The Washington PostDemocracy Dies in Darkness

HOW TO SINK AN INDUSTRY AND NOT SOAK THE RICH

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July 15, 1993 at 8:00 p.m. EDT

Congress is still squabbling over the budget, but on one vital economic issue, Democrats and Republicans are in complete agreement: Rich people have to pay too much for their yachts.

The reason is the 10 percent luxury tax that went into effect two years ago. When you buy a yacht, this tithe can cost you a lot of money.

Just open the current issue of Power and Motoryacht, a sort of nautical-porn magazine filled with color photos of gorgeous boats. Check out the ad for a sensuous 90-foot Broward with three "oversized staterooms," including one with "his and her bath with Jacuzzi." The yacht costs $2,995,000, but, thanks to the current luxury tax that kicks in at $100,000, you have to fork over another $289,500.

Rich people aren't happy about paying this extra money. Even if they can afford it, they think it's unfair. And in some cases, they're refusing to pay it -- simply by refusing to buy new boats and planes.

Of course, rich people don't have to buy a new 90-foot Broward (they can keep the old 54-foot Bertram, for instance, or buy a house in Vail, a major Childe Hassam or a minor Gauguin -- none of which are covered by the luxury tax). So the federal government doesn't get the tax money -- and, worse, Broward doesn't sell its yacht and various boat builders get put out of work.

As a result, in its first year and a half, the yacht tax raised a pathetic $12,655,000 for the Treasury. That's enough to run the Agriculture Department for a little over two hours. Meanwhile, the tax has contributed to the general devastation of the American boating industry -- as well as the jewelers, furriers and private-plane manufacturers that were also targets of the excise tax that was part of the 1990 budget deal.

But Senate Majority Leader George J. Mitchell (D-Maine), Sen. John H. Chafee (R-R.I.), Sen. John Breaux (D-La.) and Rep. Benjamin L. Cardin (D-Md.), all of whom coincidentally represent boating states, are sailing to the rescue, and repeal of the luxury tax is included in both the House and Senate versions of the budget reconciliation bill.

What's ironic is that the theme of this year's bill is soaking the rich. Back in the summer of 1990, when the nation was still governed by the man from Kennebunkport, the budgeteers figured that the sort of people who buy yachts, private planes and jewelry and furs over $10,000 could afford to pay a little extra.

What went wrong with the luxury tax was that, in trying to go after the rich guys' toys, Congress put the toymakers out of business. The rich guys, meanwhile, bought other toys (including foreign-made ones) not covered by the tax; or they bought used toys and refurbished them; or they simply saved the money, waiting to spend it another day.

The yachtsmen's friends in Congress may be right that the luxury tax is viciously unfair to a handful of luxuries, chosen almost at random (why not tax oriental rugs, trips to Paris on the Concorde or Mary McFadden gowns?). But the larger lesson may be that when you tax rich people -- and President Clinton's plan will raise the tax bill of $200,000-plus families by a whopping 18 percent -- middle-class and poor people suffer. Ask your local boatwright.

Just how bad is it? First, understand that because of the 1987 stock market crash and the 1990 recession, many of the toymakers were in deep trouble even before the luxury tax took effect.

Greg Proteau, a spokesman for the National Marine Manufacturers Association in Chicago, reports that U.S. production of $100,000-plus yachts peaked at 16,000 in 1987. By 1990, yacht output had fallen to 9,100. In 1991, the first year of the luxury tax, it dropped to 4,300; last year, 4,250. Employment at the two North Carolina factories of the largest luxury-boat manufacturer, Hatteras, has dropped from 1,550 to 500 since 1987.

"We started losing sales in 1989 as an industry," says Proteau. "The whole industry is off 40 percent, but the big-boat segment is off 80 percent." He estimates that about half the sales losses can be attributed to the recession and half to the tax, and that 25,000 to 30,000 "on-line blue-collar manufacturing jobs" have been lost out of a total of about 50,000 in the last three years.

Rhode Island, home state of Chafee, a former Navy secretary, has probably been hurt most. Ken Kubic, legislative chairman of the Rhode Island Marine Trade Association, says that "half of the boating businesses do not exist anymore" and that 12,000 jobs have been lost, "directly or indirectly, because of the boating tax."

He tells the sad story of Dave Walters, who for many years employed about 50 workers building highly respected Cambria racing yachts for $400,000 and up, with customers such as actor Christopher Reeve.

"The luxury tax cut off all sales," said Kubic. "The bank took his house, his car, all his business assets." The molds and tooling were sold off to a shipbuilder in Costa Rica, where, by the way, there's no 10 percent luxury tax.

Still, both the General Accounting Office and the Congressional Research Service expressed skepticism in 1992 about reports that the luxury tax was the main reason for the collapse of the yacht industry: "The cyclical nature of the luxury boat market indicates that any sales decline must be interpreted with caution," said the GAO.

People who actually try to sell boats and planes disagree.

Beech Aircraft, based in Wichita, Kan., is the largest American maker of private planes -- top dog in an industry that barely exists any more (in 1978, more than 17,000 general-aviation planes were built in the United States; last year, 962). Beech in 1991 surveyed its dealers and asked them to cite specific deals that were blown because the potential buyer didn't want to pay the luxury tax. The answer: sales of 80 planes, costing $130 million.

Beech then calculated that these lost sales amounted to 480 lost plane-building jobs, worth $4 million in lost federal taxes. By contrast, between Jan. 1, 1991, and June 30, 1992, the Internal Revenue Service collected just $158,000 in luxury taxes from airplane sales -- enough to run the Agriculture Department for 15 minutes.

Since planes that cost less than $250,000 and planes that were used 80 percent of the time for business (mainly jets) were exempt, the primary target of the tax -- wittingly or not -- was twin-engine propeller planes, like Beech's King Air. But for the first 18 months the tax was in effect, the IRS collected not a dime from the sale of a King Air, and Beech lost 34 King Air sales totaling at least $80 million.

This was not what the advocates of the luxury tax had in mind; they innocently wanted to get the rich to pay their "fair share." In fact, the richest 1 percent of Americans already foot one-quarter of the total income tax bill, but if Clinton feels compelled to soak them, a luxury tax isn't really such a terrible idea. It's probably less damaging to the economy, for example, than a higher tax rate on income, which discourages people from saving and earning.

Better than a tax on planes and boats, however, would be a tax on things that are already made -- like old paintings and antiques. Such a tax won't put manufacturers out of business, but it won't raise much money either. My own favorite candidate for rich-soaking would be to cap the home mortgage interest deduction at, say, the price of an average American abode.

But the rich, who are clever as well as petulant, will probably figure a way around this one, too. They'll sell their houses and live on their yachts.