Notwithstanding the uncertainty regarding prohibition, which, as has been shown, resulted in sweeping decreases in all classes of receipts from distilled, vinous, and fermented liquors, the great majority of the respective items show increases for the year over the correpsonding amounts of the preceding year. The striking exceptions where decreases are shown are in imported beers and revenue licenses, which are easily understood in the light of the explanations given above, and in matches. The net decrease of $23,372.44, shown in this item, or approximately 45 per cent of the previous year's total, at first glance seems difficult to account for, but an examination of the totals for a period of six years immediately preceding the present year shows that the consumption of matches fluctuates very little, the revenue from this source amounting to approximately $40,000 per annum. On account of trade and shipping conditions, however, importations are generally made in large invoices, so that a large part of the tax is paid at one time. When it is noted that the total for 1915-16 reached the unprecedented amount of $51,706.02, it seems quite apparent that a large part of the usual importations which would have corresponded to 1916-17 were made just before the close of the preceding year, and thus were credited to that year rather than to the succeeding one during which the matches were consumed. The most noteworthy increase, on the other hand, is in the item of cigarettes, which gives promise of producing in the near future as much revenue as was secured during the most favorable year of 1913-14. Certain changes in the rate of tax occurring about this period caused a falling off in the receipts from the cigarette tax, and it appears that after three years the effect of the change in rate is becoming spent and that receipts from this source will continue to increase from this time forward. Six distilleries were in operation during the year and manufactured 1,905,803 liters of alcohol, on which the tax of 50 cents for local consumption was paid. In addition, 112,200 liters of alcohol were released free of tax to be denatured for industrial purposes, 146,583 liters were released for the manufacture of bay rum for local consumption with benefit of drawback, 859,436 liters of high-proof alcohol were exported in bond free of tax, and 215,476 liters of alcohol were manufactured into bay rum in bond and also exported free of tax. On account of the demand for alcohol as an ingredient for the manufacture of war material, the exportation of undiluted high-proof alcohol has made a tremendous advance since 1913-14, during which year only 234,004 liters were exported. One new distillery was built during the year, but was not placed in operation until July 1, 1917. In view of the fact that prohibition will become effective on March 2, 1918, the revenue from the production of alcohol will undoubtedly decrease steadily until that time. The provision in the organic act which confers upon the local legislature the authority to regulate the manufacture and sale of alcohol for scientific and industrial purposes may afford some relief to the manufacturers and open the way for the manufacture of alcohol for fuel purposes, where at the prevailing high prices charged for gasoline it might find a ready market, but the revenue to be secured from such uses would be almost negligible. The one brewery in Porto Rico released upon payment of the tax 847,606 liters of beer, an increase of 234,801 liters over the previous year, while 180,290 liters of fermented liquors were exported to neighboring countries and other islands of the West Indies group, principally St. Thomas, Santo Domingo, Haiti, and Curacao. The graduated rate of taxation on cigars established in April, 1916, has proven eminently successful and the year just closed showed a decided increase in both the number of cigars paying the tax and the total receipts from this source. The loss in license taxes was due to a slight reduction in the rates as well as a noticeable reduction in the number of licenses issued during the last quarter, which will, of course, continue in an even more marked degree for the succeeding quarters of the new fiscal year. Years. REPORT OF THE GOVERNOR OF PORTO RICO. The following table gives the average number of licenses of the several classes issued each quarter and the revenue derived from each over a period of six years: TABLE NO. 8.-Average number of licenses issued during the past six fiscal years, with revenue received therefrom. 1911-12. 1912-13. 1913-14. 1914-15. 1915-16. 1916-17. 712 $28, 225.70 853 $52. 189.00 20, 450 $189, 630.75 22, 015 $270, 045.45 21,248 275,597.00 17, 532 273, 440.50 188, 171.75 577 $5,767.50 613 $250.36 17, 590 266, 462.11 172,098.00 505 5, 052.50 761 697.02 16, 515 240,060.02 160, 686.75 489 4,895.00 691 684.77 17, 941 228, 820.77 This number represents the average number of licenses in force each quarter throughout each year. The number issued annually is therefore in each instance four times as great as that given. The administration of the excise tax law has been markedly successful during the past year due to the fact that the force of internal-revenue agents was kept recruited up to its authorized strength, with infrequent exceptions, throughout the year, and the average length of service of the majority of the agents was greater during this year than has been the case for some time past. Most of the men had been in the internal-revenue service for a sufficient length of time to have become thoroughly familiar with their duties and the standard of the new men joining the force was noticeably raised. The complete reorganization of the force which was started several years ago has now had sufficient time to have become well adjusted and the men now employed have been with the service long enough to have demonstrated their ability and integrity, so that it is believed that the work accomplished by the field men is conscientiously thorough. The increase in revenues from many sources, where such increase could only be obtained by active enforcement of the law, seems to afford abundant justification for this belief. When it is considered that the hours of service required of these men are irregular and the nature of their duties extremely arduous and exacting, the difficulties in securing capable men at the inadequate salaries provided and retaining their services after they have become trained and are of value to the department become readily apparent. Men of the ability and devotion to duty required by this service are hard to find and the department is constantly losing some of its best men on account of positions at higher salaries having been offered them by private business organizations. In addition to the drafts made upon the service by business houses, the war is taking a heavy toll, one fourth of the entire number of agents having volunteered at the first call, including the chief of the field force and the assistant chief of the bureau. The enactment of the prohibition law in Porto Rico will increase rather than lessen the responsibilities of the revenue service, and it is earnestly recommended that this matter be carefully considered by the legislature so that provision may be made in the way of adequate salaries and sufficient personnel, so that the present high standard of law enforcement, which is the boast of this service, may not be impaired. During the year 1.827 infractions of the revenue laws were reported to the Department by the agents. the final disposition of each one of which must, under the terms of the excise tax law. be made personally by the treasurer. Of these, 1,728 were minor offenses, such as delay in renewing licenses, failure to destroy stamp on tobacco or cigarette boxes or packages, or clerical errors in stock accounts of manufacturers, and where the evidence indicated that there was no intent to defraud the revenue and that the infraction had occurred through ignorance or carelessness rather than deliberate premeditation, the complaints were settled administratively. In 347 cases, almost without exception first offenses, a warning only was given, sufficiently firm, however, to impress upon the delinquent the necessity for strict compliance with the internalrevenue laws, while in 1,381 complaints, administrative fines, often accompanied by seizure of the goods, were imposed, which amounted to $2.922.15. Inasmuch as the maximum administrative fine is fixed by law at $10, and it is generally not deemed advisable to impose the maximum penalty, the average as shown above is slightly above $2, while a great many first offenders are fined only $1. The remaining 99 cases were placed in the hands of the public prosecutors for action by the courts and it is worthy of note that of this number there were secured 92 convictions, 6 acquittals, and 1 case dismissed by the court without trial on demurrer of the accused. The number of prosecution cases while considerably less than for the previous year show almost the identical percentage of convictions and again demonstrates the care shown in pressing for prosecution only those cases where the fraud is evident and the guilt of the accused reasonably certain, as well as the efficient cooperation of the courts in the enforcement of the revenue laws. A law passed by the legislative assembly of 1915, but which did not become operative according to its terms until July 1, 1916, providing for the protection of Porto Rican cigars in the markets of the United States against fraudulent misrepresentation and requiring the use of guarantee stamps on all cigars exported from Porto Rico, was put into operation on that date and has been administered through the three special tobacco agents provided for by the law. In addition to the work of inspection and enforcement of the law, these special agents have been charged with the compilation of statistics covering the acreage of Porto Rico devoted to tobacco planting, the number of hundredweights of tobacco harvested, the purpose for which the various kinds of tobacco are eventually used, as well as the amount of leaf tobacco imported in Porto Rico from the United States for blending with Porto Rican for the manufacture of cigars, and the amount of tobacco exported from Porto Rico partially manufactured in the leaf-this is to say, stemmed, but not manufactured into cigars. As this is the first year that data of this sort has been secured, there are no figures available for comparison, but the net result of their investigations, as shown in the following table, will undoubtedly be of interest in a study of the Porto Rican tobacco industry: Leaf tobacco imported into Porto Rico. Imported leaf used exclusively for manufacture of cigars exported from Porto Rico......do.. 383, 743 ..do.... Used for cigars elaborated and consumed in Porto Rico.... ..do.... 269, 754 1,843, 896 GUARANTEE STAMPS AFFIXED TO CIGARS EXPORTED FROM PORTo rico. From the above it will be seen that there was exported from Porto Rico during the fiscal year 1916-17 a total of 210,399,365 cigars, which exceeds the previous high-water mark of 1914-15 of 174,275,407 by 36,122,958, or nearly 20 per cent. These figures are of exceptional importance to the insular treasury at this time, since commencing with March 2, 1917, all excise taxes collected under the revenue laws of the United States on such cigars, which heretofore produced no revenue for the Porto Rican government, will be returned to Porto Rico. The present rate of this tax in the United States is $3 per thousand, while under the revenue bill now pending in Congress an increase is made of $1 per thousand on cigars retailing between 4 cents and 7 cents each, which comprises approximately of the Porto Rican exportation to the United States, and an increase of $3 per thousand is made on cigars retailing between 7 cents and 15 cents, each, into which class would fall practically the remainder of the total exports. If these increases are enacted into law, it would result in an addition to the insular revenues of somewhat over $300,000 over and above the present returns from that source. As the internal revenue on Porto Rican products transported to the United States to be returned to the island under section 9 of the organic law applies to alcohol and cigarettes as well as to cigars, the table following showing the volume of such products will be of considerable interest. TABLE 9.-Taxable articles exported from Porto Rico during the past five fiscal years free of tax. As mentioned in the report for last year, a change in the method through which the supply of revenue stamps was secured was found advisable, and after a number of obstacles to making the change were overcome, an agreement was finally reached whereby the stamps for cigarettes used in Porto Rico are to be prepared by the Bureau of Engraving and Printing of Washington, and furnished to the insular government at cost. The excellence of the work performed by this bureau, which does all the work of this class for the United States Government, and the assurances against fraudulent duplication, which could be given in the highest degree by this governmental agency, made it extremely desirable to secure its advantages for the printing of the cigarette stamps, most especially as the documentary and other so-called excise stamps in use by the insular government have been furnished by this bureau since the inception of the civil government. Upon proposal of the treasurer, and following the custom which obtains in the United States of perpetuating the memory of distinguished men by placing their portraits on bank notes, postage and revenue stamps, the consent of the family of the Hon. Luis Muñoz Rivera was secured to the plan of including a likeness of the lately deceased Resident Commissioner as the central feature of the new stamp. The memory of Mr. Muñoz Rivera is cherished in Porto Rico by all classes more than that of any other native son, and the suggestion met with instant approval throughout the island. When it becomes necessary to prepare new designs for cigar stamps, it is probable that the idea will be extended to include other notable Porto Ricans, so that the distinctive Porto Rican revenue stamps will form a typical series, each different stamp bearing the portrait of some illustrious Porto Rican. ESTIMATED RECEIPTS AND EXPENDITURES FOR NEXT YEAR. Under this heading, in the report for last year, there appeared an estimate of the probable receipts of current revenue of the insular government for the fiscal year 1916-17, which showed a total of $4,230,000, and in connection therewith attention was drawn to the fact that this estimate did not reach the total amount of appropriations made for the same fiscal year, and that unless conditions during the year were found to be very different from what was at that time apparent, the available balance in the treasury would be almost, if not entirely, depleted at the end of the year. It is an agreeable disappointment to be able to state that the estimate has proven to have been "too conservative rather than unduly optimistic," the basis on which it was made, to quote the words appearing immediately before the table. As has been stated in a previous part of this report, business conditions throughout the island improved so materially shortly after the inception of the fiscal year that receipts from all classes of excise taxes increased very considerably during the first eight months, and were it not for the expected adoption of the provision of law prohibiting the sale of alcoholic beverages, these receipts would probably have reached a round three million dollars. The final total of excise taxes, however, shows a net increase of approximately $200,000, or about 74 per cent, over the estimate. An even greater increase over the amount estimated, or $260,107.52, is shown in the receipts from the income tax. This, as explained in the previous discussion on this subject, is due primarily to the doubling of the rate of normal tax, coupled with the increased prosperity of most of the island's industries. The customs also produced $78,000 more than estimated, and these receipts, together with minor increases in some of the other items, brought the grand total of current revenue receipts, excluding the items of $301,733.33, proceeds from the sale of refunding bonds, and $118,500, the amount of bonds redeemed by municipalities and school boards, as shown in the total of $5,259,418.21 in Exhibit 27 of the consolidated financial tables, to a net total of $4,839, 184.88, an increase of over $600,000 above the estimate. The balances remaining, at the end of the year, of $413,476.17 in cash, and $168,000 in municipal and school board bonds, or a total of $581,476.17, show that the apprehension felt at the size of the authorized expenditures was not unfounded, and that but for the unexpected increases in the different sources of receipts, a number of such authorized expenditures would necessarily have had to be curtailed. To the above balance of $581,476.17 may be added $94,216.69 of advances or loans to the municipalities and school boards for which bonds have not been issued, but which may be converted into bond-secured loans, at the option of the insular treasurer. The grand total of $675,692.86 of assets available for expenditure is not at all too large under present conditions, most especially as there is yet outstanding an unsecured short-term loan of the insular government of $400,000 with a banking house in New York City. It is earnestly recommended that the departmental expenditures be adjusted in such a manner that this balance should not be seriously depleted. For the ensuing year of 1917-18, the following estimate has been prepared, and the hope is again expressed that the results at the end of the year will show that it is sufficiently conservative, although it can hardly be expected that unforeseen increases will swell the total to the extent that has been experienced during the past year. Due allowance has been made for the falling off on account of prohibition, not only in excise taxes but in customs revenue as well. TABLE NO. 10.-Estimate of insular revenue cash receipts for year ending June 30, 1918. Although the digest prepared by the auditor's office of appropriations made by the legislature during the session of 1917 reaches a total of $5,471,169.17, there are included in it several appropriations, notably one of $300,000 for the construction of an insane asylum, which may be suspended or postponed if the condition of the treasury makes such action imperative, so that the discrepancy between probable revenue and authorized expenditure for the coming year does not appear so alarming as it did at the same time last year. The session of the legislative assembly, which was well under way on the date of the enactment of the new organic law, was very wisely confined to legislation of a current or emergent nature and made no attempt to carry into effect any plans or policy of far-reaching nature, on account of the very important change in the constitution of the law-making bodies, and the fact that the new legislature, to be selected entirely by popular vote, was to meet within comparatively few months. Especially is this statement true in regard to financial legislation, since the former element of uncertainty was greatly increased as far as financial matters were concerned by |