TAX ON DISTILLED SPIRITS AND CEREAL BEVERAGES

LETTER OF THE COMMISSIONER OF PROHIBITION

NOVEMBER 22, 1927.

Hon. WILLIAM R. GREEN,

Chairman Ways and Means Committee, House of Representatives.

MY DEAR CONGRESSMAN GREEN: I am writing you with respect to the attitude of the Bureau of Prohibition on two proposals now under consideration by the Ways and Means Committee dealing with the cereal beverage tax and the wine and brandy tax. I have made a very careful inquiry concerning the operation of the cereal beverage tax of one-tenth of 1 cent per gallon and find that it has been of no value to the Bureau of Prohibition in the enforcement of the prohibition laws. This bureau, therefore, would offer no objection to the repeal of the tax.

With respect to the proposal to lower the rates on wines and brandies used in the fortification of wines, I would state that this bureau sees no objection to the reduction of the rates to the pre-war level. The function of the Bureau of Prohibition in administering the laws with respect to wines and fortifying brandy will not be impaired if the rates are reduced. I do not see any objection to the removal of wines from bonded premises free of tax for use in the manufacture of vinegar under regulations of the department.

The above expression is made pursuant to your suggestion made to the Undersecretary of the Treasury, and the views given are in accord with those of the Bureau of Internal Revenue.

Very sincerely yours,

J. M. DORAN, Commissioner of Prohibition.

CEREAL BEVERAGES

[Secs. 903-904]

STATEMENT OF LEVI COOKE, WASHINGTON, D. C., REPRESENTING CEREAL BEVERAGE MANUFACTURERS

Mr. COOKE. If the committee please, it will be recalled that during the last revenue hearings on the act of 1926, Gen. Lincoln C. Andrews, who was then the Assistant Secretary of the Treasury in charge of prohibition enforcement, asked the committee to put into the act a tax of one-tenth of 1 cent on cereal beverages. That was frankly stated by him to be a policing measure. He said to the committee that the permittee-operators, developing more than one-half of 1 per cent of alcohol in their beer and then dealcoholizing it, were under the control of the department as far as could be expected, and that the department was able to police them efficiently. He further stated, however, that there were some alleged cereal beverage manufacturers who took no permits from the Government, and who said that they never raised their alcohol content to one-half of 1 per cent, and, having no permits, were not accessible to the Government as

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were the permittee manufacturers. He therefore asked that the committee report and that Congress place in the act this tax of one-tenth of 1 cent per gallon on all cereal beverages, which is purely a policing tan

Mr. CROWTHER. Was it also a part of his statement that there was too much high-powered beer coming out of places that were supposed to manufacture beer with an alcohol content of one-half of 1 per cent? Did he state that a lot of it did get out before the dealcoholizing process occurred?

Mr. COOKE. That is true. He stated that these men said that they did not manufacture any high-powered beverage or beer, and, therefore, did not dealcoholize it, but, as a matter of fact, the department claimed that they simply made regular beer and sold it in defiance of the Government.

Mr. CROWTHER. As I understand it, the high-class cereal beverages that are finally sold to the consumer and which contain less than one-half of 1 per cent of alcohol must be made like real beer in the first instance.

Mr COOKE. Very fine beer must be made and is more expensive to make, because it must go through this dealcoholizing process, in order to make it merchantable cereal beverage. Houses like those I represent, such as the Anheuser-Busch (Inc.); Jacob Ruppert, New York; C. Schmidt & Sons, Philadelphia; Pittsburgh Brewing Co., of Pittsburgh; and others, operating large breweries, have always conducted their businesses properly. They make a strong beer, hold it carefully in their plants, dealcoholize it, bottle it, and ship it as a cereal beverage. That is the cereal beverage that is served in restaurants and other places.

Mr. CROWTHER. When we took the tax off cereal beverages, or in the interim after that occurred, was the price of beer lowered any to the ultimate consumer, or did near beer sell at the same price it did when the full tax was on?

Mr. COOKE. I think the answer to that is that it is sold in a competitive market. These big houses make their product and sell it to the best advantage they can in a wholesale way. The price would reflect the saving in the amount of the tax. We demonstrated that when the tax was 2 cents per gallon on cereal beverages, the houses encountering a loss of about the amount of money that was being paid in taxes to the Government. It was really a tax on capital. The first tax was 1 cent per gallon, under the revenue act of 1917, when real beer was still being, sold in some places. Then Congress put a 15 per cent sales tax on this product, which was later changed to a tax of 2 cents per gallon, upon the showing made that the difficulty of working out the sales tax by the Internal Revenue Bureau was very great. Then, on a very clear demonstration, which, I think, convinced the entire committee as well as the Congress, the entire tax was taken off. Now that is reflected in the price in a wholesale way, because it is sold in a competitive market. There is more capacity than there is demand. Of course, when you gentlemen or I go to buy a bottle of Anheuser-Busch Budweiser we pay the restaurant price for it. If we go to a restaurant for it, we may pay 25 cents, 30 cents, or 40 cents per bottle for it, but there are retail profits represented in that price. Of course, the proprietor of the restaurant is trying to make a profit, and that has no relationship to the wholesale

transaction in the markets of St. Louis, New York, Pittsburgh, and other places.

The manufacturers did not object to this one-tenth of 1 cent tax last year when General Andrews said that it was a measure necessary to secure access to wildcat brewers who were defying the authorities and making real beer. I said to the committee that while the tax was objectionable, as a trifling tax, the respectable manufacturers could not object in the face of the assertions of General Andrews.

Mr. CROWTHER. What is the tax now?

Mr. COOKE. It is one-tenth of 1 cent per gallon. It is hardly in the nature of a revenue producer, because it probably costs the Government more to collect it than it provides. The clerks here and clerks in the collectors' offices have to look after these collections; inspectors have to look at the books of the manufacturers and have to keep in touch with it.

Mr. GARNER. What is the situation to-day with reference to the reason that led to the imposition of the tax-that is, to enable them to more efficiently enforce the prohibition act?

Mr. COOKE. That is my last topic. I would not ask to have it taken off if it showed any good effects in accomplishing the purpose for which it was designed, but I am informed that there has been no utilization of this taxing measure as a policing measure. In administering it as a taxing measure, the revenue men go to the houses during business hours, when they are all in full dress ready to make a parade. It is during the nighttime when they perform the evil actions for which they should be condemned. Furthermore, I understand that the Government has pretty well eradicated that class of manufacturers without resorting to this provision. They have simply identified them as illicit operators, have gotten search warrants, and gone in and found the beer. Of course, that is complete evidence of their misconduct if they find strong beer in their places. They have practically driven them out of business. Of course, you can not get much revenue on this trifling rate of taxation.

Mr. CHINDBLOM. The preliminary statement of August 16, 1927, shows collections of $198,610.72 from the tax on cereal beverages. Mr. COOKE. I could not ascertain what it was for the fiscal year, because this tax was not reported for the complete fiscal year. Mr. CHINDBLOM. This statement covers the fiscal year ended June 30 last.

Mr. COOKE. It might be a little larger when you go through the year, including August and September. However, under any cir cumstances, the yield of the tax, if it were $250,000, or even $300,000, is incommensurate with the labor imposed both upon the Government and private parties. The tax as a tax is a great aggravation to the industry, which has never made any money during the period in which it has been operating. These plants during some years do a profitable business, but in other years the business, under seasonal conditions, is such as to create a loss. We therefore urge, since the measure was adopted last year only as a policing arrangement, and since it has not been effective as a policing arrangement, because the policing has been accomplished otherwise, that respectable manufac turers be relieved of this aggravating tax, which punishes them with

out accomplishing any equivalent benefit to the Government or equivalent punishment or aid to punishment of the illicit producers.

Mr. CROWTHER. You do not mean that it was not effective, but that it was not necessary because other measures just as effective have been employed.

Mr. COOKE. That would be a fair statement of the situation.

Mr. CROWTHER. And, so far as the revenues are concerned, it is chicken feed.

Mr. COOKE. Yes, sir; but very annoying chicken feed to these manufacturers.

Mr. GARNER. In other words, the Treasury Department with respect to the necessity for this law is in very much the same position that it was with reference to medicinal whisky at the time they claimed it was absolutely necessary to pass such a law, and then later found that it was unnecessary.

Mr. COOKE. I stand there just as I stood last year. I stand firmly upon the same ground. I was not myself convinced of the necessity that the Government officials expressed here, and that matter may have to be dealt with again in an orderly way, at which time any views that I have will be expressed on that subject.

I want to say this much further: I addressed a letter to the chairman of the committee on this subject, and I would like to have included with these remarks a memorandum I submitted on this subject. Mr. HAWLEY. That may be inserted in the record.

(The letter and memorandum referred to are as follows:)

Hon. WILLIAM R. GREEN,

Washington, D. C., October 15, 1927.

Chairman Ways and Means Committee,

House of Representatives, Washington, D. C.

MY DEAR JUDGE GREEN: I have written a letter to Commissioner J. M. Doran of the Bureau of Prohibition presenting a request that the Treasury consider the abandonment and repeal of sections 903 and 904 of the revenue act of 1926.

Herewith inclosed is a copy of that letter, which sets forth the reasons urged by the permittee cereal beverage manufacturers against the retention of this one-tenth of 1 per cent tax on cereal beverages.

I will not repeat what I have stated in the letter to Commissioner Doran, but do ask that you treat the inclosure as a memorandum on the subject in behalf of respectable cereal beverage producers.

You doubtless will remember that General Andrews urged this provision as a means of policing nonpermittee manufacturers who claimed not to produce a strong beer for dealcoholization; and he believed that since they were without permits they could be better inspected with this tax requirement. Apparently, the provision has been useless as an enforcement measure in the guise of a revenue provision. It is none the less a burden on the respectable manufacturers, both in actual money and in bookkeeping and making of returns. The cereal beverage manufacturers are in no fiscal position to pay a special tax of this sort. The amount is nugatory from the Government's revenue standpoint, but is, of course, a burden on the trade of the small amount collected. Any revenue legislation intended for control of an industry is, of course, highly questionable as a matter of Government policy; this is particularly true when the measure affects only the honest interest and seems in no sense to aid to the surveillance of the dishonest element.

While the cereal beverage producers did not resist the tax when it was proposed by Assistant Secretary Andrews in order to avoid objection to what was urged as a policing measure, experience seems now fully to warrant both their request for its repeal as a failure in the way of a policing measure and to warrant Congress in relieving the respectable manufacturers of an unnecessary burden on their operation.

If Mr. Hawley is to be in charge of any subcommittee which will deal with this subject, as has been the case in previous Congresses, I will either send

him a further memorandum on the subject or this letter and inclosure may be turned over to him as our first presentation of the request.

Respectfully,

LEVI COOKE

Washington, D. C., October 15, 1927.

Hon. J. M. DORAN,

Commissioner of Prohibition, Washington, D. C. Subject: Requested repeal of cereal-beverage tax.

SIR: On behalf of cereal-beverage manufacturers, I beg to request that the recommendations, if any, of the Treasury Department regarding proposed revenue legislation in the ensuing session of Congress include a proposal that sections 903 and 904 of the revenue act of 1926 be repealed.

These sections cover the imposition and collection of the tax of one-tenth of 1 cent per gallon on cereal beverages.

You will recali that this tax was proposed by former Assistant Secretary of the Treasury Andrews not as a revenue measure but as a means of further policing of cereal-beverage plants, particularly those claiming to produce no beverage containing as much as one-half of 1 per cent of alcohol. Assistant Secretary Andrews believed that by virtue of such a tax access to and inspection of such latter kind of plants could be accomplished, and the production of strong beer detected by such process of inspection for revenue purposes.

The producers of cereal beverages, acting under ful permit requirements of the Prohibition Unit, are scrupulously complying with the national prohibition act; houses such as Anheuser-Busch (Inc.), of St. Louis, Mo.; Jacob Ruppert, of New York; C. Feigenspahn, of Newark, N. J.; C. Schmidt & Sons, of Philadelphia, Pa., and others of this character interposed no objection to the proposed tax of one-tenth of 1 cent, but refrained from serious opposition only because Assistant Secretary Andrews urged the proposition as a measure of control of questionable establishments not operating under Federal permit.

The permittee cereal-beverage manufacturers realized that the tax imposition would be burdensome, but being actuated by a disinclination to oppose Government measures of enforcement, withheld their objection and assumed the tax burden.

I beg to remind you that after national prohibition the first impost of a 15 per cent sales tax on cereal beverages by manufacturers was a burdensome and onerous tax, both in form and in cost on a struggling industry; this was modified to create a 2-cent per gallon tax, and it was demonstrated to the Congress that the collections under this latter impost were substantially equivalent to the losses which were encountered during the period of its collec tion by cereal-beverage producers and constituted really a tax upon capital. Congress repealed the cereal-beverage tax on the basis of this demonstration.

While it is true that the one-tenth of 1 cent cereal-beverage tax found in the revenue act of 1926 is not so burdensome as was the larger earlier tax, it is none the less a serious factor in the cost of operation, particularly in view of the continuing difficulties which the representative and respectable cereal-beverage producers constantly encounter. The tax ranges for individual manufacturers from a few hundreds of dollars per annum to some thousands of dollars per annum, according to volume of production, the gross yield in revenue to the Government being, however, entirely negligible.

It must be kept in mind that this impost was never suggested as a revenue producer, but solely as a sort of policing measure in the guise of revenue administration.

There is the added objection to the impost that it requires on the part of the reputable manufacturers additional bookkeeping and governmental returns under the provisions of section 904 (a), together with a similar amount of clerical work in the collectors' offices and in the Treasury, all of which is entirely incommensurate with the revenue yielded.

So far as public opinion is available, there has been no single prosecution of any illicit-beer manufacturer based upon the use of this taxing provision, and it has been futile to aid in the detection or punishment of any illicit operation. The provision appears to have been useless for the sole purpose for which it was proposed by Assistant Secretary Andrews.

Under these circumstances, and in the light of experience had under the act, the reputable manufacturers whom I represent now urge that the provision be repealed and the burden thereof taken from the industry. The provision con