Reference no: EM131497810

Question: Repeal of the Luxury Tax

In 1990 Congress, with the acquiescence of the Bush administration, enacted legislation imposing a 10 percent federal luxury tax on the sale of furs and jewelry costing more than $10,000, automobiles costing more than $30,000, boats costing more than $100,000, and aircraft costing more than $250,000 (except for aircraft used at least 80 percent for business). Effective in 1991, the tax was applied to the difference between the price and the tax base, so the tax on a $1,000,000 yacht was $90,000. The luxury tax was a component of the Deficit Reduction Act of 1990 and was viewed not as a significant source of additional revenue but as a symbol that the rich should bear a larger share of the tax burden. The tax yielded $251 million in 1991 and $146 million in the first half of 1992 with the vast majority coming from the sale of automobiles. As the economy slowed, sales of boats costing at least $100,000 began to decrease, falling from 16,000 in 1987 to 9,100 in 1990. In 1992 after the luxury tax was imposed, only 4,200 boats were sold. Sales of boats 35 feet or longer fell from 1,300 in 1989 to 400 in 1991, with sales revenue falling from $2.5 billion to $800 million. Employment in the industry decreased from 600,000 to 400,000 in 1993. Hatteras Yachts of New Bern, North Carolina, experienced a 50 percent decrease in sales and was forced to lay off 1,000 of its 1,800 employees. Viking Yacht of New Gretna, New Jersey, was forced to cut its workforce to 65 people. Yacht manufacturers from Minnesota, Wisconsin, Maine, Connecticut, and Florida experienced similar declines.

As one potential customer who decided to stick with his current yacht rather than purchase a new one said, "I don't care how much you spend for a boat, $190,000 in taxes is ludicrous."57 Some purchasers of yachts registered their boats in the Bahamas and the Cayman Islands to avoid the luxury and state sales taxes. The National Marine Manufacturers Association and its members blamed the collapse of the market on the luxury tax. The light aircraft industry was also hard hit, as were the other industries subject to the tax. Jaguar auto sales fell by 55 percent, and the company decided to rebate the luxury tax of over $3,000 to customers. The luxury tax had been enacted by inserting it in a large tax bill during conference committee deliberations, and opponents had little opportunity to oppose it. Once in place and its effects were realized, opposition mounted. "The purpose [of the tax] was to tax the rich and their toys," said Republican Senator John H. Chafee of Rhode Island, a big boat-building state. "What it really did was hurt the toymakers."58 Senator Robert Dole (R-KS) of Kansas, where light aircraft manufacturers were located, said, "A lot of middle-class people are losing their jobs."59 Opponents of the tax pressured Congress and the Bush administration, and Senator Dole introduced a bill to repeal the tax. The repeal bill was included in a more comprehensive bill, but Congress was unable to reach agreement on the package. Opponents saw another opportunity in the spring of 1993 as President Clinton pushed for a deficit reduction package that would include increases in personal and corporate income taxes in addition to an energy tax.

1. Use supply-and-demand analysis to identify the incidence of the luxury tax for producers and consumers. Summarize your analysis in a distributive politics spreadsheet.

2. Are the consumers or producers of luxury goods more likely to be politically active on this issue? Why?

3. Are the interests of U.S. automobile manufacturers aligned with those of yacht builders?

4. What is the nature of the politics of this issue?

5. Are the opponents of the luxury tax likely to be successful?