Mr. PORTMAN. In essence, although you don't address this specifically in your testimony, perhaps you are not in a position_to_comment on it today, but in essence you are saying there would be no revenue impact based on the historical data that the Joint Tax Committee staff or some other entity might use to analyze the provision, because you would, in a sense, be ensuring that the government would continue to have the revenue flow through the flat statutory rate.

Mr. ISRAELOFF. I am prepared to say exactly that. We have done the studies and we feel that the 34-percent statutory rate will make the government whole. In addition, there is a provision in there that says if a business has owners that average more than a $250,000 income per owner from that business, which is a very large S corporation or partnership, then the statutory rate would be 39.6 percent, equal to the highest individual rate. We have tried to put everything in the bill that provides security to the government that the revenue flow will be there.

Mr. PORTMAN. That sounds like sort of the flat tax proposals I have heard of. Flat tax, but at an incremental level.

I thank you and thank the Chairman.
Chairman ARCHER. Thank you.

We have a 15-minute vote, with 10 minutes still remaining on the floor of the House, to be followed by a series of 5-minute votes. I hesitate to start the next panel when we can only stay here for about another 5 minutes before we have to leave for this first 15minute vote. The Chair will recess the Committee until the conclusion of the 5-minute votes.

We don't know how long that will be and I apologize for that to our next set of witnesses. But there is no other alternative.

We will recess now to vote. We will come back immediately after the beginning of the last 5-minute vote.

The Committee will stand in recess.

[Recess.]

Chairman ARCHER. The Committee will come to order.

We are going to try again, although we expect more votes on the floor of the House.

If we could ask our next panel to be seated, we have Charles Smith, president of Smith Management Co., Houston, who represents the National Automobile Dealers Association; Doug Metz, managing director, Wine & Spirits Wholesalers of America; John Huber, counsel, Petroleum Marketers Association of America; and Edwin L. Harper, president, chief executive officer of the Association of American Railroads.

If you gentlemen would have seats at the witness table, I will be pleased to hear your presentations. Hopefully, the Committee will make up in quality what it lacks in quantity with the number of Members who are here.

I do apologize to you because we never know when these votes will come up, and obviously, we have got to get over there and make the votes when they do.

Mr. Smith, would you like to lead off?

I suppose I should formally introduce you because you are my constituent from Houston, Texas, and we are delighted to have you before us today.

I would say to all of you that, as I mentioned to other witnesses, if you have a statement in writing, without objection, the entire statement will be entered into the record, and you may proceed verbally, limiting your verbal presentation to 5 minutes.

Mr. Smith, here we go again. Would you like to commence? STATEMENT OF CHARLES M. SMITH, PRESIDENT, SMITH & LIU MANAGEMENT CO., HOUSTON, TEXAS, ON BEHALF OF NATIONAL AUTOMOBILE DEALERS ASSOCIATION AND AMERICAN INTERNATIONAL AUTOMOBILE DEALERS ASSOCIATION

Mr. SMITH. Sure.

Good morning, Mr. Chairman. It is a pleasure to be here.

I am Charles Smith, and I am an automobile dealer from Houston, Texas, representing both domestic and international franchises. My family has been in the business since 1917, and I am here to testify on behalf of thousands of American small businessmen and women across this Nation just like myself who have been unfairly shouldering the burden of our Nation's sole "luxury" tax, the 10-percent excise tax on the price of automobiles above $32,000. The so-called "luxury taxes" were originally placed on certain boats, planes, jewelry, furs, and autos by Congress in 1990 in an effort to soak the rich by taxing the purchases of high-income individuals. In 1993, Congress repealed all luxury taxes except on autos. Congress became convinced that these taxes did not impact the high-income purchaser but instead caused harmful unintended consequences for American businesses.

While the wisdom of imposing the tax on autos is subject to the same question, it was not repealed simply because it raised too much revenue. The auto excise tax has had a significant adverse impact on the U.S. auto industry. While dealerships are not necessarily in jeopardy of closing down due to the excise tax, our already narrow profit margins have been further eroded by this tax. I didn't come up to Capitol Hill armed with facts or figures from the Congressional Budget Office or the most popular think tank in town. I am merely a small businessman working hard, paying taxes, creating jobs in my community, and doing the best to live the American dream.

While I am not an expert on tax policy, I can tell you how this tax is affecting my business and the jobs in my dealerships. Mr. Chairman, the auto tax is a tax on small business. I have seen its effects on the bottom line.

Sales in my showroom have been jeopardized because after my customers have agreed to a price, I have to go back and say, by the way, you owe 10 percent excise tax on top of the agreed price. The intended target of the tax, the customer, sidesteps it by forcing me to pay all or part of the tax. They feel like it is a totally unfair tax. You may think it is worth my paying the excise tax on each car to make a sale, but let me point this out: Auto dealerships in America realize an average of only $130 net profit per new vehicle retail, $130. Obviously, a few hundred dollars in excise tax on each new vehicle can push already razor-thin profits into the red.

As the price of the vehicles has risen over the past few years, I have seen the effects of the tax spill over onto vehicles which

American middle-class families demand to meet their transportation needs. Today, vehicles impacted by the tax include the popular vehicles, minivans, sports utilities, and family sedans. Models of the Ford Explorer and the Oldsmobile Aurora, for example, now stand above the threshold of the tax. The consumers that purchase these vehicles are not the wealthy we hear so much about, but middle-class Americans trying to purchase a vehicle to fit their transportation needs.

This tax is also fundamentally unfair and unjust. Today, the average price of a new car is $20,000. It is a strange tax policy that does not call the $1 million yacht or $500,000 diamond necklace or $75,000 fur coat a luxury item but targets a $32,000 car. Obviously, something is wrong.

I understand this Congress is looking to cut the Federal deficit. I wholeheartedly-and I repeat, I wholeheartedly support this effort and simply ask Congress not to do it on the backs of the American small business auto dealers. All we ask is that the Committee consider phasing down of this unfair tax so that we can sunset it at its scheduled date in 1999.

Mr. Chairman, auto dealers like me have paid their fair share, and we will continue to pay our fair share in the future under this proposal. I commend Congresswoman Dunn and Congressman Levin for their efforts in support of the phasedown and sunset on the auto tax and several other Members of the Committee who have indicated a willingness to move ahead on the issue.

Mr. Chairman, as I have previously pointed out, small business auto dealers have been paying the price for a flawed tax for the past 5 years. Let's wind down this unfair tax, remove the burden of a national sales tax on a single industry and allow small businesses' entrepreneurs to drive the engine of growth and prosperity in this country.

On behalf of the members of the National Automobile Dealers Association and the American International Automobile Dealers Association, I urge this Committee to support a phasedown and sunset of the auto tax.

I would like to add for the record that this proposal I have addressed today enjoys the full support of General Motors, Ford Motor Co., and all international automakers.

Thank you for allowing me this opportunity to appear before you, and I will happily answer any questions.

Chairman ARCHER. Thank you, Mr. Smith.

Mr. Metz, you may proceed.

STATEMENT OF DOUGLAS W. METZ, MANAGING DIRECTOR, WINE & SPIRITS WHOLESALERS OF AMERICA

Mr. METZ. Thank you, Mr. Chairman.

My name is Doug Metz, managing director of the Wine & Spirits Wholesalers of America. Our members under license purchase for resale over 90 percent of the distilled spirits distributed in the 32 licensed States, the District of Columbia, and Puerto Rico. We appreciate the opportunity to testify in support of a simple revenueneutral change in the method of paying the Federal excise tax on distilled spirits.

This proposal was advanced 10 years ago, and the two colleagues immediately to your right and the gentleman to your left were supporters of the measure. It failed largely because of an inability to provide a revenue-neutral offset to the cost of the revenue lag.

We believe we have solved that this year, Mr. Chairman. This proposal would consolidate responsibility for collection of the Federal excise tax on distilled spirits in one and not two Federal agencies. It would reduce a major regulatory burden by eliminating dual agency supervision of distilled spirits warehouses.

We have appended to our record photographs showing the arbitrary requirement of construction of a cage to be bonded as a part of the warehouse facility. On one side of the cage Customs has jurisdiction. On the other side of the cage, the BATF, Bureau of Alcohol, Tobacco and Firearms. We would eliminate that.

The proposal would simplify collection and compliance by combining the wholesale point of payment of both Federal and State excise taxes on distilled spirits. And last, it would end the favored treatment of imported bottled products which makes wholesaler costs for competing domestic products some 40 percent higher.

The problem that I am addressing today is one of great importance to hundreds of small American businesses. Currently, wholesalers can purchase foreign bottled distilled spirits "in-bond," that is, tax free, paying the Federal excise tax to the Federal Government directly after sale to a retailer. In contrast, when a wholesaler buys domestically bottled distilled spirits, which is nearly 86 percent of his total spirits inventory, the price includes the Federal excise tax prepaid by the distiller.

The inequity caused by this discrimination favoring foreign over domestic products means that hundreds of U.S. family-owned businesses increase their inventory financing costs, as I mentioned, by 40 percent when buying U.S. products. Under this proposal, wholesalers would be able to purchase domestically produced or bottled spirits "in-bond" as now permitted for competing foreign products. It would allow suppliers to save the carrying costs on the tax which they bear pending payment by wholesalers in the 18 control States which operate their own liquor systems. The movement of the Federal excise tax point of payment on domestic spirits from the supplier to the wholesaler will create a one-time 60-day lag in tax receipts by the Treasury.

This revenue lag would be neutralized by requiring "All-In-Bond" electing companies annually on September 20, to make an estimated payment of excise taxes due in October and November based on tax payments for the same months for the preceding year.

In addition to the described benefits to hundreds of American wholesalers as well as suppliers of bottled distilled spirits and the 18 control States, the proposal offers significant advantages for the Federal Government.

First, it places responsibility for assuring tax collection and compliance with a single agency of jurisdiction over matters related to the sale of alcohol beverages, namely the BATF.

Second, it offers BATF an opportunity to streamline excise tax collections and minimize auditing practices by utilizing procedures already used by the States. Every wholesale purchaser of domestically bottled spirits currently pays excise taxes.

It reduces the regulatory compliance burden by eliminating the requirement for segregated warehouse supervision by two Federal agencies.

It offers significant overall savings to Treasury because the States perform the same function and there are opportunities for synergies and interaction with the States.

In conclusion, Mr. Chairman, I believe that this "All-In-Bond" proposal is a sound tax policy and offers an opportunity to benefit American business.

Thank you very much.

[The prepared statement and attachments follow:]