Senator VANDENBERG. I think your observations are very important. I am not quarreling with your conclusions, but I was struck with your suggestion that there might be some tax on liquor which the consuming public would accept as fair, as you said in view of the defense needs of the United States. I wondered how far you would go and still be fair as far as the public opinion is concerned.

Mr. CHILDS. I would say this, Senator: My own feeling about it is that the tax we have now of $3 a gallon must be considered fair. I see a good side to the proper, the moderate, use of alcoholic beverages. I know it will go on. It is better to have a regulated liquor traffic than an unregulated liquor traffic. I feel at the present time the people ought to be willing to sacrifice, to pay the present tax, if they can do anything to save our country in this hour of peril.

Senator BARKLEY. Let me ask you this: An increase of the tax from $3 to $4 a gallon represents an increase of 25 cents a quart, does it not? Mr. CHILDS. Yes.

Senator BARKLEY. And 121⁄2 cents per pint.

Mr. CHILDS. Yes.

Senator BARKLEY. Do you know whether, and if so to what extent, those who are engaged in the distribution of the liquor to the public, that is the retailer, whether they add anything to that tax in the price that they get for their commodities? When the individual purchases it, for instance, if this dollar tax were added it would add, theoretically and actually if only the tax is added, 122 cents a pint. You cannot split a penny, you either get 12 cents or 13 cents or maybe 15 cents. To what extent, if you know, does. any retailer selling liquor by retail add more than the tax which is represented, we will say, by an increase of a dollar a gallon?

Mr. CHILDS. I think, Senator, he does add more in most cases, because of the fact that he has been trained, as every businessman is trained, to add a mark-up on his cost. I think the answer is "Yes," Senator.

Senator BARKLEY. You do not know how much?

Mr. CHILDS. No. Take in the State of Pennsylvania, for example, in the case of our monopoly there, the Pennsylvania State Liquor Store, the board adds about 55 percent to the cost of the liquor, which cost would include taxes. Now, I might say frankly, we propose in the next 2 weeks to make a strong plea to the State liquor board to lower the mark-up, so that in effect it will not be imposing a mark-up on emergency taxes imposed by the Federal Government. I would say as a matter of accounting practice, leaving aside people who want to profiteer, I do not think the State of Pennsylvania wants to profiteer or make too much money, even though they start out with the form of imposing their mark-up on the cost, which includes taxes. Senator BARKLEY. That is all.

Mr. CHILDS. Thank you, very much.
The CHAIRMAN. Thank you, sir.
Mr. O'Rear.

STATEMENT OF JAMES B. O'REAR, REPRESENTING BUFFALO SPRINGS DISTILLING CO., STAMPING GROUND, KY.

Mr. O'REAR. My name is Jim O'Rear. I am president of the Buffalo Springs Distilling Co., a small, independent Kentucky distillery. I have been requested by the Kentucky Distillers Association and by the Distilled Spirits Institute, producers and owners of more than fourfifths of the distilled spirits of the United States, to outline to you the attitude of the industry as represented by these associations toward the proposed increase in the excise tax on distilled spirits.

The distilled-spirits industry is not only ready but is desirous of doing everything it possibly can for national defense. The industry, which after all is only a tax collection agency so far as excise taxes are concerned, can collect for the Government only such taxes as consumers are willing to pay.

In fixing the rate of excise tax on distilled spirits, certain facts and factors must be kept in mind which are peculiar to this industry.

In most other industries the imposition of excise taxes involves the sole problem of determining the maximum revenue producing point. It is just a question of whether the rate of tax results in a price which the consumer will pay for the product or whether because of the tax the consumer will elect to do without the product.

In the distilled-spirits industry, however, there is an entirely different and much more difficult problem. In considering the rate of excise tax on distilled spirits, there must be kept in mind the fact that so long as the laws of nature exists and so long as there are sugars and starches in existence the demand for distilled spirits will be supplied.

This was made abundantly clear to the American people during the ill-fated prohibition era. The problem in considering a rate for excise taxes on distilled spirits, therefore, is not whether the consumer will buy the product or do without it but is whether the consumer will buy the tax-paid product or the illicit product.

An excessively high rate of tax on distilled spirits is just as sure to re-create the illicit industry as the reenactment of statutory prohibition.

If the excise tax rate on distilled spirits is raised to the point where sufficient subsidy is given to the now disorganized racketeering mobs which flourished during the prohibition era, those disorganized mobs will most certainly be brought back to life and the country will be again faced with the scandals and mob law enforcement problems with which it was faced during the era of the eighteenth amendment.

I need not elaborate on the law-enforcement problems or on the attendant evil effects on the young people of the country which resulted from prohibition and it is our sincere hope that this condition will not be revived in the form of prohibition by taxes on distilled spirits.

We do not believe that it is our function or our right to tell the committee at what point the excise taxes bring about the prohibition evils.

We do feel, however, that it is our duty to advise the committee of facts from which it may draw a sound conclusion in this regard. I have with me Mr. Howard Jones, of the Distilled Spirits Institute, who will present to the committee various facts, figures, and charts which show the effect of the various increases in the distilled-spirits excise taxes which have occurred since repeal of the eighteenth amendment.

Mr. Jones' figures deal with both State and Federal taxes. I am sure these will be enlightening to the committee. I only want to call attention to two things-(1) that not only is the Federal Government dependent on the excise tax on distilled spirits for a substantial portion of its revenue but that the State governments are also dependent on the excise tax on distilled spirits for a substantial portion of their revenue.

Prior to prohibition this situation did not exist. During all of the years prior to prohibition the Federal Government was the only governmental entity that levied an excise tax on distilled spirits.

It must be kept in mind that whenever the Federal tax depresses the volume of business, even though the total Federal tax collections increase, the State revenue is proportionately decreased.

Thus, any Federal tax which depresses consumption is incentive to the States to maintain their gross income by increasing the State tax rate; and unless we are very careful we are liable to create a vicious circle of taxation which, taken as a whole, will create prohibition by taxation even though the Federal rate standing by itself may not be sufficient to result in a real subsidy to the bootlegger; (2) after the last increase in tax, there was virtually no increase in total consumption of distilled spirits despite the fact that national income rose materially.

Mr. Jones will give you the figures but it is my recollection that with national income increasing 10 percent the consumption of distilled spirits increased only 1.6 percent. This leveling off of consumption would indicate that possibly the saturation point has been reached in the excise tax on distilled spirits.

The $1 increase now proposed may be a dangerous dollar. That is something for this committee to determine. I trust that you will analyze the figures which Mr. Jones will give you carefully and that they will be helpful to you.

In conclusion I want to call the attention of the committee to the fact that America is now faced with a hidden danger in its defense. program. Any real subsidy to the racketeering mobs through a tax on distilled spirits would, I am afraid, create a real danger to national defense.

In this connection, if in your wisdom you should find it proper to impose the $1 tax or any portion thereof, it is respectfully suggested that the matter be called to the attention of the Appropriations Committee so that they may give some additional appropriation to the law enforcement authorities, particularly to the Alcohol Tax Unit which is charged with the duty of policing illicit production and distribution of distilled spirits.

In this connection, your attention is directed to a circular, copy of which is filed for the record, issued by the Alcohol Tax Unit and covered by Treasury Department news release of August 12, 1941.

seeking cooperation of sugar refiners, brokers, and wholesalers, in keeping sugar out of bootleggers' hands.

Mr. Chairman, I would like to have your permission to introduce this circular as part of the evidence.

The CHAIRMAN. Yes; you may.

Mr. O'REAR. It was issued by the district supervisor, Alcohol Tax Unit, New York City.

The CHAIRMAN. You may do so; yes, sir.

Any questions, gentlemen?

Senator BARKLEY. May I ask Mr. O'Rear the question I asked Mr. Childs a while ago, if he can answer? To what extent, if at all, any retailer is calculated to add more than the tax to the bottle of whisky which he sells to the ordinary consumer who buys it over the counter.

Mr. O'REAR. Senator Barkley, in the commerce of the liquor industry it is the fairly universal custom that the average mark-up, through the channel which liquor is distributed-and that is very carefully regulated by the Treasury Department-the distiller sells to the wholesaler and in most instances the wholesaler takes the average mark-up of about 15 percent, and the wholesaler sells to the retailer and the retailer takes an average mark-up of about 3313 percent, or, roughly, a 50-percent mark-up upon your taxes. In the State stores of monopoly States-some 17 of them-I think the average mark-up is approximately 50 percent.

Senator BARKLEY. In other words, we will take liquor that has been in bond 4 years and is bottled-the tax is paid at the time the liquor is removed from the bonded warehouse and bottled; let us suppose it bears a $4 tax, that tax is added to the other costs of the production, and the wholesaler pays the distillery sales price plus the $4 tax; is that correct?

Mr. Q'REAR. That is correct.

Senator BARKLEY. Now, the wholesaler then adds his profit based upon a percentage of what he has paid, and that percentage is added to the tax.

Mr. O'REAR. That is correct.

Senator BARKLEY. No; that is to the original cost of the liquor. So there is a pyramiding process there by which everybody who handles it-whether his mark-up is 10 percent or 50 percent, or 20 or 25 percent-everybody who handles it bases his mark-up on the cost to him, and that cost includes the tax, and the greater the tax the greater the mark-up. That is true, is it not?

Mr. O'REAR. That is right.

Senator BARKLEY. So the average mark-up by the time the ordinary consumer gets it, based upon the price that the wholesaler paid for it, is about 50 percent?

Mr. O'REAR. The retailer's mark-up is 33% percent. The total mark-up on the tax is about 50 percent.

Senator BARKLEY. That is what I mean-from the time it leaves the distiller until it gets to Dick, Tom, and Harry.

Mr. O'REAR. Yes, sir.

Senator VANDENBERG. Would it be possible to control that mark-up pyramiding of the tax by requiring that the tax be carried as a separate item on the bill from start to finish?

Mr. O'REAR. That presents a great many difficulties, Senator. I would not be prepared to state that. In the American system of commerce, where any excise tax is imposed, it is customary in all lines that the mark-up shall be on the entire cost of the product, including the tax, whether it is an excise tax or hidden tax.

Senator VANDENBERG. I do not see any theory by which State sales taxes are protected against mark-up by being carried as a specified item, why that same theory could not be applied to this tax from start to finish on liquor.

Mr. O'REAR. In the handling of our distilled spirits, in the channels of commerce, we are very strictly regulated, including the line of questions that you are proposing. The State stores do not have that regulation applied to them, and they are able to make their own laws and regulations to suit themselves for their own business, which is different from that which we use, and they impose a sales tax which is different from an excise tax.

Senator TAFT. On the cheap whisky what, roughly speaking, proportion of the price is taxed when it goes to the wholesaler?

Mr. O'REAR. Based upon today's tax rate, the withdrawal tax is $9 per case or $3 per gallon on cheap whisky that would sell at $15 per case. to the wholesaler.

Senator TAFT. That is $6 for whisky and $9 for the tax?

Mr. O'REAR. $6 does not represent the whisky. It represents hidden taxes, costs, and various and sundry other things, but $9 of that price is the tax.

Senator TAFT. For $15 a case, $9 is Federal tax, or 60 percent, roughly?

Mr. O'REAR. Yes.

Senator TAFT. And if this is made $12, of course, that would be twothirds, or 66 percent?

Mr. O'REAR. Yes.

Senator GUFFEY. How old is that cheap whisky that we are talking about? Is it blended by the time the consumer gets it?

Mr. O'REAR. Senator, at that price some of it may be 4 years old and some of it may be blended.

Senator GUFFEY. All right.

The CHAIRMAN. Thank you, Mr. O'Rear.

(The circular referred to by Mr. O'Rear is as follows:)

SUGAR THE LIFEBLOOD OF ILLICIT DISTILLING

Since all alcohol is produced through the processes of fermentation and distillation from sugar, sugar is the one absolute essential which an illicit distiller is dependent upon for his existence when operating in any thickly populated areas. Deprived of it, his theft of taxes so sorely needed to support the national-defense program would cease.

Sugar is used by bootleggers in the preparation of mash in the general proportion of one 100-pound bag to each 50 gallons of mash. On distillation, such mash may be expected to produce about 62 gallons of 95-percent alcohol, or 190° proof. Since the Federal tax is $6 on each gallon of pure 200° proof alcohol, each bag of sugar so used represents a loss to the Federal Government of $37.05. Any State taxes evaded represent so much additional public loss.