Despite Tax-the-Rich Plans, Congress May Repeal Luxury Tax
TWELVE minutes after the 103rd Congress convened early this year, there was a proposal to repeal the luxury tax on yachts costing $100,000 or more. By the end of the day there were five separate proposals to repeal the tax, including several proposals to repeal the levy on all luxury items covered - yachts, furs, jewelry, planes, and cars.Skip to next paragraph
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"The luxury tax has been a miserable failure," said Rep. Bob Stump (R) of Arizona, who wants to eliminate all the taxes.
Advocates of revoking the tax, especially the one on yachts, say it will easily pass Congress. The legislature has already revoked the yacht tax twice, but in broader tax measures vetoed by President Bush, who also favored its repeal.
This time, however, proponents of eliminating the tax believe it will be signed by President Clinton. In the last Congress, both Senate Majority Leader George Mitchell (D) of Maine and Sen. Lloyd Bentsen (D) of Texas, now Treasury secretary, supported repeal for yachts. A spokesman for Mr. Bentsen says it's too early to know if repeal will be part of Clinton's budget package.
However, even proponents of the repeal admit it will look funny for Mr. Clinton to repeal a tax bill aimed at products bought by the rich at the same time as he enacts new taxes on them. In the campaign, Clinton called for legislation raising the tax rate on anyone earning $200,000 or more and adding a surcharge on millionaires.
If the president approves ending the luxury tax, it will make reducing the deficit, one of his chief worries, a bit tougher.
The Joint Committee on Taxation originally estimated the tax would bring in $1.5 billion over its five-year life span. The repealers say it never did. "Rather than increase the nation's revenues, it has reduced them," Rep. Stump stated.
Well, not quite.
According to the Internal Revenue Service, the total tax brought in $98 million for fiscal year 1991 and $154 million for fiscal year 1992 (through the quarter ending March 31). Although that is not much money in terms of the Federal budget deficit (now running at over $300 billion), it is revenue. Thus, Congress must find an "offset" to replace the repealed tax.
Rep. Olympia Snowe (R) of Maine, in her repeal bill, reduces the oil depletion allowance for independent oil drillers as her offset. Maine has few independent oil drillers but it does have a lot of boat builders. "This tax has cost Maine a lot of jobs," says a Snowe spokesman.
In fact, the National Marine Manufacturers Association, the trade and lobbying group for the boat builders, says the tax has resulted in the loss of 25,000 jobs. In a 1991 report, the Joint Economic Committee concluded the combined impact of the taxes "is to throw more than 9,000 Americans out of work and to cost the Federal Government nearly $20 million in 1991."
To help revive the industry, some proposals make the repeal retroactive to its enactment. "Dealers have had to swallow the tax if they wanted to make a sale. The retroactive feature would give them some new capital," says Robert Healey, chairman of Viking Yacht Company, which makes boats costing $400,000 to $2 million. He claims the tax resulted in a sales slump of up to 55 percent for big boats, compared with 36 percent in the 1982 recession.
The tax also hurt sales of luxury automobiles, which had a 10 percent tax added to cars costing over $30,000. However, most of the pain was felt by luxury-car importers such as Mercedes. In the 1990-91 car year, Mercedes' sales fell 20,000 units. "About half the drop" was from the effect of the luxury tax, says Michael Bosserman, president of Mercedes Benz, North America.
Alarmed by the drop, foreign-car dealers collected a sizable war chest to influence Congress. According to Federal Election Commission records, in 1991 the Auto Dealers and Drivers for Free Trade Political Action Committee contributed $477,050 to congressmen. In addition, the Americans for Free International Trade PAC spent $171,650 and the NMMA PAC $70,500.
Among the sponsors of the repeal bills, Rep. E. Clay Shaw Jr. (R.) of Florida received $21,250 in 1991 and '92 PAC contributions, Rep. Wilbert J. "Billy" Tauzin (D) of Louisiana $5,000, Rep. David Bonior (D) of Missouri $3,900, Rep. Toby Roth (R) of Wisconsin $2,500, and Rep. Benjamin Cardin (D) of Maryland $2,000.
The luxury car industry partially rebounded from the tax last year, says Susan Jacobs, president of Jacobs Automotive, which follows the luxury car market. She notes that most manufacturers developed programs to either absorb the cost through rebates to the consumer or to lessen the impact with leasing programs.
If the luxury tax on autos is not repealed, a congressional aide foresees greater interest in indexing it for inflation since more US luxury cars are now getting into the $30,000 range.