Wholesale tobacco distributors in 34 cigarette-tax States perform an exemplary service to their States as tax-collecting agents. Under the proposed law, the tobacco distributors of the District of Columbia will be called upon to render this type of service. This committee will, therefore, appreciate that this important group of businessmen in the community, who contribute substantially to the support of the District through the payment of property and income taxes, are anxious that your committee be apprised of the certain and dire effect of that proposed cigarette tax on their businesses and those of the retailers.

To understand the acuteness of the problems that will result if a cigarette tax is imposed in the District of Columbia, it is necessary to consider the peculiar geographical States, Virginia and Maryland. both of which do not impose cigarette taxes. Although I am certain that it is unnecessary for me to dwell on the physical characteristics of the District, I believe it should be pointed out that the District of Columbia marketing area does not respect State lines; that is to say, merchandise is distributed by wholesalers in both the District and surrounding areas of its neighboring States, Maryland and Virginia. Therefore, a cigarette tax in the District would have the anomalous effect of causing a higher price in one part of this marketing area. while in another part a lower price would prevail. The consequences of this situation to the wholesale distributor would be to disrupt and unbalance his entire distribution system and procedure by placing an unequal load on his facilities serving Maryland and Virginia, where his sales would naturally increase in the face of a tax in the District. In the District of Columbia there are approximately 4,000 retailers of tobacco products who depend in great measure for their livelihood upon the sale of cigarettes and who are our customers. Unlike many other products, consumers are quick to display a stiff resistance to an increase in the price of cigarettes, even a small increase of 1 cent per package. Sales by wholesalers and retailers of cigarettes in the District would seriously suffer for that reason, should a tax be imposed. However, the loss of sales to these merchants as a result of consumer resistance to an increased price is only part of the total hardship that a cigarette tax would visit upon them. Even more serious is the certainty that a tremendous volume of sales of cigarettes and other merchandise will be lost to them because of the diversion of cigarette sales to Maryland and Virginia, where there are no cigarette taxes. We can certainly expect that residents of the District will travel 2 or 3 miles-and in some cases the distance would only be a few blocks-to purchase their cigarettes at a lower price.

Moreover, it is estimated that approximately 45 percent of the residents of nearby Maryland and Virginia are employed or are engaged in a profession or in business in the District of Columbia. With a differential in the price of cigarettes between the area in which they live and the District, it seems obvious that these persons will purchase their cigarettes where they reside and where there is no tax. In addi tion, experience in similar situations in other States has demonstrated that these individuals who work in the District will also bring into the District cigarettes purchased for fellow workers, friends, and others.

A 1-cent-per-package tax would mean a 10-cent saving in the price per carton between the District and Maryland or Virginia-certainly

a sufficient amount to influence the purchase of cigarettes outside of the District, particularly when a carton is normally a week's supply of cigarettes for the average smoker. Because of the diversion of cigarettes to Maryland and Virginia, it is estimated that the loss in sales volume by wholesalers and retailers in the District would be approximately 40 percent-an amount of business that these merchants sorely need and can hardly do without if they are to realize a profit on their operations.

Senator CAIN. That is purely an estimate. What is it based on? Mr. KAUFMAN. We are basing it on actual experience in the city of Baltimore, which, as recently as January 1, imposed a 1-cent cigarette tax. Mr. Goldberg will present to you gentlemen some further specific information to that effect.

There is yet another practical aspect of the problem that should have your serious consideration. The loss of cigarette sales to neighboring States would drastically reduce the amount of revenue it is expected will be received from a cigarette tax. If it is anticipated, on the basis of the normal consumption of cigarettes in the District, that the proposed tax will yield, for example, $800,000 per year, this amount must necessarily be reduced by approximately 40 percent to allow for the loss of cigarette sales to District merchants. In addition, the income to the District will be further decreased because of the high cost of administering the tax.

It therefore does not seem practical to us that your committee would find it advisable to impose a tax on sales of cigarettes in the District when the net result, financially and otherwise, does not warrant the expenditure of time, effort, or money, and when it would also constitute a nuisance to everyone concerned.

Another danger inherent in the proposed tax-and one which should not be overlooked-is the probability of price confusion in connection with the sale of cigarettes, as well as price demoralization on this product on which so many merchants in the District depend for a living. It is inevitable that should residents of the District and those working in the District purchase cigarettes in Maryland or Virginia— or in other nontaxing States-District merchants will be forced to cut prices in order to compete, thus absorbing and paying the tax out of their own pockets, which, because of the minute margin of profit obtained on cigarettes, would result in a loss on these sales. This would constitute a further and unfair burden on these merchants.

Now, gentlemen, as Federal legislators, I believe you will agree that the tobacco industry, as such, in its larger sense has never shirked its tax obligations. The people who make up our industry recognize that in order to enjoy the blessings and privileges of a free democracy, it is necessary for them to shoulder a fair share of the national and local tax burden. Nevertheless, the fact cannot be denied that the tobacco industry and its customers for many years have been paying a disproportionate share of the cost of Government.

In 1946 the Federal tax collected on cigarettes was almost one and a half billion dollars. The tax collected by the State on tobacco taxes was about 250 million dollars. The startling result is that over 50 percent of every dollar spent today on cigarettes is in the form of taxes.

We feel that once in possession of these facts, and after consideration of the serious consequences of the proposed cigarette tax, this

wil recognize the inequitable and undesirable aspects of. ae dangers inherent in, a cigarette tax in the District. As as of the welfare of the District of Columbia, we believe your tee will recognize the inadvisability, from every standpoint, ning such a tax.

Cator CAIN. Let me ask you, Mr. Kaufman: Do you represent the cocco industry or a group of tobacco merchants within the District? M. KAUFMAN. I am associated with the National Association of Tobacco Distributors, which is the national organization representing to wholesale tobacco trade in the country.

In this particular instance, we are representing that segment of the wholesale tobacco trade located in the District of Columbia.

Senator CAIN. But your sphere of influence is much broader, geographically, than the District of Columbia.

Mr. KAUFMAN. Yes.

Senator CAIN. I mean, if a tax were to be imposed in the State of Virginia, without prejudice to you, I want to say that it is clear you would be over in Virginia appearing in opposition to that tax; the point involved being that you are more in opposition to a tax on tobacco than you are against the imposition of a tax, as such, within the District of Columbia.

You are representing the industry. I want to get that straight. Without, again, any prejudice to you, that is your business. I appre

ciate that.

Mr. KAUFMAN. If I might add this, Senator: We have members in the District, for whose interests and welfare we do look out specifically and individually. So I cannot say that our interest is only national.

Senator CAIN. We have a strike, for example, in the city of Tacoma. And sitting across my desk, there is an international vice president, who lives in some place in North Carolina. But he comes out and speaks, very feelingly, on the issues which confront a city 3,000 miles away.

I respect your position. I would say, however, in answer to it, that it is a difficult problem. I happen to live in a portion of a State which lies adjacent to another State. In my State we have a 3-cent cigarette tax per package of cigarettes, if I am not mistaken, and in Oregoa there is none.

Now, we are considering the advisability of a piece of legislation which would serve the effect of taxing cigarettes imported within the State, to offset the very legitimate criticism that you have of this operation.

Mr. KAUFMAN. Yes.

Senator CAIN. You are familiar with the State of Washington and the situation there?

Mr. KAUFMAN. Yes; we have many similar situations. The most serious situation is that in the State of New Jersey. And, of course, there is a great loss of business to surrounding States, and even as far as Washington, where they are mail-ordered.

Senator CAIN. Your position has been very ably presented.
Mr. KAUFMAN. Thank you.

Senator CAIN. We appreciate that position, and we will study it on the basis of our general objective on this side of the table. Mr. KAUFMAN. Yes, sir.

Senator CAIN. Mr. Goldberg, without being misunderstood, I want to say that you are actually a resident of Washington, D. C. You are speaking feelingly now of something that takes something out of your personal pocket.

STATEMENT OF NATHANIEL GOLDBERG, ATTORNEY, REPRESENTING WHOLESALE TOBACCO COMPANIES OF WASHINGTON, D. C.

Mr. GOLDBERG. With the slight exception that I do not smoke. That alone being the exception: I am a resident of the District of Columbia and have been for 26 or 27 years. I am a practicing attorney and am here solely to testify in connection with this cigarette tax. Mr. BATES. Do you abstain from smoking because it is prejudicial to your health?

Mr. GOLDBERG. Perhaps I should not answer that question. Senator CAIN. The other day, Mr. Bates, our friend Kronheim was here representing the alcohol side. If I am not very much mistaken, he never had a drink in his life.

Mr. BATES. I do not want to have it appear prejudicial, but I do not smoke either, Senator.

Senator CAIN. So you have a very sympathetic listener, Mr. Goldberg.

Mr. GOLDBERG. Yes; I have something in common with the Congressman.

In connection with the bill and our opposition to it, I represent a group of local companies. I would like, for the purpose of the record, to name them: The Washington Tobacco Co., Standard Cigar & Tobacco Co., Capital Cigar & Tobacco Co., William Deiches & Co., George W. Cochrane & Co., and the District Tobacco & Candy Co.

I also represent the District Grocery Stores, Inc., the United Food Stores, Inc., the Nationwide Service Stores, Inc., and the Independent Food Distributors of the District of Columbia, which latter organization is the retail grocers association of Washington.

These firms would like to register their opposition to the pending tax bill, for several important reasons.

There are in the District of Columbia approximately 25 wholesalers, vending-machine operators, or retailers, buying cigarettes directly from manufacturers who would have the burden of affixing the stamps to the packs of cigarettes.

Because of the problem that they would face in the way of affixing the stamps, I think most of them will have to buy these socalled metering machines to affix the stamps.

As I understand it, these metering machines are available and have been offered for sale to the wholesalers and they cost approximately $800 apiece.

In addition to that, the actual meters which run the machines are not for sale, as I understand it, but require a monthly rental of $15 per meter.

Now, we have, as I say, around 25 wholesalers who are going to have to assume the burden of affixing the stamps. When they lay out $800 for the machines, that represents an initial outlay in cash of some $20,000.

On top of that, these 25 merchants are going to have to pay out in yearly revenue for the rental of these machines a total of about $4,500 per year.

As I understand it, the same wholesalers would have the job of removing the cartons of cigarettes from the cases. And they come 50 cartons to a case.

They would have to, by machine or otherwise, slice open the tops of the individual cartons, and, by machine or otherwise, stamp the individual packages.

Senator CAIN. May I stop you there?

Mr. GOLDBERG. Yes, sir.

Senator CAIN. You make those observations probably on the basis of your research, which has determined that that is what must be done in those several States now under taxing law?

Mr. GOLDBERG. That is right. As a matter of fact, there are several States, Senator, that do not, for some reason, allow meter machines: which puts upon the wholesaler a worse problem, of having to affix the individual stamps by hand.

Senator CAIN. It is a tough business, this tax subject, yes.

Mr. GOLDBERG. The stamps have to be affixed to the individual package, the cartons have to be closed in a firm position again, and offered for sale.

Now, it so happens that the Washington wholesalers, by their geographical location, serve storekeepers in Maryland and Virginia.

The packages sold by Washington wholesalers to retailers in Maryland and Virginia would not have the tax stamps affixed, because the tax is on the sale to consumers. So the individual wholesalers would have the problem of having cigarettes in their inventories bearing tax stamps on the one hand, and a special allotment of cigarettes not bearing tax stamps, for sale to their Maryland and Virginia customers.

Now, I am perhaps not being very legal, but being practical as I can, I know the wholesalers have this problem, and they are going to have it if the tax should be passed-God forbid such a thing.

They have only ordinary help, colored help, making up orders and assorting merchandise. If they have two separate inventories of cigarettes, one with the tax stamps, and one without, and a truck driver gets on a truck to make a delivery, he might be the best intentioned person in the world, but somewhere along the line he is going to take tobacco with no stamps and deliver it to a District merchant. The merchant might pay the bill without even looking at the merchandise, and perhaps some clerk of his is going to sell those without the tax stamps affixed. And then the law provides that he is liable for a $1,000 penalty or a year in jail.

Seriously, the act, insofar as penalties are concerned, does not even require that any violation be willful or intentional. It just says the violation of the act; so if a person inadvertently, by carelessness, by. the mistake of a new employee, makes a sale under those conditions, the employer is subject to criminal penalties.

Another problem is this: You mentioned before, Senator that there is no way of figuring specifically how much business is going to be lost by the application of a tax. All we do know-and we have tried to find out from other places, where the situation would be reasonably similar to what it will be in Washington-is that loss is