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United States Congressman Clerrient STATEMENT OF REP. BOB CLEMENT OF TENNESSEE BEFORE THE HOUSE COMMITTE)E ON WAYS AND MEANS ON THE ADMINISTRATION'S PROPOSED HEALTH SECURITY ACT NOVEMBER 18, 1993 MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE: IT IS AN HONOR TO APPEAR BEFORE YOU AND I THANK YOU FOR THE OPPORTUNITY TO SHARE MY VIEWS ON ONE ASPECT OF THE FINANCING CONTAINED IN THE PRESIDENT'S HEALTH SECURITY ACT. HEALTH CARE REFORM IS AN ISSUE OF UNPARALLELED IMPORTANCE TO OUR FELLOW CITIZENS AND THE COMMITTEE'S HEARINGS ARE AN IMPORTANT PART IN THE PROCESS OF'FASHIONING A LEGISLATIVE PACKAGE THAT WILL ADDRESS THEIR CONCERNS. AS THE PRESIDENT STATED IN HIS REMARKS TO US IN STATUARY HALL, HEALTH CARE REFORM IS AN ESPECIALLY COM- PLEX ISSUE AND ANY SOLUTION MUST BE APPROACHED WITH BOTH COMMON SENSE AND FAIRNESS AS WELL AS VISION AND FAITH. I THANK THE COMMITTEE FOR RAISING FOR DISCUSSION QUESTIONS ABOUT THE FINANCING OF THE ADMINISTRATION'S REFORM PACKAGE. AND I THANK YOU FOR ASKING, IN PARTICULAR, QUESTIONS ABOUT THE FAIR- NESS OF THE EXCISE TAX INCREASES PROPOSED FOR TOBACCO PRODUCTS. MUCH ATTENTION HAS BEEN FOCUSED ON THE PROPOSED 75 CENT IN- CREASE IN THE FEDERAL EXCISE TAX ON CIGARETTES. INDEED, TOBACCO, PARTICULARLY BURLEY TOBACCO, WAS THE NUMBER ONE CASH CROP IN THE STATE OF TENNESSEE. RECEIVING LESS ATTENTION, BUT NO LESS ONER- OUS OR IMPORTANT, IS THE PROPOSAL TO INCREASE THE EXCISE TAX ON SMOKELESS TOBACCO PRODUCTS. AS YOU MAY KNOW, I HAVE THE HONOR OF REPRESENTING IN CON- GRESS NOT ONLY THE COUNTRY MUSIC CAPITAL OF THE WORLD, NASHVILLE, TENNESSEE, BUT ALSO THE DARK FIRED AND DARK AIR CURED TOBACCO CAPITAL OF THE WORLD - ROBERTSON COUNTY. I REPRESENT MORE THAN 2000 FARMS THAT GROW DARK TOBACCO AND THE REGION STRETCHING NORTH AND WEST OF NASHVILLE INTO SOUTHERN KENTUCKY GROWS MORE-OF THESE TYPES OF TOBACCO THAN ANY OTHER PLACE IN THEVORLD. THESE TWO TYPES OF TOBACCO ARE USED IN SMOKELESS PRODUCTS - SNUFF, CHEW, PIPE TOBACCO AND CIGARS. SNUFF AND CHEWING TOBACCO ARE PRODUCED IN A MANUFACTURING PLANT IN NASHVILLE THAT EMPLOYS 423 INDIVI- DUALS. CONSEQUENTLY, ANY POLICY WHICH AFFECTS THE PRICE OR AVAILABILITY OF SMOKELESS PRODUCTS IS A SOURCE OF GREAT CONCERN TO ME AND MANY OF MY CONSTITUENTS. AND BELIEVE YOU ME, THE PRESIDENT'S PROPOSAL TO INCREASE THE TAX ON CHEWING TOBACCO BY 10,417 PERCENT, THE TAX ON SNUFF BY 3,472 PERCENT, THE TAX ON CIGARS BY 3,333 PERCENT AND THE TAX ON 3 1

PIPE TOBACCO BY 1,850 PERCENT, IS A SOURCE OF GREAT CONCERN. FOR A WHILE, MY INITIAL REACTION TO THE PROPOSAL WAS THAT IT DID NOT PASS.WHAT WE IN NASHVILLE CALL THE "HEE-HAW" TEST. AND WITH ALL DUE RESPECT TO MY FRIENDS AT THE NASHVILLE NETWORK, I KNOW THE HEE HAW TEST AND, MR. CHAIRMAN, THIS PROPOSAL IS NO HEE HAW! IN ALL SERIOUSNESS, THE PROPOSAL IS OF GREAT CONCERN. TRANSLATED INTO DOLLARS AND CENTS, FOR EXAMPLE, THE TAX ALONE ON A TIN OF SNUFF WOULD INCREASE FROM 3 CENTS TO 97 CENTS. THE TAX ON A POUCH OF CHEWING TOBACCO WOULD INCREASE FROM 2 CENTS TO $2.34.- THE PROPOSAL IS ALSO A SOURCE OF GREAT CONSTERNATION FOR THE WHITE HOUSE HAS NOT PROVIDED AN ADEQUATE EXPLANATION FOR ITS PRO- POSAL. IN FACT, I QUESTION WHETHER THE WHITE HOUSE UNDERSTOOD OR APPRECIATED THE PERCENTAGE INCREASES THEY WERE ASKING WHEN THEY TRIED TO "EQUALIZE" THE TAX ON CIGARETTE AND SMOKELESS TOBACCO. THE WHITE HOUSE HAS NOT EXPLAINED ITS RATIONALE FOR ABAN- DONING DONING THE PROPORTIONAL PERCENTAGE APPROACH BETWEEN SMOKELESS AND CIGARETTE TOBACCO ADVOCATED BY TAX EXPERTS AND ADOPTED BY PAST CONGRESSES. AS YOU KNOW, THIS WELL-REASONED TRADITIONAL APPROACH RECOGNIZES THAT THERE IS NO RELEVANT DEFINITION OF EQUIVALENCY BETWEEN CIGARETTES AND SMOKELESS TOBACCO PRODUCTS. THE TRADITIONAL APPROACH RECOGNIZES DIFFERENCES IN WEIGHT DUE TO THE MOISTURE OF MANY SMOKELESS PRODUCTS AS COMPARED WITH CIGARETTE TOBACCO. IT ALSO RECOGNIZES DIFFERENCES IN THE SIZE AND WEIGHT OF PACKAGING, DIFFERENCES DUE TO TYPE AND VALUE ADDED AMONG VARIOUS TYPES OF TOBACCO PRODUCTS. THIS DIFFERENTIAL IS FURTHER RECOGNIZED BETWEEN SOME SMOKELESS PRODUCTS, LIKE SNUFF AND CHEW. AS SUCH, THE PROPORTIONAL APPROACH HAD A COMMON SENSE RATIONALE, TAX EQUITY AND A DEGREE OF FAIRNESS TO IT. BY CON- TRAST, THE UNDERLYING RATIONALE FOR THE ADMINISTRATION'S RECOM- MENDATION IS NOT EVIDENT, UNLESS BEING PUNITIVE OR CONFISCATORY IS THEIR RATIONALE. SOME HAVE SUGGESTED THAT THE RATIONALE IS TO DETER UNDERAGE INDIVIDUALS FROM USING CIGARETTES AND SMOKELESS PRODUCTS. IF THIS IS INDEED THE PRESIDENT'S OBJECTIVE, IT IS ONE WE ALL SHARE. BUT WOULDN'T ENFORCEMENT OF EXISTING FEDERAL AND STATE LAWS BE A BETTER MECHANISM TO PREVENT SUCH SALES. I WOULD POINT OUT TO THE COMMITTEE THAT RECENT HEALTH AND HUMAN SERVICES REPORTS SHOW THAT USE BY UNDERAGE INDIVIDUALS DECLINED BETWEEN 1991 AND 1992. ACCORDING TO AN HHS REPORT, "HEALTHY PEOPLE 2000 REVEIW," THIS DECREASING TREND IS APPROACHING AND VERY CLOSE TO THE YEAR 2000 GOAL OF 4 PERCENT USE BY INDIVIDUALS UNDER THE AGE OF 18. IN A RECENT LETTER TO THE PRESIDENT, I ASKED IF HE WAS FULLY APPRISED OF THE ECONOMIC CONSEQUENCES OF HIS RECOMMENDATION ON NOT ONLY THE GROWERS OF MY REGION AND THOSE WHO WORK AT A PRO- CESSING PLANT IN NASHVILLE, BUT ALSO ON THE SMOKELESS TOBACCO INDUSTRY AS A WHOLE. IN AN INDUSTRY WITH ONLY $1.5 BILLION IN TOTAL SALES LAST YEAR, IT IS DIFFICULT TO SEE HOW DETERRING USE, AND PRESUMABLY LOWERING SALES, ON THE ONE HAND, AND RAISING TAXES BY THESE ASTRONOMICAL PERCENTAGES ON THE OTHER, WILL LEAD TO THE $500 TO $800 MILLION ANNUALLY IN NEW REVENUE WITHOUT SUBSTANTIAL- LY DISRUPTING THE LIVES OF-PEOPLE ASSOCIATED WITH SUCH A SMALL INDUSTRY. I AM SKEPTICAL THAT THESE REVENUE TARGETS CAN BE REACHED, PARTICULARLY IF CONSUMPTION DECLINES. WILL FURTHER TAX INCREASES BE NECESSARY IN LATER YEARS? FOR THE AVERAGE TOBACCO FARMER IN MY DISTRICT, THE EFFECT OF THE PROPOSED TAX INCREASE WILL BE TREMENDOUS. ONE IMMEDIATE IM- PACT WILL LIKELY BE ON WHETHER THE DEPARTMENT OF AGRICULTURE WILL BE ABLE TO CALCULATE NEXT YEAR'S TOBACCO QUOTA. WILL SALES DE- CLINE 3 PERCENT? 5 PERCENT? OR MORE OR LESS? THERE IS NO EX- PERIENCE ON WHICH TO ESTIMATE PRICE ELASTICITY OF SMOKELESS PRO- DUCTS. OVERESTIMATE THE CONSEQUENCE OF THE TAX INCREASE, AND IMPORTS WILL GO UP TO MAKE-UP THE SHORTFALL IN DOMESTIC PRODUC- TION. CURRENTLY, THE INDUSTRY PURCHASES OVER 99 PERCENT OF THE DOMESTIC DARK TOBACCO GROWN. UNDERESTIMATE THE CONSEQUENCE AND 2

FARMERS WILL BE STUCK PAYING A NO-NET-COST ASSESSMENT AS EXCESS TOBACCO ENDS UP IN THE POOLS. UNDER EITHER SCENARIO, OR SIMPLY VIEWED FROM THE PERSPECTIVE OF DECLINING SALES, FAMILY FARM INCOME IS LIKELY TO DECLINE. A RECENT STUDY ASSUMING A 3 PERCENT DROP IN CONSUMPTION SHOWS THAT THE PROJECTED AFTER-TAX PRICE INCREASES IN SNUFF WILL REDUCE DEMAND BY 2.63 MILLION POUNDS OR 11.4 PERCENT. DEMAND FOR CHEWING TOBACCO IS EXPECTED TO BE REDUCED BY 1.32 MILLON POUNDS OR 39 PERCENT. ALTHOUGH THE NUMBER OF POUNDS USED FOR CIGAR AND PIPE TOBACCO IS SMALLER, THE REDUCTIONS ARE STILL 18 AND 30 PER- CENT RESPECTIVELY. TRANSLATING THESE REDUCTIONS INTO LOST FARM VALUE, FARMS GROWING DARK FIRE TOBACCO WOULD LOSE BETWEEN 6.3 AND 10.4 PERCENT OF VALUE. FARMS GROWING DARK AIR CURED TOBACCO WOULD LOSE BE- TWEEN 18.9 AND 31.8 PERCENT OF VALUE. IF THESE PROPOSED TAXES WERE TO BECOME LAW, THEY WOULD RE- SULT IN A DEVASTATION OF THE FARMING COMMUNITY AND THE INDUSTRY. THE $45 MILLION CONTRIBUTED BY DARK TOBACCO TO THE LOCAL TENNES- SEE AND KENTUCKY ECONOMIES WILL ALSO DECLINE. JOBS ASSOCIATED WITH THE PRODUCTION, MARKETING, PROCESSING AND MANUFACTURING OF THESE PRODUCTS WILL BE LOST AND TAX REVENUES FOR STATES REDUCED. MORE SIGNIFICANTLY, THE ADMINISTRATION'S PROPOSED TAX IN- CREASES FALL DISPROPORTIONATELY.ON THE SOUTHERN REGION OF OUR COUNTRY. FARMERS ARE CONCENTRATED IN JUST 4 STATES - KENTUCKY, TENNESSEE, WISCONSIN AND PENNSYLVANIA, WHILE THE GREATEST EFFECT ON DISPOSABLE INCOME IS CONCENTRATED PRIMARILY IN 12 STATES, ALL IN THE SOUTH. IN FACT, CONSUMERS IN THE SOUTH WOULD PAY ONE HALF OF THE PROPOSED TAX INCREASE. WHICH ONE OF US WOULD WANT TO PLACE EITHER A REGION OF OUR COUNTRY OR A SECTOR OF OUR ECONOMY WITH SUCH A BURDEN WHEN, IN- DEED, IT IS ENTIRELY PREVENTABLE? MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, GROWERS ARE AS DECENT, HARD-WORKING AND LAW-ABIDING AS ANY PEOPLE. GROWING TOBACCO IS BACK-BREAKING, LABOR INTENSIVE WORK. THE PEOPLE WHO WORK IN THE MANUFACTURING PLANTS ARE SIMILARLY DECENT AND HARD- WORKING. YET WE LOOK AT THESE PEOPLE AS PARIAHS, PURVEYORS OF A PRODUCT WHICH I MIGHT REMIND YOU IS ENTIRELY LEGAL. MR. CHAIRMAN, I KNOW OTHERS WILL ADDRESS THE MANY OTHER ISSUES THIS PROPOSAL RAISES, INCLUDING THE CONSEQUENCE ON STATES' REVENUE SOURCES AND THE PRESUMED SOCIAL COST OF TOBACCO USE. FOR SMOKELESS TOBACCO, WE ASK SIMPLY THE COMMITTEE TO RE- STORE FAIRNESS. REINSTATE THE TRADITIONAL PROPORTIONAL RATE DIFFERENTIAL BETWEEN SMOKELESS PRODUCTS AND CIGARETTES. THE COMMITTEE HAS WISELY USED THIS APPROACH IN THE PAST AND I HOPE YOU WILL USE IT HERE, SHOULD YOU INCLUDE TOBACCO EXCISE TAX INCREASES AS A FINANCING MECHANISM FOR HEALTH CARE REFORM. THANK YOU FOR THIS OPPORTUNITY TO SHARE WITH YOU MY VIEWS.