STATEMENT OF THE HON. A. LEE M. WIGGINS, UNDER SECRETARY OF THE TREASURY

Mr. Chairman and members of the committee, I am glad to have this opportunity to present to your committee the views of the Treasury Department on the proposals to modify or repeal the excise taxes and occupational taxes on the manufacture and distribution of oleomargarine.

The taxation of oleomargarine dates from 1886 and the present schedule of rates from 1902. Uncolored oleomargarine is subject to a tax of one-quarter cent per pound and colored oleomargarine, 10 cents per pound. Imported oleomargarine irrespective of color is taxed at the rate of 15 cents per pound.

In addition, manufacturers and distributors of oleomargarine are required to pay annual occupational taxes. The manufacturers' tax is $600. Wholesalers are subject to a $480 tax if they distribute colored oleomargarine and to a $200 tax if they distribute only uncolored products. For retailers of yellow oleomargarine the tax is $48 and for retailers of uncolored oleomargarine $6.

In recent years there has been some reduction in State taxation of oleomargarine through both legislative and judicial action. However, the commodity is still subject to excise taxes in 19 States. The tax is particularly heavy in seven States where rates ranging from 5 to 15 cents are imposed on uncolored margarine, regardless of the materials from which it is made. In the remaining 12 States, the exemption of margarine made of domestic oils and fats, or with a specified minimum percentage of animal fats, renders the tax ineffective.

Colored margarine is taxed in four States at the rate of 10 cents a pound. Three of these are States which also have effective taxes on uncolored margarine. The manufacture and sale of colored margarine is completely prohibited in 5 of the States with effective taxes on uncolored margarine, as well as in 18 other States.

License fees for the manufacture or sale of margarine are required in 14 States. Annual fees for manufacturers and wholesalers vary from $1 to $1,000, and for retailers from 50 cents to $400.

The oleomargarine taxes have little revenue significance. Collections for the current and the next fiscal year are estimated at approximately $7,000,000. Actual collections during fiscal year 1947 were less than $6,000,000, which compared with approximately $5,000,000 in 1946. Throughout the 1930's, total annual collections from this item ranged around $2,000,000. Until the prosperous postwar years, virtually all of this revenue was accounted for by uncolored oleomargarine; the revenue from colored oleomargarine was unimportant. More recently, the use of colored oleomargarine has increased with the result that currently it accounts for about 40 percent of total collections.

The legislative history of these taxes and the considerations advanced in their defense during their long history indicate that the purpose is to buttress the competitive position of the dairy industry by discouraging the consumption of a substitute commodity. The testimony presented before this committee by a large number of witnesses in 1943 bears this out.

The effect of the Federal taxes concerns primarily the competitive position of colored margarine and butter. The public preference for

yellow table fats makes colored margarine much more competitive with butter than uncolored margarine. The improved coloring facilities supplied to consumers by manufacturers have not overcome public aversion to the purchase of uncolored fats. For this reason, the oleomargarine tax issue centers primarily upon the special rates applicable to the colored product. The taxes on uncolored oleomargarine have relatively little effect on the competitive positions of the two industries.

The competitive relationship between taxed colored oleomargarine and butter depends in part upon the differential in the prices of the two commodities. During the prewar period when the price differential between the two products was less than 10 cents, the taxes on colored oleomargarine were an important factor in maintaining public preference for butter. When butter prices increased at a more rapid rate than oleomargarine, increasing the differential to 40 cents and more, the taxes on colored oleomargaine were less effective in protecting the public preference for butter. Tax-paid withdrawals of colored oleomargarine increased from less than 1,000,000 pounds in the prewar years to approximately 10,000,000 pounds in 1944 and 21,000,000 pounds in 1947.

The effect of the widened price differential on the competitive position of the two products would have been appreciably greater but for the fact that in 23 States the sale of colored oleomargarine is prohibited at any price.

The basic issue raised by the oleomargarine taxes is the propriety and desirability of using the tax laws to affect the relative position of competing industries, both of which use domestic agricultural raw materials. In the case of oleomargarine, the taxing power is used as a punitive measure against one industry to advance the interests of another. In the process, the public is deterred from the free exercise of its consumer preferences. Without passing judgment on the relative merits of the two products from the viewpoint of the public health, matters upon which your committee has had abundant expert testimony, it is the view of the Treasury Department that the use of the taxing power to distort the normal development of competing industries and to deprive them of the full benefit of the free enterprise system conflicts with the public interest, and in the absence of compelling consideration, should be avoided.

In general, the use of the taxing power to affect the competitive position of industries interferes with the optimum utilization of national resources. The testimony of experts before this and other committees of Congress suggests that the national diet would be improved if more of the table fat requirements were obtained from oleomargarine and if milk were diverted to consumption in fluid. form The Treasury Department is not qualified to appraise the validity of these assertions. The illustrate, however, that the punitive use of the taxing power can result in the inefficient use of resources and support the principle that the tax system should not be used for these ends, except where the objective is clearly in the public interest.

From the viewpoint of the country as a whole, the principal economic effect of these taxes is to impose direct and indirect burdens on consumers and on distributors which in the aggregate tend to fall with particular weight upon low-income groups.

The total tax burden represented by the excise taxes on margarine is in itself of relatively little moment because the population consumes only small amounts of colored margarine. Over 90 percent of margarine consumption consists of the uncolored product, which is subject only to the nominal one-fourth-cent tax per pound. For those individuals who consume colored margarine, the payment of a 10cent per pound tax imposed on a basic type of food constitutes a serious tax burden. While the occupational taxes probably affect the retail price of the product, the tax burden imposed on consumers is small. In 1947, Federal excise and occupational tax collections equalled about 1 cent per pound of margarine sold.

The tax burden, however, reflects only part of the cost of these taxes to consumers. The existence of the oleomargarine taxes interferes with the availability of margarine in certain areas and induces individuals who would otherwise buy margarine to forego table fats or buy butter. Where, for example, as a result of the occupational taxes, consumers with equal preference for the two products are unable to procure 40-cent margarine and are obliged to purchase 90-cent butter, the burden of these taxes approximates the difference between the selling price of these items.

It is clear that for several reasons the burden of these taxes on consumers is not adequately measured by the Treasury's tax collections. The taxes increase the cost of the product; they interfere with the consumer's freedom of choice in satisfying personal wants; and they increase his living cost by interfering with the consumption of less expensive foods. While the imposition of these burdens through taxation is always undesirable, it is especially objectionable at times when high prices threaten the living standards of important groups in the population.

The legislative history of these taxes indicates that they were first enacted to assist in preventing the fraudulent sale of oleomargarine as butter. The taxing power has on several occasions been used for regulatory purposes. Taxes imposed on the production or distribution of narcotics, white sulfur matches, firearms, and national bank notes are examples. In these cases, the taxing power supports the Government's control over certain activities in the public interest. However, in the case of oleomargarine, the need for regulation through the taxing power has been affected by several developments in recent years. The effectiveness of the Government's administrative agencies for regulatory purposes has been developed and improved. For the purpose of safeguarding public-health standards as affected by interstate commerce, Congress specifically created the Pure Food and Drug Administration. In the meanwhile, the need for regulation has diminished as standards of business conduct improved. This is the experience of the Bureau of Internal Revenue. In view of these developments, it is believed that there is little need for the continued use of the taxing power to prevent the misrepresentation of oleomargarine.

However, if the Congress deems the continued use of the taxing power for this purpose to be necessary, then such taxes should be imposed at nominal rates, sufficient only for regulatory purposes. The oleomargarine tax structure in effect for more than 40 years goes far beyond these requirements.

In summary, it is the Treasury Department's view that the present oleomargarine taxes distort the competitive position of two domestic industries, interfere with the optimum utilization of national resources, and unnecessarily burden consumers far in excess of the amount paid in taxes. Revenue considerations are not involved.

In many parts of the country, State-imposed taxes on and prohibitions against the use of oleomargarine are so far reaching that this item of food would continue to be unavailable to consumers, even in the absence of federally imposed taxes. It is the Treasury's view that the Federal taxes should nonetheless be repealed. Such action would benefit consumers in the majority of the States. In the event, however, that the continued use of the tax instrument is deemed to be necessary for regulatory purposes, this end can be attained by the imposition of nominal tax requirements without recourse to punitive tax

measures.

Mr. Chairman, in support of that statement, we submit four tables. Table 1 showing the State oleomargarine excises and license fees as of January 1, 1948; table 2 shows the collections from oleomargarine taxes, fiscal years 1934-49; table 3 shows the production and withdrawals of colored and uncolored oleomargarine, fiscal years 1934–47; and table 4 shows the number of taxpayers of special taxes on manufacturers of and dealers in oleomargarine, fiscal years 1934-47.

Mr. Chairman, with your permission, I would like to have these tables inserted in the record following my testimony.

The CHAIRMAN. Without objection, the statements will be incorporated in the record at this point.

(The statements referred to are as follows:)

TABLE 1.-State oleomargarine excises and license fees, Jan. 1, 1948

TABLE 1.-State oleomargarine excises and license fees, Jan. 1, 1948-Continued

1 Tax applies to oleomargarine (colored or uncolored) not made from oils and fats (specifically named by the statute) that are largely derived from domestic materials.

2 Manufacture or sale of colored margarine prohibited.

Idaho also prohibits the manufacture or sale of colored margarine.

4 Minnesota's tax applies to oleomargarine not containing a minimum percentage (65 percent) of animal fats, as well as that made of foreign materials. Wyoming's tax applies only to vegetable oleomargarine (containing 20 percent or less of animal fats).

6 The license is for 2 years.

6 Tennessee's tax applies to all colored margarine, regardless of ingredients. Uncolored margarine is exempt if made from domestic oils and fats.

7 $2 to $100.

TABLE 2.-Collections from oleomargarine taxes, fiscal years 1934-49

2 Includes collections from taxes on adulterated butter.

Source: Annual Reports of the Commissioner of Internal Revenue and The Budget of the United States Government, fiscal year 1949.