When a luxury tax took wind out of yacht sales


ONCE WHEN Paul Hindemith, composer of very modern music, was rehearsing one of his especially dissonant compositions, he interrupted the orchestra, saying, "No, no, gentlemen. Even though it sounds wrong, it's still not right."

Contemporary politics, a kind of atonal music, produces moments like that. Consider Rhode Island Democratic Rep. Patrick Kennedy's proposed legislation to succor the yacht industry and assuage the pains of its most put-upon customers.

The Omnibus Budget Reconciliation Act of 1990 was the budget agreement by which President Bush broke his "read-my-lips" vow not to agree to new taxes. The act was, as omnibus bills tend to be, an eye-of-newt-and-hair-of-toad brew of this and that and some other things, and it included -- in the name of fairness, of course -- a stern tax on "luxury items."

Those items included automobiles, aircraft, jewelry and furs over certain prices. And yachts costing more than $100,000.

'Fairness' benders

In 1990, there were no luxury excise taxes, all of them having been repealed in 1965. But perhaps every quarter-century or so government -- it cannot help itself -- must go on a "fairness" bender, the memory of the hangover from similar misadventures having faded.

In 1990, the Joint Committee on Taxation projected that the 1991 revenue yield from the luxury taxes would be $31 million. The actual yield was $16.6 million. Why? Because -- surprise! -- the taxation changed behavior: fewer people bought the taxed products. Demand went down when prices went up. Washington was amazed. People bought yachts overseas. Who would have thought it?

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

This illustrates the shortcomings of "static analysis." Concerning which, consider an imaginary case.

It has been calculated that if the federal government imposed -- in the name of fairness, of course -- a 100-percent tax on all the earnings, from the first penny, of all millionaires, which is to say if the government confiscated all their earnings, the sum would suffice to run the government for just six weeks.

The problem with that calculation is that it reflects "static analysis." That is, it does not allow for behavioral changes the tax would provoke: No one would earn the one-millionth dollar, thereby triggering the confiscation, so the revenue yield from the 100-percent rate on millionaires would be zero.

Constituent concerns

But back to reality. "Practical politics," Henry Adams famously said, "consists in ignoring facts." But facts are famously stubborn things, particularly when they involve unpleasantness for one's constituents. In 1993, Congress repealed the excise taxes on boats, aircraft, jewelry and furs. It also indexed, phased down and scheduled the expiration of the tax on cars.

Now comes Mr. Kennedy with "The Boat Building Investment Act," which he calls "exactly the opposite of a luxury tax." Indeed it is.

Its centerpiece is a 20-percent tax credit for purchasers of American-made luxury yachts over 50 feet long. So the purchaser of a $1 million yacht would get a $200,000 credit against his federal income taxes. However, this would not be an unlimited benefit for the upper crust. The credit would be capped at $2 million, so the government would help only with the first $10 million that a purchaser spends on a yacht.

You probably have not heard of Mr. Kennedy's legislation. Do you think you might have heard a media uproar about it if its author were a Republican? Just a thought.

Mr. Kennedy says America lags behind other nations in "supporting" boat manufacturers, so this bill also would spend $25 million annually on "export assistance" -- for example, marketing American-made yachts at overseas expositions -- and training employees of America's yacht-builders. This is necessary, Mr. Kennedy says, to "continue the revitalization" of the industry after the "near-fatal experience when the luxury tax was implemented."

This legislation is a matter of fairness, says Mr. Kennedy, who acknowledges that hitherto he has supported "targeted tax cuts" targeted at people of modest means.

But his proposal, as he explains it, is really sort of like that. The benefit of up to $2 million for each purchaser of a luxury yacht would benefit the nearly 6,000 Rhode Islanders working in the state's more than $1 billion a year boat-building industry, and workers elsewhere.

You see, the subsidy to the wealthy would, to coin a phrase, trickle down.

George F. Will writes a syndicated column.

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