Special Message to the Congress Recommending Reduction of Excise Taxes and Increases in User Charges

To the Congress of the United States:

Fourteen months ago, I signed the Revenue Act of 1964, which reduced the income taxes of the American people by $14 billion.

That action had a profound impact on the American economy:

--Consumer buying rose $28 billion

--Business investment in plant and equipment rose $6 1/2 billion.

--Almost 2 million new jobs were created, and unemployment fell to the lowest level in 7 years.

Meanwhile, the stability of our prices-unmatched in the world today--held firm, and our foreign trade surplus set new records.

I am proud of the success of the 1964 tax cut. It proves that taxes do much more than raise revenue to finance Government-they also affect the health and strength of the Nation's economy.

Unwise tax policy can:

--unduly restrict private purchasing power;

hold back economic growth; --stifle incentives;

--distort decisions by consumers and producers;

--enlarge rather than shrink budget deficits.

On the other hand, wise tax policy can:

--raise the purchasing power of private citizens;

--expand production and create jobs;

--stimulate initiative and improve efficiency;

--reduce budget deficits by expanding the tax base and increasing tax revenues.

We used tax policy last year to achieve those goals.

As a result, this month we passed a milestone in economic history: more than 50 months of unbroken peacetime expansion.

But we cannot stand still. We must continually adjust our tax system to assure that it makes a maximum contribution to our economic growth.

For that reason I am recommending reductions in excise taxes as well as increases in user charges.

EXCISE TAXES I recommend an excise tax reduction of $3.5 billion in two equal stages effective July 1, 1965 and January 1, 1966.

I also recommend further reductions on January 1 of each year from 1967 through 1969 totalling $464 million.

Many of our existing excises were born of depression and war. Many were designed to restrain civilian demand in wartime and thereby free resources for military use. They need to be re-examined to assure that they do not hold back an expanding peacetime economy.

The proposed program of excise tax cuts and revisions will spur growth and move us closer to full employment by removing an unnecessary drag on consumer and business purchasing power. It will also:

--lower prices to consumers;

--lessen the burden of regressive taxes on low-income families;

--raise business profits by expanding sales and cutting costs of tax compliance;

--cut the Government's costs of tax collection and enforcement;

--end an unfair burden on many businesses and workers who produce the commodities singled out for excise taxation;

--free consumers from the distorting effects of these taxes on their market choices.

THE PROGRAM OF EXCISE TAX REDUCTION In the Budget for fiscal year 1966 I proposed an excise tax reduction of $1.75 billion effective July 1, 1965 and an increase in user charges of $300 million.

Our improving fiscal position, together with our developing economic situation, now makes it possible and desirable to double the recommended excise tax cut.

Responding strongly to an expanding economy, revenues for both fiscal years 1965 and 1966 are now estimated substantially higher than our conservative January estimates:

--For fiscal 1965, we now expect revenues to be $1.4 billion above the January figure of $91.2 billion.

--For fiscal 1966, we now anticipate-given the tax program as proposed in January-that revenues would be about $1.6 billion above the January estimate of $94.4 billion.

We can make the recommended tax cuts and still realize total revenues well above--and a deficit well below--our earlier estimates for fiscal 1966.

Because the progress of the U.S. economy in 1965 is living up to our expectations, the January proposal for a $1.75 billion reduction this July continues to be appropriate.

But as we look ahead to 1966, we must be alert to the possibility that our taxes will take too much buying power out of the private economy. To foster continued strong expansion of the economy in 1966, I am recommending an additional $1.75 billion reduction of excise taxes, effective January 1, 1966.

The revenue impact on the fiscal 1966 budget of the additional reduction--which will affect only the last half of the fiscal year--will be about $600 million. This will leave a substantial portion of the anticipated increase in revenues above the January Budget estimate to reduce the estimated budget deficit.

The reductions I am recommending will accomplish, prudently and responsibly, a major reform of the excise tax structure. We will:

--eliminate most of our present excise taxes on July 1, 1965, and even more on January 1, 1966;

--eliminate the tax on telephone service, in several steps, by January 1, 1969;

--gradually reduce the automobile excise tax from 10 percent now to 5 percent by January 1, 1967;

--leave only, in addition, the excises on alcoholic beverages, tobacco, gasoline, tires, trucks, air transportation (and a few other user-charge and special excises) which should remain a part of our tax system.

EXCISE TAX REDUCTION, DEFENSE AND NATION'S ECONOMY In proposing these reductions, I am fully aware of our present and prospective commitments for the defense of the free world. It is impossible to predict precisely what expenditures these may involve in the future. There is, however, no present indication that expenditures will increase to an extent that would make these excise tax reductions inadvisable.

Indeed, our international responsibilities require that we redouble our efforts to assure the continued healthy growth of our economy. Barring some sudden change in the present world situation, I am sure that these excise tax reductions will be a sound and profitable investment in that growth.

A careful evaluation of our labor supply and industrial capacity--and of the prospective rapid growth of both--indicates that:

--The carefully timed stimulus of the excise tax cuts will help us achieve fuller use of the American economy's great and growing potential without creating pressures that might threaten our fine record of price stability.

--Removal of excise taxes will, in fact, cut the prices of many items to consumers and thereby tend to ease pressures on our cost of living.

To ensure that the excise tax reductions make the maximum contribution to continued price stability and balanced prosperity, I call on American business to translate lower excise taxes promptly into lower retail prices for consumers.

Business will share fully in the benefits of excise tax cuts through the larger sales volume they will generate. Rising volume will boost profits and create more jobs.

These advances will extend beyond the industries whose taxes are removed or reduced. Consumers and businesses will use some of their gains to enlarge their purchases of other products and services. Demand will be strengthened throughout the economy. And for products bought by businesses, the tax reductions will lower costs.

In these ways excise tax cuts, like income tax cuts, will stimulate total demand in the economy and serve to increase production and incomes by far greater amounts than the cost of the tax reduction itself.

And again, Federal revenues will grow-not shrink--as the final result of tax reduction.

Effective July 1, 1965, I recommend the following:

Retail Taxes--the complete repeal of the existing retail excise taxes on handbags and luggage, toilet articles, jewelry and furs.

Manufacturers Taxes--the complete repeal of the manufacturers excise taxes on business machines, sporting goods (other than fishing equipment), radios, television sets, phonographs, phonograph records, musical instruments, cameras, film and other photographic equipment, refrigerators, freezers, air conditioners, electric, gas and oil appliances, fountain pens, ball point pens, mechanical pencils, lighters, matches and playing cards.

Automobile Tax--a reduction of the manufacturers excise tax on passenger automobiles from 10 percent to 7 percent.

Miscellaneous Taxes--the complete repeal of the excise taxes on safe deposit boxes, coin-operated amusement devices, bowling alleys, and pool tables.

Refunds To avoid deferral of purchases, the July 1 tax reductions on automobiles and air conditioners to be made retroactive to apply to all consumer purchases after May 14, 1965. Refunds would be made to the manufacturer on presentation of evidence that the final customer had been reimbursed.

I further recommend the following later excise tax reductions:

Local and Long Distance Telephone Service Tax--effective January 1, 1966, a reduction from 10 percent to 3 percent of the tax on local and long distance telephone service, including teletypewriter service. A further reduction of one percentage point effective each January 1 through January 1, 1969, when the tax will be completely repealed.

Admissions Taxes--effective January 1, 1966, the complete repeal of the excise taxes on admissions, including the tax on general admissions which applies to certain movies, theater performances, concerts, athletic events and racing, the tax on cabarets, and the tax on club dues.

Other Manufacturers Taxes--effective January 1, 1966, the complete repeal of the manufacturers taxes on lubricating oil and electric light bulbs, and repeal of the tax on automobile parts and accessories except as it applies to those parts and accessories which are primarily for use only on trucks.

Automobile Tax--effective January 1, 1966, a further reduction to 6 percent in the tax on new passenger automobiles and effective January 1, 1967, a final reduction to 5 percent. I recommend that the excise tax on new automobiles be retained as a continuing revenue source at the 5-percent rate. It is not regressive. It is an important source of Federal revenues. Its compliance and collection costs are exceptionally low.

Documentary Stamp Taxes--effective January 1, 1966, the complete repeal of the documentary stamp taxes on the issuance and transfer of stocks and bonds and on deeds of conveyance.

Other Communications Taxes--effective January 1, 1966, revision of the tax on local and long distance telephone service so that it will no longer apply to amounts paid for private communications systems even where the private system is linked with the general telephone network. This service is almost exclusively a business cost item and competes with non-taxable business communication services. Charges for service on the general telephone network originating or terminating in the private system would be taxable until the telephone tax is completely repealed. I also recommend complete repeal of the tax on telegraph and wire and equipment service.

In the foregoing program, customer refunds are recommended for purchases after May 14 only in the case of

--air conditioners, which are unique in their seasonal purchase pattern

--automobiles, which are unique in the large dollar amount of tax per unit.

I am informed that other business groups affected by the proposed tax cuts have concluded that the advantages of possible refunds are outweighed by the cost and complexity of the paper work they would involve.

Floor-stock refunds are appropriate for most manufacturers taxes and are so provided in the recommended program.

One further important change concerns the annual automatic reductions in the so-called Korean rates. To avoid the costly and time-consuming process of nullifying these reductions each year, I recommend removal of the automatic reduction dates for the present excise taxes on distilled spirits, wines, beer, and cigarettes.

The Committee on Ways and Means has already held extensive public hearings on excise tax reduction. Further, the recommended program calls for repeal of the great majority of excises, thereby minimizing the controversy and hard choices that might otherwise have delayed action. Therefore, it is my hope and expectation that the Congress will enact these changes without undue delay.

USER CHARGES The reductions in excise taxes which I am recommending will contribute to greater economic efficiency and equity in our society.

Pursuit of these very same goals of efficiency and equity demands that we increase certain other excise taxes or impose new ones.

This special class of excise taxes is better described as "user charges." They are taxes paid by those who benefit from special services provided by the Government. These user charges serve several purposes:

--They assess the costs of special services and facilities against those who reap the benefits, instead of imposing unwarranted burdens on the general taxpayer.

--They restrain the demands of special groups for expanded services by establishing the principle that the beneficiaries pay at least part of the costs.

--In the case of transportation, they help to eliminate the economic distortions which result when competing modes of transportation rely in varying degrees on facilities or services provided by the Government.

Every President since Harry Truman has reaffirmed the principle of user charges and has proposed extension of their use.

President Eisenhower said: "Many services performed and privileges granted by the Government in the public interest also convey a special, added benefit to individuals or groups who can afford to pay for them. In some cases, the fees are substantially below the costs of providing the services. Thus, the general taxpayer is required to subsidize operations which should be self-supporting. The scope and cost of these hidden subsidies have grown considerably during the past decades. I firmly believe in the principle that Government services which give a special benefit to users should be financed by adequate charges paid by the users."

Substantial constructive action has been taken by the Congress to reaffirm and extend the principle of user charges, particularly in the field of transportation. But user charges have not been applied with an even hand. I would consider it a serious abdication of responsibility if I were to propose a substantial reduction in excise taxes without at the same time moving to correct serious inequities that exist in the field of user charges.

Users of highways come closer to reimbursing the Federal Government for its transportation investment than any other group. But inequities remain among the various classes of highway users.

The airlines and their passengers make substantial--but still insufficient" contributions toward the development and operation of the Federal airways. The airlines operate about 2,000 planes. The private, business, and pleasure aircraft which make up the general aviation sector number some 86,000. Yet general aviation, which receives a large share of the benefits of the Federal airways system, contributes very little toward the cost of the airways.

Users of the inland waterways pay nothing toward the cost either of the initial improvements or of the operation and maintenance of the waterways.

The absence of a fair system of user charges strongly affects the ability of various segments of the transportation industry to compete and obscures the inherent advantages of some modes of transportation. As a result, it unnecessarily increases the cost of transportation to the economy.

I therefore recommend new and additional transportation user charges. These proposals are designed to:

--move toward the elimination of inequities among the several modes of transportation

--recover a larger part of the outlays by the Federal Government for services and facilities which mainly benefit special groups.

HIGHWAYS New cost estimates already submitted to the Congress show that the Interstate System will cost $5.6 billion more to complete than previously estimated. The added funds are needed because of increased construction costs, additional design features, and the requirement that highway capacity be based on estimated traffic twenty years in the future rather than on the traffic anticipated by calendar year 1975. Of this cost increase, $5 billion represents the Federal share.

I recommend that Congress approve this revised cost estimate, as required by law, and authorize the additional necessary appropriations so that the Interstate System can be completed.

Existing user taxes will provide almost $a billion of the increased costs. This leaves approximately $3 billion to be raised by extending these taxes beyond the present expiration date, or by increasing some of these taxes--or both.

In the interest of advancing this program at an orderly pace, part of this requirement should be met by a short extension of the completion date for the Interstate System and of the existing user charges. I recommend, therefore, that the date for reduction of the taxes earmarked for the Highway Trust Fund be extended from September 30, 1972, to February 28, 1973.

Extending the completion date and the existing user tax program will meet most of the increased costs of the Interstate System. But unless we enact some increase in current revenues to the Highway Trust Fund, a number of States will be required to cut back sharply on their construction programs.

For this reason, I recommend immediate additional user taxes on heavy trucks estimated to yield about $200 million annually until 1973.

Specifically, I recommend

--that the excise tax on highway diesel fuel be raised from 4 cents to 7 cents per gallon;

--that the present truck use tax be increased from $3 to $5 per thousand pounds on trucks having a taxable gross weight of more than 26,000 pounds; and

--that the tax on tread rubber, largely affecting heavy trucks, be increased from 5 cents to 10-cents per pound.

In its extensive study of highway costs and cost responsibilities--submitted to the Congress in preliminary form in 1961 and in final form this year--the Bureau of Public Roads has carefully allocated cost responsibilities among the various classes of highway users. The Bureau's studies clearly show that heavy trucks are not paying fully for the additional cost of heavier pavement and other design features needed to carry them.

The increases I am proposing will provide the added revenues required to complete the Interstate System. They will also achieve a fairer sharing of costs among the users of the highways.

I have carefully considered proposals for an increase in the limits on sizes and weights of trucks that may legally operate on the Interstate System. As I have noted, substantial under-taxation of heavy trucks now exists. This inequity would be further aggravated if increases in size and weight limits were to be made without imposing the additional user charges. I should not and must not approve legislation to relax these limits for vehicles on the Interstate System unless the Congress imposes these additional user charges. I will promptly recommend that the size and weight limits on trucks using the Interstate System be raised as soon as just and appropriate user charges are enacted.

AVIATION In 1961 the Congress took a major step forward in the area of aviation user charges. At that time it dropped the general excise tax of 10 percent on the transportation of persons. But it retained a 5 percent tax on the transportation of persons by air to serve as a user charge. I recommend

--that this tax now be made permanent;

--that commercial aviation bear a larger share of its appropriate cost responsibilities through the enactment of a new user tax of 2 cents per gallon on jet fuels and by continuing the existing user tax of 2 cents per gallon on aviation gasoline;

--that a user tax of 2 percent be levied on air freight waybills so that shippers by air as well as air travelers will bear some part of the cost of maintaining the Federal airways.

At the present time general aviation contributes less than 4 percent of its fair share of the cost of developing and maintaining the Federal airways. To replace the present 2 cent tax on aviation gasoline used by general aviation, I recommend a modest user charge of 4 cents per gallon on all fuels used by general aviation. Under this proposal, general aviation would pay 9 percent of its share of total costs.

All of these taxes should be made permanent, and aviation gasoline taxes now transferred to the Highway Trust Fund should be retained in the General Fund.

Over the years the Federal Aviation Agency has provided the Congress with careful studies of the appropriate allocation of airways costs among military, commercial, and general aviation users. These studies show that even with these new user charges, the various classes of civil users will still be paying less than their full share of airways costs.

INLAND WATERWAYS No user charge of any kind is presently in effect on the use of the inland waterways. This is unfair to the taxpayers and to competing modes of transportation. We are currently spending more than $50 million a year for operating and maintaining the inland waterways, and over $200 million a year for new investment. In view of these large and increasing public expenditures, equity requires that users of the inland waterways begin to contribute to the cost of providing their transport network. Accordingly, I recommend a tax of 2 cents per gallon on all furl used on the inland waterways. The proposed tax will recover a very small fraction of the operating and maintenance costs of the waterways.

DRAFT LEGISLATION AND REVENUE IMPACT I am transmitting herewith draft legislation to carry out my recommendations.

The attached tables provide the detailed revenue figures associated with my recommendations.

CONCLUSION I know that the Congress and the country will join me in recognizing our good fortune in being able to declare a new fiscal dividend of nearly $4 billion in excise tax cuts out of the bounty of a prosperous and growing economy--a dividend that will help keep it prosperous and growing.

This is not our first tax cut. It will not be our last. But in consolidating our prosperity and advancing the cause of fairness and balance in our tax system, it will surely rank as one of the most important.

LYNDON B. JOHNSON

The White House

May 17, 1965