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Mr. KNUTSON. Are you speaking of liquid corn? [Laughter.]
Mr. CROWTHER. The last time we discussed this matter of taxes on intoxicating liquor we had a man by the name of Smith, a distiller from Kentucky, before the committee, and he submitted a statement to us in response to our request, substantiating the figures that he had given us showing that with everything added, cost of barrels, corn, rye, yeast, labor, supervision, fuel, repairs, interest on plant, taxes, obsolescence and insurance, depreciation, office expense, 1 cent a gallon for dry feed, N. R. A. code cost 16 cents—which, of course, you do not have now---reasonable profit on investment, selling price to the trade in contract and thousand-barrel lots, 26 cents a barrel.
Mr. Van WINKLE. Well, maybe he can, but we cannot do it for double the price.
Mr. CROWTHER. That was the actual cost of making a barrel of whisky computed on four plants was $6.71 per barrel. At the No. 4 the cost was $5.22 per barrel.
Mr. VAN WINKLE. What was the gentleman's name?
Mr. VAN WINKLE. We have no distiller by that name in Kentucky, that I know of.
Mr. CROWTHER. I wish you would see if you can find out who
Mr. Knutson. I remember his testimony. He interested me very much.
Mr. CROWTHER. He represented a group of four distillers, O'Flaherty Inc., Old Blue Ribbon, Old Woods Distillery Co. and Lincoln Springs Distilling Co., all in Kentucky.
Mr. VAN WINKLE. I will say that I do not know any of them, and I know every distillery in Kentucky, I think.
Mr. CROWTHER. You do not know any one of those distilleries? Mr. VAN WINKLE. I do not know a single one of them.
Mr. CROWTHER. Well, you have not given me a very satisfactory answer yet. Can you make whisky at a cost of 40 cents a gallon?
Mr. VAN WINKLE. I cannot make whisky for 40 cents, not what we call good whisky, not at that price, not in this day and age.
Mr. CROWTHER. Take whisky 4 years in bond, what does it cost?
Mr. VAN WINKLE. Well, I could not answer that. I can tell you what that will cost you 4 years from now. That is going to sell for just about what this 2-year-old whisky is selling for now. You will have plenty of cheap whisky in another 18 months. There will not be any complaint to register about that, because we will have plenty of whisky. The reason that bonded whisky is high in price is that during the prohibition era the Federal Government would not let us make any whisky except 3,000,000 gallons a year. That is all that they would let us make. Well, that is not enough to talk about. And what little there is of that left, naturally whoever has got a little of it, it is sort of like a fine horse, he wants a pretty good price for it.
Mr. CULLEN. Thank you, Mr. Van Winkle.
Mr. O'NEAL. Mr. Higgins will be our last witness, Mr. Chairman. The others I would just like to have them state who they are and their position on the bill.
Mr. Cullen. Very well, Mr. Higgins.
Mr. VAN WINKLE. Mr. Chairman, may I offer for the record a telegram and three letters?
Mr. CULLEN. Without objection, they may be made a part of the record at this point.
(The telegram and letters referred to are as follows:)
Sioux Falls S. Dak., May 24. J. P. VAN WINKLE,
BROWN DRUG Co.
MCMULLIN-WHITAKER DISTRIBUTING Co.,
Sedalia, Mo., May 23, 1938. Mr. J. P. VAN WINKLE,
Willard Hotel, Washington, D. C. DEAR SIR: We are in favor of the passage of the bill before Congress to tax floor stocks on whisky, and will consider it a favor if you will see that our wishes are presented to the Ways and Means Committee. Very truly yours,
MCMULLIN-WHITAKER DISTRIBUTING Co.,
Griggs, COOPER & Co.,
St. Paul, Minn., May 23, 1938. Mr. J. P. VAN WINKLE,
Washington, D. C. DEAR MR VAN WINKLE: We understand that you are appearing before the Ways and Means Committee on Wednesday, May 25, as a witness in regard to the assessment of a floor tax on liquor.
We certainly are in favor of a tax on liquor covering all floor stocks from the distillers down to the retail dealers. Possibly there should be a small exemption on a few gallons for each retailer's stock. In that way we would get our prices up immediately. This would not permit any large retailer or large wholesaler stocking up with a lot of tax-free liquor and then later demoralize the market.
We hope that when you appear before the committee you will use every effort
GRIGGS, COOPER & Co.,
ALEXANDER R. FRITZ, INC.,
Providence, May 23, 1938. J. P. VAN WINKLE, President, Stitzel-Weller Distillery, Inc.,
Shively, Ky. DEAR MR. VAN WINKLE: I understand you are to be in Washington on Wednesday, May 25 to appear before the Ways and Means Committee in regard to passing legislation to tax floor stocks of whiskies in the hands of distillers, wholesale liquor dealers, rectifiers, and retail liquor dealers as of July 1, 1938.
We have written to the Rhode Island Senators and Representatives and as you are to appear personally before the committee, we would appreciate it if you would represent us in advising them that we are in favor of taxing floor stocks.
If the bill is not passed, the large chain stores would being position to buy sufficient stocks before July 1 to last them for an indefinite peirod. Consequently, the smaller merchant as is represented in our State could not compete with these companies and others who are in position to take advantage of the situation.
For your information, I might say that Senator Peter G. Gerry and Representative Aime J. Forand have acknowledged receipt of my letters and both said they would be very glad to give the matter their attention. I have not heard from Senator Green or Representative O'Connell.
I trust you will be successful in having the tax bill passed.
ALEXANDER R. Fritz, INC.,
ALEXANDER R. FRITZ, President. Mr. O'NEAL. Mr. Chairman, Mr. Higgins will be our last regular witness. Then there are several other gentlemen present whom I would like to have come forward, state who they are and what their position is on this bill.
Mr. Cullen. Very well. We shall be very glad to hear Mr. Higgins.
STATEMENT OF JOHN H. HIGGINS, TREASURER OF THE READVILLE
DISTILLERIES, INC., BOSTON, MASS. Mr. CULLEN. Mr. Higgins, give your name and state whom you represent, for the record.
Mr. Higgins. My name is John H. Higgins. I am treasurer of the Readville Distilleries, Inc., up in Boston. It is a privately-owned corporation.
Mr. CULLEN. In Boston?
Mr. HIGGINS. In the Readville section of Boston. We are making rye and bourbon whisky. We created a new industry up there. Prior to the time we established ourselves, we had to depend on Kentucky and some of these other States for our whisky.
I have a prepared statement that covers many of the arguments that you gentlemen have heard today. May I have permission to make that a part of the record ?
Mr. Cullen. Without objection, it may be made a part of the record.
(The statement referred to is as follows:) STATEMENT IN BEHALF OF READVILLE DISTILLERIES, INC., BOSTON (READVILLE),
Mass., BEFORE WAYS AND MEANS COMMITTEE, May 25, 1936 Gentlemen of the committee, we earnestly urge favorable consideration by your committee of a bill providing for an additional 25 cents tax on floor stocks of distilled spirits withdrawn from bond and in the bands of members of the industry on July 1, 1938. The tax bill already passed provides for an additional 25 cents tax on all spirits withdrawn from bonded warehouses after July 1, 1938.
We respectfully contend that the floor tax should be imposed to accompany the additional 25 cents per gallon tax for the following reasons:
I. Without a floor tax the increase in the tax will be inequitable and unfair to the smaller units of the industry.
II. Without a floor tax the Government will suffer a large loss of revenue and most of the amount will be pocketed by the more strongly financed members of the industry.
III. Without a floor tax the price structure of the industry will be utterly demoralized.
IV. Failure to provide for a floor tax will seriously impair the credit structure and banking facilities of the industry.
1. WITHOUT A FLOOR TAX THE INCREASE IN THE TAX WILL BE INEQUITABLE AND
UNFAIR TO THE SMALLER UNITS OF THE INDUSTRY With very few exceptions individuals and companies operating in all branches of the distilled spirits industry, including distillers, rectifiers, wholesalers, and retailers, are undercapitalized. Practically all of them, except possibly a few retailers, are operating in large part on borrowed money, and most of the retailers
depend on short-term credits from wholesalers in order to continue in existence. None are in a position to invest any large amount of cash in the tax payment of distilled spirits prior to July 1, 1938, the date on which the 25 cents additional tax becomes effective.
There are, however, a few members of the industry, including the large distillers, who are publicly financed, and chain and department stores who will be able to invest considerable sums in cash in the taxpayment of merchandise prior to July 1, thereby obtaining an advantage over their smaller competitors, who have more limited resources. Unless - a floor tax is imposed spirits withdrawn prior to July 1 can be marketed during subsequent months with an advantage of 25 cents per gallon, or $12.50 per barrel over those distillations withdrawn and tax paid after July 1.
The average independent distiller, like our own company, is glad to operate its business under present day conditions on a net profit of 5 to 10 cents per gallon, or $2.50 to $5 per barrel, and in some cases less than that figure. Unless a floor tax is imposed the independent distiller will be compelled for a number of months following July 1, 1938, to compete against distillations withdrawn prior to July 1 which will carry an advantage of 25 cents per gallon, or $12.50 per barrel--more than double his present net profit. Manifestly it will be impossible to do so.
Floor taxes were provided when increases were made in the distilled spirits tax during the war-time period, and when the tax was increased from $1.10 per gallon to $2 per gallon in 1934. All persons holding floor stocks on the effective date of the tax were required to immediately file reports of stocks on hand and were given a period of time in which to pay the additional tax. Such a method did not impose any hardship on any member of the industry and was in no manner inequitable. This precedent should be followed in the present case.
The small rectifier, wholesaler and retailer will find himself competing against bottled distilled spirits which have been withdrawn prior to July 1 which carry an advantage of 75 cents per case, and this differential in a great many cases is greater than the net profit per case which rectifiers and wholesalers have been operating for some time.
II. WITHOUT A FLOOR TAX THE GOVERNMENT WILL SUFFER A LARGE LOSS OF REV
ENUE AND MOST OF THE AMOUNT LOST WILL BE POCKETED BY THE MORE STRONGLY FINANCED MEMBERS OF THE INDUSTRY
There will be a considerable loss in revenue if the additional 25-cent tax is not imposed on the normal amount of floor stocks outstanding in the hands of rectifiers, wholesalers, and retailers. This loss will be considerably increased by abnormal tax payment of merchandise during the month of June by the more strongly financed members of the industry in order to avoid the 25 cent increase already levied on distillations to be withdrawn after July 1, 1938. The stronger companies will thereby gain a competitive advantage over their competitors who have not the cash available, and cannot borrow it, in order to make tax payments. Approximately 39,000,000 gallons of distilled spirits were tax paid during the 6 months period from July 1, 1937, to December 30, 1937. The additional 25-cent tax on such a quantity amounts to approximately $10,000,000 and affords a very rich prize for those able to take advantage of the situation and tax pay and withdraw distilled spirits prior to July 1, 1938.
INDUSTRY WILL BE
III. WITHOUT A FLOOR TAX THE PRICE STRUCTURE OF THE
In anticipation of the increase in the tax without any accompanying floor tax distillers and rectifiers will tax pay during the month of June to the limit of their ability. Wholesalers will order to the limit of their credit standing. Retailers, especially chain and department stores with their tremendous buying power, will acquire large stocks. The smaller and weaker distilling companies, rectifiers and wholesalers, the little retailers with limited resources will suffer financial loss to the extent that the stronger companies will take advantage of the situation. Every possible merchandising evil must necessarily arise out of such a situation. The retailers will have on their shelves the same brands purchased at two different prices. The chain stores will begin to offer brands at prices lower than their competitors can afford to sell the same brands which carry the burden of the additional 25-cent tax. An orderly readjustment of consequent demoralized price structure cannot take place for months after the lower tax-paid stocks of the smaller dealers have been exhausted. It seems to us that the situation will be absolutely chaotic.
Failure to Provide for a Floor Tax will Seriously Impair the Credit Structure and
Banking Facilities of the Industry The distilled-spirits industry differs from the ordinary business in that two and possibly three of its important branches--the distiller, rectifier, and in some cases the wholesaler-in order to meet competition, must purchase whisky during the month it is produced and finance the aging of such whisky over a period ranging from a few months to 4 years. Distillers are first required to make enormous investments in plant, equipment, and warehouses and they are forced to shoulder the burden of financing the aging of their own inventory and the inventories of their customers.
At the present time there are approximately 10,000,000 barrels of whisky remaining in bonded warehouses produced at cost ranging from $20 to $25 per barrel, or at a total cost of between $200,000,000 and $250,000,000. A very large percentage of this cost of manufacture has been advanced by banks throughout the country to distillers and rectifiers, and in some cases to wholesalers, the banks taking the obligations of the owners secured by warehouse certificates representing the whisky in storage as collateral. Most of these loans have been made by banks on a basis of a per-barrel loan value of $15 to $25 per barrel. It has been extremely difficult for many distillers and rectifiers to secure from banks the amount of credit they require to carry on a planned production and to age their inventory requirements.
Every time a chaotic price situation arises in the industry the banks become timid and curtail the amount of credit they will extend, thereby making it more difficult for members of the industry to continue and maintain adequate inventories.
In the event there is a failure to provide a floor tax it will be only a short time before the banks which have made advances of $15 to $25 per barrel on distillations produced before July 1, 1938, and remaining in bond, become aware of the fact that the collateral they are holding is competing with similar distillations carrying an advantage due to the differential in applicable tax rate when withdrawn amounting to $12.50 per barrel, or an amount ranging from 50 to 85 percent of the loan which they have advanced. Obviously the bankers will not permit such loans already made to remain outstanding. In some cases they will call time loans and in others will require additional collateral. This will result in very great hardship on the smaller members of the industry.
In conclusion, may I say that the proposed bill providing for a tax to be imposed on all floor stocks on hand on July 1, 1938, exempting 50 gallons in the hands of retailers, and affording members of the industry a period of 7 months in which to pay the tax into the Treasury, is the only way that the inequitable features of the additional 25-cent tax on distilled spirits in the tax bill already passed can be eliminated. Such a bill will carry out the declared policy of this administration to help the small-business man and discourage monopoly. Respectfully submitted.
John H. HIGGINS, Jr.,
Treasurer, Readville Distilleries, Inc. There is one point that I want to emphasize, gentlemen, that has not been touched on here today, and that is the margin of profit taken by the average distiller. We are about in the position of Mr. Van Winkle who has just testified, and the position of probably 90 percent of the distillers in the industry.
Under present-day conditions we are very, very happy to sell our whisky at a net profit of from 5 to 10 cents a gallon. Now, that should convince you gentlemen of the danger of this possible competitive advantage of 25 cents a gallon if the floor-stock tax does not go on. We will then be confronted with a competitive disadvantage of from 2 to 500 percent greater than our present per-gallon profit.
The other point that I want to emphasize is this: That is the banking angle. That is what I am altogether afraid of. The whole industry, particularly the small distiller, is undercapitalized. We had to make an investment in fixed assets of $500,000. We are capitalized for $350,000. We are borrowing about $650,000. Now, as fast as we make whisky, we have to pledge it with the bank. It is very, very difficult to get credit.