consideration. I thank you and I would be happy to answer any questions anybody poses.

[The prepared statement follows:]

STATEMENT OF HON. MELVIN H. EVANS, a Delegate IN CONGRESS FROM THE

VIRGIN ISLANDS

Mr. Chairman, and distinguished members of this Subcommittee, I am most pleased to have the opportunity to appear before you once again on a matter of great economic importance to the Virgin Islands. I most deeply appreciate your action in holding this hearing on H.R. 7709, legislation jointly introduced by Representative Jim Jones and myself.

Mr. Chairman, this legislation addresses and rectifies the unforeseen adverse impact upon cigarette revenues in the Virgin Islands which occurred as a result of passage of the Customs Procedural Reform and Simplification Act of 1978, Public Law 95-410. That law was intended primarily to curb the abuses of Canadian cigarette exports; however, at the same time, it unfortunately restricted the unlimited number of cigarettes which could be imported duty-free from the Virgin Islands by limiting the number of cigarettes to 200. H.R. 7709 merely allows for the importation of cigarettes from the Virgin Islands to be increased to not more than 1000 cigarettes. It does not, however, lift the cigarette limitation applicable to foreign countries.

I would like briefly to touch upon the impact which Public Law 95-410 has had on the Virgin Islands. A study conducted by the Virgin Islands Department of Commerce, a copy of which you have before you, shows that imports of cigarettes in the Virgin Islands by the three major United States distributors dropped 29 percent between 1978 and 1979, despite an unprecedented increase in tourism and tourist expenditures during the same period. After a steady increase in taxes paid on cigarettes which reached a peak of $411,544 in fiscal year 78, it dropped dramatically the next fiscal year by 39 percent to $252,122.

IMPACT OF U.S. CIGARETTE IMPORT RESTRICTION ON ECONOMY OF THE U.S. VIRGIN ISLANDS

The U.S. limitation on duty free entry of cigarettes has had a noticeable and detrimental effect on the fragile, tourism-dependent economy of the U.S. Virgin Islands. According to recent data from government and private businesses, there has been a drop in both cigarette imports and sales and in the government revenues derived from this activity since the current U.S. one-carton (200 cigarettes), duty free limit took effect in late 1978.

Reduction in imports

Imports of cigarettes into the Virgin Islands by the three major U.S. distributors dropped 29 percent between 1978 and 1979, despite an unprecedented increase in tourism and tourist expenditures during the same period. As shown on the table below, the combined imports from the Philip Morris International, R. J. Reynolds, and Brown & Williamson cigarettes manufacturers decreased from 339,777,000 cigarettes in calendar year 1978 to 241,420,000 cigarettes in 1979. The individual sales loss for one company-Brown & Williamson-was even heavier, for a total drop of 41 percent.

TABLE 1.-IMPORTS OF U.S. CIGARETTES INTO THE U.S. VIRGIN ISLANDS 1

Totals for PMI and B. & W. include a small percentage-less than 5 percent-imported for bonded sales to cruise ships. These sales did not appreciably change in the years cited. R. J. Reynolds figures do not include imports for the shipchandlery sales, which they estimate amount to about 30,000,000 per year. Imports of cigarettes for bonded sales are included in U.S. Department of Commerce import data.

Decrease in cigarette sales

A. H. Riise, the major cigarette retailer on St. Thomas, reported a decline of 46.1 percent in their cigarette sales between calendar years 1978 and 1979 based on

transfers from their warehouse to their retail stores on St. Thomas. During 1978, a total of 54,484,000 cigarettes were sent to the retail stores for potential sales of at least $817,260 (assuming 200 cigarettes per carton and a sales price of at least $3.00 per carton). During 1979, the number of cigarettes transferred for retail sales dropped to 29,416,000 and potential sales to $441,240, for a dollar loss of at least $376,020.

A. H. Riise personnel also commented that the actual drop in sales probably was greater than indicated by the above statistics because not all of those cigarettes transferred to retail shops were sold. During early 1979, in particular, substantial (but unrecorded) numbers of cigarettes were sent back to the warehouse for either shipment back to the manufacturer or destruction. They also noted that cigarette sales had declined in 1978 compared to the previous year because of restrictions imposed by Puerto Rico limiting its returning residents to 2 cartons per person and by the State of Florida limiting its returning residents to 3 cartons per person. In response to a questionnaire on cigarette sales distributed by the Virgin Islands Department of Commerce in mid-1979, the Bolero gift shop of St. Thomas estimated that they had suffered a 50 percent decline in their cigarette business since the change in the U.S. Customs regulations. The shop, however, provided no documentation for this judgment.

In response to the same questionnaire, Colorado's Liquor Store, Inc., also on St. Thomas, estimated that its cigarette sales had dropped 40 percent to 50 percent in recent months. This shop was also unable to supply a sales breakdown.

Cigarette sales to cruise ship visitors

The Department of Commerce survey of cruise ship visitors to St. Thomas during the 1978-1979 winter season reveals that 40 percent of the respondents purchased cigarettes, spending an average of $17.00 on such purchases (i.e., the equivalent of four cartons per party, or two cartons per person since each respondent represented two persons.)

TABLE II.-CIGARETTE PURCHASES BY CRUISE SHIP VISITORS SURVEYED DURING 1978-79 WINTER SEASON

Percentage of total survey who purchased cigarettes equals 39.7 percent. Questions regarding cigarette purchases were also included in an abbreviated survey of cruise ship visitors conducted from mid-October through mid-December 1979. The results of this sample showed a decline in both the number of persons buying cigarettes and in the number of cartons purchased. Of the some 300 persons queried in late 1979, only 20 percent, versus 40 percent during the previous season, reported buying any cigarettes at all. In addition, of those visitors who did make cigarette purchases some 70 percent, versus 60 percent in the earlier survey, bought only up to or less than the duty free limit of one carton per person.

TABLE III.-Cigarette purchases by cruise ship visitors surveyed during the 1979 fall season, percent of 2-person parties who bought cigarettes

Percentage of total Survey Who Purchased Cigarettes equals 20 percent.

Loss of Government revenues

According to an analysis by the Virgin Islands Department of Finance, cigarette revenues decreased 38.7 percent between fiscal years 1978 and 1979. A review of the

Excise Tax returns filed with the Tax Division showed that the following taxes were paid on cigarettes brought into the Territory:

Fiscal year 1976 (July 1, 1975 to June 30, 1976).
Fiscal year 1977 (July 1, 1976 to June 30, 1977).
Fiscal year 1978 (July 1, 1977 to June 30, 1978).
Short period (June 30, 1978 to Sept. 30, 1978).
Fiscal year 1979 (Oct. 1, 1978 to Sept. 30, 1979)..

$163,907.27

316,323.53

411,544.00

78,957.95 252,122.34

Mr. Chairman, this measure would have no discernible affect on either the general economy of the United States or the revenues of the United States derived from cigarettes, but as you can see, has a marked affect on what must be called the very fragile tourist oriented economy of the Virgin Islands. This measure, if passed by the Congress, would be one more step in the direction of making us more self sufficient. I urge its favorable consideration.

Thank you, and I will be most happy to respond to any questions which you may have at this time.

Mr. VANIK. Thank you very much.

The next statement will be by Mr. Francis.

STATEMENT OF AMADEO I. D. FRANCIS, COMMISSIONER OF COMMERCE, GOVERNMENT OF THE U.S. VIRGIN ISLANDS Mr. FRANCIS. My name is Amadeo Francis, and I am commissioner of commerce of the U.S. Virgin Islands. As part of my responsibilities, I am responsible for the tourism activities in the Virgin Islands, which, of course, as you are undoubtedly aware, Mr. Chairman, is the base of the Virgin Islands economy.

Mr. VANIK. You are going to get hit hard with these high airplane rates.

Mr. FRANCIS. That is why this is important.

Mr. VANIK. People are probably going to spend their holidays in Baltimore.

Mr. FRANCIS. Unfortunately, you are going to be joined by so many others.

The Government of the Virgin Islands wholeheartedly supports H.R. 7709, which partially restores the privilege the territories enjoyed prior to 1978 by increasing the number of cigarettes acquired in the insular possessions which are accorded duty-free treatment when brought into the United States by returning residents.

I firmly believe the proposed duty-free allowance of 1,000 cigarettes, that is to say, five standard cartons, is a much more reasonable limit than the current 200-cigarette limit level, and quite possibly fairer to all concerned than the limited number of cigarettes that could formerly be imported duty free from the insular possessions.

The duty-free quota of one carton which was put into effect in 1978, Mr. Chairman, was basically intended to eliminate the abuses being experienced at the Canadian border and not-I repeat notin the U.S. possessions. The distance between the U.S. mainland and the territories would obviously not encourage any such abuses. Over the past 12 years, the Virgin Islands has suffered a significant reduction in imports of cigarettes. There has been a drastic decrease in sales, retail sales of cigarettes, and there has been a loss of territorial tax revenues.

The reduction of the duty-free cigarette allowance has further reduced the incentives that the U.S. resident has in traveling to the Virgin Islands. Coupled with the other advantages Congress

has afforded to U.S. residents visiting the U.S. territories, such as a duty-free allowance of $600 and a 1 gallon duty-free import of alcoholic beverages, the proposed five-carton limit would contribute to enhancing the choice of a vacation in the U.S. Virgin Islands of visitors of the Caribbean and/or foreign destinations.

On the other hand, I can assure you nobody is going to travel to the Virgin Islands merely to purchase five cartons of cigarettes, irrespective of the cost savings that may be realized as compared to what he would pay on the U.S. mainland. But psychological benefits are derived from the advertising and promotional value which far outweigh the monetary gains to any single party, whether that be the individual visitor, the local business concerns, or the territorial government first.

But for a small, fragile tourist-dependent economy, these advantages are of particular importance and are even more critically important at this point when we are experiencing a substantial decline in the number of visitors to the territories, Mr. Chairman, for, among other reasons, the increasing air fares.

This year it is costing the average couple who wants to travel to the Virgin Islands $400 more to get to the Virgin Islands than it did 1 year ago, and the impact has really been seen. There was a decline of over 15 percent in the number of air arrivals in the Virgin Islands during the first 6 months of this year. And we are very concerned about what is going to happen.

Unfortunately, we have no alternative. It is therefore of the utmost importance that we do everything and you help us to maintain our posture in an increasingly more competitive effort to attract our share of the flow of U.S. business to the Caribbean.

It is for this and other reasons that are in my statement that I urge swift approval of H.R. 7709. Thank you very much. I stand ready to answer any questions you might deem appropriate. [The prepared statement follows:]

STATEMENT OF AMADEO I. D. FRANCIS, U.S. VIRGIN ISLAND

On behalf of the Government of the Virgin Islands, I wholeheartedly support H.R. 7709 which is designed to increase the quantity of cigarettes that would be accorded duty-free treatment. The current law unduly and adversely affects government and business concerns in the Territory. I firmly believe that a duty free cigarette allowance of not more than 1,000 cigarettes, five standard cartons, is a much more realistic and reasonable limit to set than the current 200 cigarette level.

As you are aware, the duty-free quota of one carton was only put into effect in 1978 and basically was intented to eliminate the abuse at the Canadian border, not in United States possessions. However, as a result, the Virgin Islands suffered a significant reduction in imports, a drastic decrease in retail cigarette sales and an erosion of tax contributions to the Territory's treasury. I cannot overemphasize the relatively large effect that such changes whether they be positive or negative have on our small fragile tourist dependent economy as compared to that of the U.S. One million dollars is nearly an imperceptible portion of the United States tax budget, but in the Virgin Islands, such an amount may serve to ensure a competitive number of firms engaged in import activities, a profit life-line for a group of retail business and/or a noticeable impact on our earnest attempts to balance the local budget. As you can see the outsiders we may not be asking for much yet, to us, it is an important issue of additional livelihood and means.

The Virgin Islands Government would not support a request for an increased allowance unless it was shown to have sizeable and positive impacts on considerations such as the potential earnings of Virgin Islands businesses and other direct, as well as indirect benefits, throughout the entire economy. The research and analysis undertaken by my staff unequivocally indicates the costs of past legislation and the benefits the proposed changes before us would have. Therefore, I strongly endorse swift passage of H.R. 7709 as presented this day.

Mr. VANIK. Thank you.

Mr. Dawson, do you have anything to add?

STATEMENT OF DONALD S. DAWSON, ON BEHALF OF THE

VIRGIN ISLANDS MERCHANTS ASSOCIATION

Mr. DAWSON. Mr. Chairman and members of the committee, Dr. Evans has very ably presented the historical and congressional position on this bill. Commissioner Francis for the Virgin Islands Department of Commerce has given the position of the local government. I represent the private sector, which is likewise in need of your assistance.

I wholly and totally endorse the position of the U.S. Department of Commerce in testifying on this bill. In the year since enactment of the bill, there has been a loss in cigarette sales of 29 percent in the Virgin Islands alone.

This amounts to $1,700,000 in retail sales, Mr. Chairman, and a corresponding loss in wholesale sales. In addition, the Virgin Islands government lost $159,000 in local excise taxes and about $34,000 in gross receipts taxes, plus 2 percent on wholesale sales, which is about $200,000 total.

Of course, there was a loss in income taxes, as well. This is a great deal in that economy, whereas the impact on the U.S. Treasury would be very slight.

If all the cigarette sales lost in 1979 were in the additional fourcarton allowance, the loss would be only $488,000.83 Federal excise tax per carton. The net governmental loss would therefore be very small, approximately $200,000.

The Department of Commerce has stated in its letter to you that there would be no adverse effect on it. The International Trade Commission has stated the revenue impact would be minimal.

There was no intention in 1978 to hurt or penalize the territories. The effect was unintentional. In fact, the Congress has heretofore provided generous treatment of the territories to give tourists an incentive to visit the territories as their economy is largely dependent on tourism. This is especially true in the Virgin Islands. For example, the Congress has granted twice the exemption for tourists returning from the territories, $600 as contrasted to $300 from foreign countries, and 5 fifths liquor against 1 quart from foreign countries.

Passage of this bill would be of the greatest importance to the people in the territories. Also, I would call your attention to the report of the Department of the Interior which is before you in which the Secretary states: "We strongly recommend that the bill be enacted."

Thank you, Mr. Chairman.

[The prepared statement follows:]

STATEMENT OF DONALD S. DAWSON, REPRESENTING VIRGIN ISLANDS MERCHANTS ASSOCIATION

My name is Donald S. Dawson. I am a practicing attorney located at 723 Washington Building, Washington, D.C., representing the Virgin Islands Merchants Association and appearing in support of H.R. 7709.

Prior to the enactment of the Customs Procedural Reform and Simplification Act of 1978, the U.S. Territories (American Samoa, Guam and the U.S. Virgin Islands) enjoyed the benefit of duty-free importation of cigarettes without limitation-that