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the manufacturers, the distributors, the retailers, and the suppliers of our materials, and which we submit for your consideration. You will find our proposed tax schedule attached to the summary now before you and it will also be incorporated in the brief, which I understand we will be permitted to file with the clerk on or before August 6. May I assume we have the committee's approval to so do? Mr. SIMPSON (presiding). You have.

(The summary and brief referred to follow :)

CIGAR INDUSTRY'S STORY AT A GLANCE-CIGAR MANUFACTURERS ASSOCIATION OF AMERICA, NEW YORK, N. Y.

1. THE PRESENT TAX ON CIGARS IS EXCESSIVE

(a) It has exacted revenues vastly in excess of that anticipated when enacted as a wartime measure in 1942.

(b) The Secretary of the Treasury in 1942, estimated his proposed revision would yield additional revenue of approximately $13 million annually; a doubling of the prewar revenue. Instead of doubling it has resulted in a tripling of the industry's tax burden-yielding approximately $43 million annually instead of the $26 million anticipated.

2. THE CIGAR INDUSTRY'S HEAVY TAX LOAD HAS DEPRESSED ITS PROFIT MARGINS TO UNECONOMIC LEVELS

The rate of return on stockholders' investments in the cigar industry have declined steadily since 1947, according to the Federal Trade Commission. From 10.2 percent in 1947 to 5.6 percent in 1951 with the greatest burden falling on the smaller companies whose best year, 1949, showed a return on invested capital of only 4.5 percent. And this has since declined to 2.9 percent in 1951.

3. SMALL BUSINESS IN THE CIGAR INDUSTRY HAS BEEN HARDEST HIT

Of more than 10,000 cigar manufacturers in business in 1926, only 1,763 remained by the end of 1951. In 1941 there were over 3,000 cigar manufacturers whose sales were less than $50,000 annually. But by the end of 1951 nearly half of them were forced to close their factories (Internal Revenue Bureau).

4. THE CIGAR INDUSTRY CANNOT ADEQUATELY ADJUST ITSELF TO PRESENT CONDITIONS WITHOUT A LESSENING OF THE TAX LOAD

Greater sales are required to obtain a fair return on invested capital. Rising cost of materials, labor, transportation, etc., continue to squeeze the already narrow margins. Increased sales are impossible without a tax reduction.

5. TAX REVENUE HAS INCREASED MORE THAN ANY OTHER MAJOR COST ELEMENT IN A CIGAR

Compared with 1941, tobacco increased 169 percent in 1952; labor rates increased 138 percent, and revenue taxes increased 241 percent. Despite these tremendous increases, the cigar industry has been unable because of consumer resistance to adjust its prices with the result that net earnings have diminished to uneconomic levels.

6. THE CIGAR INDUSTRY IS NOT KEEPING PACE WITH UNITED STATES ECONOMY

Comparing 1952 with 1941 consumer's dollar expenditures for cigars increased 96 percent while expenditures for durable goods increased 174 percent, and nondurable goods 170 percent. Disposable income of consumers in the United States rose 155 percent. But a proportionate share of this income was not expended for cigars.

7. PRESENT TAX STRUCTURE HAS RESULTED IN SERIOUS DISLOCATIONS

The present tax schedule now in effect is inequitable and has resulted in serious dislocations between price brackets. It has little relationship to the retail price of the product. The tax rates ranging from 4 percent to 25 percent.

8. A NEW TAX SCHEDULE IS NECESSARY

Our proposal distributes the tax burden equitably and should yield approximately the revenue anticipated by the Government when the present tax law was enacted. It will permit greater flexibility in pricing of cigars since the tax rate is approximately the same throughout all classes and the tax breaks are just above normal retail price groupings.

Cigar excise-tax schedule proposed by Cigar Manufacturers Association of America

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Mr. CARLSON. Our proposed schedule will provide greater flexibility in the pricing of our product and is the nearest approach to an ad valorem tax without imposing drastic changes in the industry's pricing practices. It provides a natural grouping of prices in each tax bracket. For example, the 2-for-5- and 3-for-10-cent cigars are taxed alike. The 5- and 6-cent cigars are included in a single tax class. These traditionally competitive price groupings are recognized and maintained throughout our entire proposed schedule.

May I therefore, on behalf of the thousands of tobacco farmers in the States of New York, Connecticut, Pennsylvania, Massachusetts, Florida, Georgia, Wisconsin, Ohio, and Minnesota, their families, their employees, the thousands of leaf packers, the thousands of tobacco distributors, and the hundreds of thousands of independent retail tobacco merchants, the cigar manufacturers, and their thousands of employees urge your serious consideration of our prayer for relief from the burden of a wartime-imposed taxload which has stifled and impeded the recovery of a depressed industry.

Mr. SIMPSON. For the committee I thank you, Mr. Carlson, for your appearance. I recollect the case made by your industry back in 1950 and 1951, at which time efforts were made to increase the then high tax on cigars, and the effectiveness of your arguments which persuaded the committee in 1951 not to grant the increase requested. I call attention to the fact that we did that at a time we were desperately seeking more money. We recognized your industry was one which could not stand more taxes. Unlike the subject of the previous witness, you are ap

pearing before us representing what might be termed a hardship case, applying to the industry.

Mr. CARLSON. That is the way we see it.

Mr. SIMPSON. And you are asking relief from a tax burden which is, as you see it, affecting the volume and sale of your product and decreasing or affecting Federal revenues adversely by that very fact, are you not?

Mr. CARLSON. Yes, sir.

Mr. SIMPSON. I call attention that the other witness' testimony was just the other way. As Mr. Eberharter developed, he and I together, it seems as though the higher the taxes go, the sales continue increasing. You are unlike that, then, in that respect, are you?

Mr. CARLSON. I don't like to be in the position of taking sides on an issue, but one thing is very clear, Mr. Simpson: We feel that ours is a depressed industry. We have a product which is extremely sensitive to price increase. The industry has been most modest in price advances purely because it has not shown steady growth over the years, and we are practically in a squeeze between increased labor costs, increased materials costs, plus what we feel is not only an excessive tax rate, under present-day conditions in the light of our understanding back some years ago, that it would not yield as much to the Government as it has, and frankly we do not know what direction to move in.

Mr. SIMPSON. I always thought when we had a limited amount of money to play with by way of possible excise-tax reductions that those industries which are unhappily hardest hit and are represented in a hardship area should be given an advantage of tax reduction first. Mr. Eberharter, any questions?

Mr. EBERHARTER. Your proposal would bring in, according to your estimate, about $26 million?

Mr. CARLSON. Approximately so, sir.

Mr. EBERHARTER. On cigars?

Mr. CARLSON. That is correct, sir.

Mr. EBERHARTER. That would be what the Secretary of the Treasury asked for in 1951.

Mr. CARLSON. Yes, sir.

Mr. EBERHARTER. That was 1950.

Mr. CARLSON. That was 1942.

Mr. EBERHARTER. That is right. Your memorandum here, Cigar Industry's Story at a Glance, is covered by your statement, is it not, the items in the memorandum?

Mr. CARLSON. Yes, sir; that is a brief summary of the presentation. Mr. EBERHARTER. Do you want that in the record, too?

Mr. CARLSON. That is for purposes of your convenience at the moment. It is the statement that I made just now that we would want in the record.

Mr. EBERHARTER. This schedule that you present here is the suggested schedule of the industry.

Mr. CARLSON. That is correct, sir. We are submitting a brief for the record which will include the schedule.

Mr. EBERHARTER. Do you think the sales of cigars will increase if prices are reduced? Do you intend to reduce the prices if taxes are reduced?

37746-53-pt. 4

Mr. CARLSON. Mr. Eberharter, it is difficult for me sitting here as a representative of the industry as a whole to indicate what any individual manufacturer might do, price-structure-wise. The point I would like to make, however, is that with the suggested new schedule that we propose, the manufacturer would have more opportunity for movement up and down, pricewise, without jumping from one tax bracket to another which, in itself, pyramids the costs. We feel that given an opportunity to operate within the schedule which we propose the industry would have a greater opportunity to increase its sales, which in turn would accrue benefits to the Government as well.

Mr. EBERHARTER. The representative of the cigarette industry and those connected with it said that price at present is not a factor in the volume of sales of cigarettes, but you feel the price is a factor in the volume of sales of cigars?

Mr. CARLSON. We very much do feel that it is.

Mr. EBERHARTER. Emphatically so?

Mr. CARLSON. Yes, sir.

Mr. EBERHARTER. Thank you.

Mr. CURTIS of Nebraska. You make reference to the fact that the tax-rate schedule is out of step with the pricing practices in the industry. On whom does that irregularity fall? Does it make it awkward for the retailer, consumer, or the manufacturer?

Mr. CARLSON. Actually, sir, it reflects itself all the way down the line. As an example, the present tax schedule-well, let me put it this way: You have certain traditional pricing in cigars. One manufac turer may isolate himself to manufacture cigars retailing at 5 cents. Another manufacturer may be known to manufacture cigars in the 2-for-15-cents bracket and another at 10 cents and so on, and he is identified with that price bracket. Let us assume that he is confronted, which he actually is, with increased materials and labor costs, and finds it necessary to advance prices to offset those increased costs: The schedule that we offer as a proposal now would give him a greater opportunity to move without adding to it a new tax bracket which, in itself, would run him up into a higher bracket. If I may have. permission to do so, I would like to point out some of the difficulties that cigar manufacturers have encountered as a result of the haphazard incidents of the present schedule of cigar taxes.

Mr. SIMPSON. You have that permission, if you want to extend your remarks in the record.

Mr. CARLSON. It is all right for us. Let us assume we had a 2 for 15 cents cigar which because of an increase in the materials and labor costs amounting to $4 per thousand cigars must be raised to a proper price. The proper price of that cigar would be three for a quarter. This would mean an increase in the wholesale list price of $5 per thousand. However, such an increase would shift the cigar from present class D to class E, costing an additional $3 in tax. Now what happens? After trade discounts we would only get $4.40 out of that $5, but we would have to pay the Treasury $3 out of it, leaving only $1.40. Since $1.40 does not cover the $4 cost price increase, the retail price would have to be set at 9 cents instead of three for a quarter. This new schedule which we propose, we feel, would offer the opportunity for movement without getting into a new tax bracket which would, in itself, increase the cost that much more.

Mr. SIMPSON. Mr. Sadlak will inquire.

Mr. SADLAK. I think the word Mr. Carlson is looking for is flexibility. That is what he means and what he is pleading for before this committee. I noted in your statement that from 1947 to 1950 you were then suffering a hardship because of the tax, and the situation instead of bettering itself has become worsened, as you have stated on page 3 at the bottom of the paragraph; that it was nevertheless lower in 1952 than it had been in any prewar years except the depression years of 1932 and 1933.

Mr. CARLSON. That is correct.

Mr. SADLAK. Being in the business and in the trade you should know. Whatever happened to the 5-cent cigar that we always said this country needed? Did the taxes bring it up to that 6-cent cigar that you are talking about, or did it bring it up higher than that, and then completely go out of existence?

Mr. CARLSON. I think when the statement was made by Thomas Marshall, if I recall correctly, there were 5-cent cigars available. I believe that cigars are higher priced today by virtue of taxes, general economic conditions, which have caused all commodities to increase in price. I should like to point out, however, that the price of cigars at the retail level or the advance in the price of cigars at the retail level does not even approximate the advance in price of many other commodities.

Mr. SADLAK. I am tremendously impressed with your statement that so many small cigar manufacturers have gone out of business. It is attributable to the fact that we have had this tax. That is your conclusion, is it not?

Mr. CARLSON. We feel that the tax is a large part of it. I don't think that it would be fair for me to sit here and say it was the sole season, because you have normal business mortalities under any set of circumstances. But we do feel that the tax works a hardship on the industry, and some reason must be attributed to the fact that there are today less than 2,000 factories as compared with some 10,000 in 1926.

Mr. SADLAK. In other words, it is a contributing factor.

Mr. CARLSON. We feel it is largely a contributing factor; yes, sir. Mr. SADLAK. That is all the questions I have.

Mr. SIMPSON. We thank you, Mr. Carlson.

The committee will stand adjourned.

(Whereupon, at 9: 10 p. m., the committee was recessed.)

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