are used, so there is some awkwardness. This does present some problems just from this fact alone for the industry and for the Alcohol and Tobacco Tax Division. So we have been thinking about this problem and talking to the industry about, it and we are studying it to see if changes can be made. Senator MORTON. We have been thinking about and talking about it ever since the prepayment for stamps was superseded by the present arrangement which was along about in 1952, I think. Mr. SURREY. Probably 1954. Senator MORTON. 1954, yes. Senator LONG. If I might just interject here to say this, it seems to me that this tax on liquor is about 1,000 percent of the cost of production, and in the last analysis the rate at which you are going to collect that tax is the rate at which people consume liquor, and insofar as you just impose hardship on somebody who happens to be in that business, between the time he produces it and the time he is able to merchandise it, you simply are imposing a tax on a fellow whose business is 90 percent paying taxes and 10 percent merchandising a product. Mr. SURREY. Yes, sir. Senator MORTON. How has the-I don't know how the automobile excise tax is going to end up, but as of today, that is the present law— how is the automobile excise tax assessed and collected? Mr. SURREY. For the sales for any particular month a return must be filed and payment made at the end of the following month. Senator MORTON. And if I ship a car on the 10th day of April, I pay the tax on the end of May? Mr. SURREY. That is correct. Senator MORTON. Well, I think that the automobile industry probably has, I know it enjoys excellent credit, and probably they can afford to pay their taxes as easily, if not more easily than the distilling industry. Of course there was a time when the State of Michigan got in such hardship that they hard to ask the automobile industry to pay their taxes in advance, but through political circumstances they may have straightened that one out. There is one other thing, Mr. Surrey, and then I won't hold you any longer. There is in the case of tobacco, cigarettes. The time starts when the merchandise leaves the manufacturing or processing plant. In the case of distilled spirits, the time starts when the bulk merchandise, that is, the whisky in barrels, is withdrawn from bonded warehouse. You told me the other day that you are making a study of this. There seems to me an inequity and it causes operating difficulties. In the distilling industry, sales are very heavy in the 6 or 7 weeks before the Christmas season, and very light in certain other periods. Because of this heavy tax, a distiller can hardly afford to hold bottle goods on his floor because it is taxpaid or taxpaid within a few days. We have distillers in some small towns throughout Kentucky where the labor supply is somewhat limited, and it means that he has to bring in extra help at times and then face the resultant unemployment compensation. If the same thing applied to the distilling industry that applies in the case of tobacco, that is that this tax, whatever the period is, whether it is 1 month or 45 days or 15 days, whether it begins If a gallon which the Congress promised would be taken of belief is that we number of details mean rather comp gua the method of Senator LONG. This really is som tax, does it not? taxes, you tax the _t out, there are real operating difficulties in connection with higher percentage ent system which, again, is a historical one. It grows out of es of control that may have been experienced many years ago to help relieve yo Dhol Tax Unit is studying this matter and will be discussing product. Insofar a industry a great many problems of detail that would have t they part title to in order to make this change from withdrawal to time of justice on their sid do think that the present system causes a number of operating es which we should certainly try to avoid if at all possible scussions will be going on, and we will be making a very thor dy of this, with the objective of seeing what we can do t these problems that you call attention to. or MORTON. Mr. Chairman, would it be in order for me to ass ey to have the Alcohol Tax Unit or whatever the appropria in the Treasury Department, perhaps the General Counse a memorandum for the committee on the history and how th orks on the question of the time element in the collection of es, the first problem that I brought up? hen if we could, because I dont' think the members of th Mr. SURREY. Ye out between alcoho Senator LONG. A Senator TALMAI like to ask if I may. Senator LONG. 1 Mr. SURREY. Ye (The information ALCO Prior to June 1959. with certain minor va had to be e are aware of this problem, have a memorandum of ju premises afixed to the happening—you have figures as to how long it takes th to get its money, when they pay you their tax money, the that is involved, then we could give the industry an oppor return system. Under two periods, the 9th th the next month. Payr working day after the semimonthly system t about 11% calendar d The time elapsing be comment on that memorandum and have this for the infor allowed for payment f think that the committee is fully aware that the industr heavily taxed industry in the country, is paying in advan bonded premises until ng a pretty high interest on a big chunk of money. r LONG. Let me ask you, Mr. Surrey, can you correct muc dministratively? URREY. I believe that with respect to the first part of Senat A rough average of the tomers varies between much longer in the ca credit terms than ciga greater diversity of cre facturers might be set At the fiscal 1966 level is $170 million and on di Senator TALMADG whatever on trucks of the small farmer. only for business pu question we do have the administrative authority to exten |