Taxes: Tempest in a Yacht

By Bernard Baumohl

The levy has been labeled the Robin Hood tax by one economist because it helps transfer money from the rich to the poor. Not everyone sees it that way, however. A rare chorus of blue-chip retailers and blue-collar workers denounces it as a disaster tax. At issue is the six-month-old "luxury tax" that Congress adopted last year as part of a comprehensive deficit-reduction plan. The new 10% excise tax was tacked onto such goods as pleasure boats, private airplanes, jewelry and fur. While the tax bite is not particularly severe -- a minuscule $25 million is expected to be raised in fiscal 1991 -- the levy has outraged businessmen and workers who produce and sell these items.

The boating industry claims to have been especially hard hit. Dealers point to the new tax as the main reason that sales have tumbled 88%, to $8 million, in South Florida during the first quarter. The recession no doubt contributed to the slowdown, but boat sellers complain that shoppers have escaped the tax by buying yachts in the Bahamas. "It's a question now of how long we can hold out until the tax gets repealed," says Werner Kuhnke, a Miami-based Bertram Yacht dealer. Another consequence of the tax, contends the National Marine Manufacturers Association, has been the layoffs of thousands of skilled boatbuilders. "In a nutshell, this tax has been devastating," says Carl Herndon, president of Blackfin Yacht in Fort Lauderdale. "The rich are still rich. But the people who are on the unemployment rolls are blue-collar workers."

Since the tax threshold on cars is $30,000, most of the affected models are foreign, but U.S. dealers are complaining all the same. "It's killed us," laments Norman Scott, a Mercedes-Benz dealer in Houston. "Those guys in Washington are crazy." Consumers seeking to avoid the levy are switching to cars whose prices fall just below $30,000. Mercedes and Lexus sales have plummeted 27% and 10%, respectively, in the first quarter, but Acura dealers report no major dent in sales.

Some economists argue that the luxury tax acts as a drag on consumer spending just as the economy is struggling to get out of recession. Moreover, the tax may be grossly inefficient. The Congressional Budget Office estimates the tax will generate $1.5 billion in revenues over five years. But Peter Scott, a former Internal Revenue Service official who now works for the accounting firm Coopers & Lybrand, contends the tax will cost about twice that much just to enforce.

Four resolutions have been introduced in Congress seeking to repeal or change the luxury tax, and the Bush Administration said last weekend that it wouldn't object to getting rid of the levy. But Washington insiders say the odds of killing the tax are still very low, since it was part of a delicately balanced package. If the tax is eliminated, it could unravel a budget compromise that took months to hammer out. Says a staff member on the House Ways and Means Committee: "Once you allow the process to start, you just don't know where it is going to stop."

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With reporting by S.C. Gwynne/Washington and Laura Myers/Miami