A century ago taxes on whisky, rum and other spirits accounted for about half of all federal revenues. So the government posted inspectors armed with locks, seals and measures at each distillery to prevent shortchanging of the Treasury.
Now taxes on distilled spirits contribute less than 1 per cent of the federal budget, and the industry is highly regulated. But the Bureau of Alcohol, Tobacco and Firearms still keeps about 300 inspectors at 180 distilleries and industrial alcohol facilities, doing much the same work their predecessors did 100 years ago.
That is the backfrop for a General Accounting Office study, released today, that urges that the on-site inspectors be withdrawn and replaced by systematic tax audits, supplemented by periodic inspections.
The present system is unnecessary and wasteful, and existing procedures "require significant staff-day expenditures, reveal minor irregularities and seldom result in the discovering of major tax deficiencies," the GAO said in pointing out that the inspectors generally have little training in auditing procedures.
"It is time to bring matters to a head," said the congressional watchdog agency in its report to the Joint Committee on Internal Revenue Taxation.
The GAO proposed that Congress repeal the long-standing "anachronistic" legislation that requires on-site inspectors with the power to lock and unlock the machinery, monitor measurements of distilled spirits, observe their deposit and removal, review production records, examine locks and seals, verify the accuracy of labels and test for alcoholic content.
Responsibilities vary from place to place, the report said. It cited the case of an inspector who was required to be at a warehouse all the while it was unlocked even though he spent only about 3 hours a day watching shipments in and out of the building.
"Continuing to assign permanent (government) personnel only makes sense if government cannot place any trust in the firms being monitored," the report said. "GAO doubts that this is the case."
To assure compliance with federal tax laws, under which the government called $3.1 billion from distilleries in 1975, the GAO would have the bureau and the Internal Revenue Service do joint audits of basic financial and production records.
The GAO also suggested that the Secretary of the Treasury, who oversees the bureau's operations, recommend, by the end of this fiscal year, long-term legislation revising regulation of the distillery industry.
As a permanent solution, the GAO suggested an "all-in-bond" system under which the distilled spirits, covered by a surety bond throughout the process to guarantee payment of taxes, would be taxed as they leave the distillery. Under the present system, tax liability is determined before bottling according to the level of uncut spirits.
This "all-in-bond" system would leave the distilleries completely in charge of their own operations. While studies may have to be made on the impact of this and other possible approaches, the GAO recommended that Congress not delay legislation permitting removal of the on-site inspectors.
The GAO said the proposed new system was considered by the bureau 14 years ago but abandoned because of industry opposition. Under the complex taxing system for domestic and imported spirits, domestic producers would lose a tax advantage if the "all-in-bond" system were enacted. A modification could be made to retain the domestic tax advantage, the GAO said.
In comments on the GAO proposals, the Treasury Department said they "oversimplify" the situation and underestimate the need for on-site inspections but agreed that some improvements may be warranted.
Treasury agreed to legislation permitting removal of on-site inspectors but said the department should be able to retain inspectors when they are deemed needed. Also, it said, "it is essential to have the understanding of the affected industries before seeking to change the law." The department also criticized the idea of joint Bureau-IRS audits.