REPORT OF THE COMMISSIONER OF INTERNAL REVENUE.

TREASURY DEPARTMENT,

OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C., November 15, 1905.

SIR: I have the honor to make report of the operations of the Bureau of Internal Revenue for the fiscal year ended June 30, 1905, with a statement, as required by law, of the receipts from the several sources of internal revenue for the months of July, August, and September of the current fiscal year.

RECEIPTS.

The receipts of this Bureau for said year were $234,187,976.37, being an excess of $1,284,195.31 over the collections for the preceding year.

The receipts for the first three months of the current fiscal year show an increase in collections as compared with the same months of the past fiscal year. I estimate that the receipts from all sources of internal revenue for the fiscal year ending June 30, 1906, will aggregate $242.000.000.

The objects of internal-revenue taxation producing the largest amount of revenue are (a) distilled spirits, being spirits distilled from grain, apples, peaches, etc.; (b) fermented liquors, including beer, ale, porter, and other similar fermented liquors; and (c) tobacco, including cigars, cigarettes, snuff, chewing and smoking tobacco.

During the past fiscal year there was collected from the tax on distilled spirits, $129,512,628.19; on fermented liquors, $49,459,539.93; on tobacco, $45,659,910.50.

RECEIPTS IN LARGE TAX-PAYING DISTRICTS.

The leading States in the payment of internal-revenue taxes for the past year are Illinois, $51,892,703.18; New York, $27,991,572.20; Indiana, $24,652,244.26; Kentucky, $21,754,399.70; Ohio, $19,782,615.61; Pennsylvania, $19,196,170.42. Among the States paying the smallest amounts are Idaho, Maine, Mississippi, Nevada, North Dakota, Vermont, and Wyoming.

Of the 66 collection districts in the territory of the United States subject to internal-revenue laws, the Fifth district of Illinois reported the largest collections, $34,691,666.

In 1904 the total production of distilled spirits was 139,505,214 gallons; in 1905, 153,259,379 gallons. In 1904, in round numbers, 118,400,000 gallons of tax-paid spirits were withdrawn; in 1905, 117,700,000. There has been an increase in the amount of tobacco and snuff manufactured, and in the production of beer.

The four States having the largest production of distilled spirits during the fiscal year ended June 30, 1905, are Illinois, 44,408,930 gallons; Kentucky, 30,848,701 gallons; Indiana, 21,266,932 gallons; Ohio, 11,754,912 gallons. The two collection districts having the largest output of distilled spirits are the Fifth district of Illinois, 34,472,990 gallons, and the Fifth district of Kentucky, 14,288,755 gallons.

The four States which made the largest quantity of fermented liquor are New York, 11,062,210 barrels; Pennsylvania, 6,114,257 barrels; Illinois, 4,777,783 barrels, and Wisconsin, 4,112,708 barrels. The two districts which produced the largest quantity of fermented liquor are the Third district of New York, 4,343,049 barrels, and the First district of Illinois, 4,001,426 barrels.

The four States producing the greatest number of cigars weighing more than 3 pounds per thousand, and the production of each during the year are Pennsylvania, 1,892,274,290; New York, 1,320,633,477; Ohio, 609,391,597; and New Jersey, 413,481,947.

The two districts showing the largest output of cigars are the Ninth Pennsylvania, 763,851,120, and the Third New York, 697,995,110.

The States showing the greatest production of little cigars (weighing less than 3 pounds per thousand) are Virginia, 349,023,940; Maryland, 263,643,700, and New York, 98,399,289.

The greatest production by districts is Maryland, 263,643,700; Second district, Virginia, 189,020,140; Sixth district, Virginia, 160,003,800, and Second district, New York, 66,051,720.

The States of New York, Virginia, Louisiana, and California, in the order named, show the greatest production of cigarettes weighing less than 3 pounds per thousand: New York produced 2,140,369,834; Virginia, 787,792,420; Louisiana, 279,265,920, and California, 72,214,535. The two districts producing the greatest number of little cigarettes are the Second New York, which produced 1,227,021,865, and the Second Virginia, which produced 763,348,290.

New York State produced the greatest number of large cigarettes, 6,507,653, of which number, 4,310,353 were manufactured in the Third district and 2,179,010 in the Second district.

The States of North Carolina, Missouri, Kentucky, and Virginia, in the order named, 'were the largest manufacturers of both chewing and smoking tobacco, the quantity being, North Carolina, 68,502,499 pounds; Missouri, 68,319,983 pounds; Kentucky, 40,766,729 pounds, and Virginia, 28,983,362 pounds.

The First Missouri district produced the largest quantity, its returns showing the manufacture of 68,061,752 pounds during the year, the next largest being the Fifth Kentucky, 35,908,485 pounds.

OLEOMARGARINE.

There has been a substantial increase in the amount of colored oleomargarine produced and tax paid and in total sum received from the oleo tax, as appears from the following comparative statement show

ing the different kinds of oleomargarine produced, tax paid, and the amount collected in the United States during the fiscal years ended June 30, 1904 and 1905:

There was virtually no change in the amount of uncolored oleomargarine produced, and a slight reduction in sum total exported. In 1904 we exported free of tax 2,628,365 pounds; in 1905, 2,543,433 pounds.

The State of Illinois produced the largest quantity of oleomargarine, 30,612,100 pounds, of which 30,611,800 pounds were made in the First district of that State.

COST OF COLLECTING THE INTERNAL REVENUES AND RECOMMENDATIONS CONCERNING SAME.

The cost of collecting the internal revenues for the past fiscal year was 2.01 per cent. The average cost since the creation of this Bureau

is 2.83 per cent.

This average is low, but the cost of collections is largely increased by "free work" done in this Bureau through services rendered by high class internal-revenue employees in connection with distilled spirits, which pay no revenue into the Treasury in connection with this free work performed.

FIRST.

Under existing laws the gauging of spirits at rectifying houses is done without cost to the rectifiers, and stamps are furnished by the Bureau for packages of rectified spirits and wholesale liquor dealers' packages without charge for the stamps themselves or for the labor done by Government officials in affixing them.

During the fiscal year just closed there were issued in two large internal-revenue collection districts 797,709 stamps for rectifiers and wholesale liquor dealers. The total cost to the Government in gauging rectified spirits in these two districts was at least $70,000.

In addition to the expense of gauging and the cost of stamps, clerks in the collectors' offices in these two districts were paid salaries in connection with this free work aggregating at least $6,000, and in addition much work was done in the local office here in connection with this stamping and gauging.

This gauging is done and these classes of stamps are issued in virtually all collection districts, and several other districts show approximately as much work done as the two heretofore considered.

The average yearly total of rectifiers' and wholesale liquor dealers' stamps issued for the fiscal years 1901-1904, inclusive, was 3,570,800. The number of these stamps being used is increasing, and it is believed that a fair estimate of the number that probably will be placed upon these packages will soon reach 4,000,000 yearly.

The act of July 20, 1868, imposed a tax of 25 cents each on stamps for rectified spirits and wholesale liquor dealers' packages, and the same rate was in force until August 1, 1872. (Act of June 6, 1872.) During this period there was collected in the whole United States from these classes of stamps:

.Rectifiers' stamps

Wholesale liquor dealers' stamps.

Total....

The average per year for this period was as follows:

Rectifiers' stamps

Wholesale liquor dealers' stamps

Total average per year.........

$1, 260, 506. 75

564, 243.75

1,824, 750. 50

$315, 126. 69

141, 060. 94

456, 187.63

The total number of stamps issued during this period was:

Rectifiers' stamps

Wholesale liquor dealers' stamps

Total...

The average per year of stamps issued during said period:

Rectifiers' stamps

Wholesale liquor dealers' stamps

Total per year

5,042, 027 2,256, 975

7,299, 002

1, 260, 507 564, 244

1,824, 751

The act of June 6, 1872, reduced the price of these stamps to 10 cents each from and after August 1, 1872, and this value continued until the taking effect of the act of May 28, 1880, since which time no charge has been made for rectifiers' or wholesale liquor dealers' stamps.

During the period intervening between the acts of June 6, 1872, and May 28, 1880, there was collected, at the rate of 10 cents per stamp, the following amounts:

These free stamps are prepared by the Government at a heavy cost for paper, plates, printing, binding, handling, transportation, and necessary clerical work.

Wholesale liquor dealers and rectifiers pay at this time what is termed the special tax on the business, being at the rate of $100 per year for wholesale liquor dealers, and either $100 or $200 per year for rectifiers, according to the amount of business done.

These special taxes were paid during the periods above set forth when charge was made for the stamps furnished them.

The special tax received from these two classes of taxpayers equals perhaps the cost of the stamps furnished them and the work done in gauging, so that at present, as a matter of fact, the Government virtually receives nothing in the way of revenue by the issuance of these special tax stamps, because the sum derived therefrom is exhausted in paying the cost of the stamps and the official gauging.

Other special taxpayers, such as retail liquor dealers, brewers, oleomargarine manufacturers, wholesale and retail dealers in oleomargarine, receive no similar and corresponding benefit.

Reasons why the Government should furnish these stamps free of charge and meet the expenses of gauging rectified spirits which pay no tax in connection with and by reason of rectification, the tax having been paid when the spirits were originally withdrawn from the distil lery warehouse, are not apparent, and it is submitted whether in justice to the Government and to its revenues a proper charge should not be made for these stamps of, say, 20 cents for each stamp.

It is possible that the use of the wholesale liquor dealers' stamps might be decreased somewhat should such a charge be made.

I therefore recommend that through proper legislation a charge of 20 cents per stamp be made for each stamp issued to rectifiers or wholesale liquor dealers for use upon packages prepared and sent out by them. From this source an increased revenue of some $750,000 to $800,000 would be produced. This sum would cover, possibly more than cover, the entire expense of the work done by Government officials in connection with this class of dealers.

SECOND.

In the last annual report of this Bureau attention was distinctly called to the fortification of sweet wines through the use of grape brandy withdrawn free of tax. A recommendation was made that a tax of 25 cents per gallon be imposed on all such brandy. I feel it proper to renew that recommendation.

During the past fiscal year there were gauged and withdrawn free of tax 3,430,829 taxable gallons of grape brandy for fortification purposes. If the tax paid by distilled spirits, of $1.10 per gallon, had been collected upon this brandy, it would have amounted to $3,773,911.90. If a tax of 25 cents per gallon had been imposed, as recommended, this would have produced during the past fiscal year $857,707.25.

Assuming that the law under which brandy for this purpose was withdrawn free of tax was originally enacted to encourage wine production in the United States, it is respectfully submitted that the time has come when some tax should be imposed upon this brandy.

The cost to the Government in salaries and expenses of gaugers employed in gauging brandy withdrawn for fortification purposes, and other expenses pertaining thereto in the collection districts where the work is done, the cost of the services of clerks in this Bureau, blanks,