In the wake of the recent congressional debt-reduction deal, there has been a lot of talk about a luxury tax as a means of generating additional revenue. But with the yachting industry based primarily out of South Florida, a luxury tax would be detrimental to Florida's already ailing economy.
Proponents of a luxury tax argue that if taxes must be increased, it should be in the form of a luxury tax because a luxury tax would target the wealthy (who, according to them, should pay more taxes than less wealthy Americans who receive the same government services). Proponents further tout the "fairness" of a luxury tax, contending that taxpayers can avoid a luxury tax by abstaining from the purchase and consumption of luxury items, such as yachts, jets, and expensive automobiles.
But "fairness" was the cornerstone of the luxury tax enacted in 1991 under the Bush Administration. Proponents of that tax contended that the 10% tax on luxury items was a proficient means of raising revenue insofar as wealthy Americans who purchase luxury items would bear the tax without financially affecting lower- and middle-class Americans.
But while the Bush Administration might have had noble intentions, the practical effect of the luxury tax of the early 1990s was to destroy jobs, spike unemployment, and dismantle the previously well-established American shipbuilding industry.
Indeed, Viking Yachts, which was the largest American shipbuilder at that time, was forced to fire more than 81% of its workforce and discontinue production operations at one of its two U.S. manufacturing facilities within eight months of the luxury tax taking effect. In addition, more than 33% of American-based yacht building companies abated production altogether during the first year of Bush's luxury tax regime.
As a result, the U.S., which was once a major yacht exporter, became a net importer of yachts. The American shipbuilding industry never fully recovered, and the U.S. continues to import yachts rather than manufacture them domestically.
To be sure, some high-quality yachts continue to be manufactured domestically -Trinity Yachts are manufactured in Mississippi and New Orleans, Westport Yachts are manufactured in Washington State, and Derektor Yachts are manufactured in Connecticut, Florida, and New York. But the reality is that American shipbuilders cannot effectively compete because lower costs of labor, land, and materials in foreign nations allow foreign shipbuilders to offer enhanced levels of quality at lower prices.
For example, last February, my husband, who works as a yacht broker, helped host the American debut of the NISI yacht, which is manufactured in China. NISI yachts are completely customized to owner specifications using high-quality materials from around the world. Moreover, their yachts are RINA-compliant, which is an international charter classification signifying one of the highest levels of safety and quality. What is more, NISI is able to offer this exceptional level of quality at a fraction of the cost.
American shipbuilders, then, are at a competitive disadvantage, and American consumers have strong economic incentives to choose foreign-built vessels over domestically-produced vessels as it is. A luxury tax would only further obscure the ability of American shipbuilders to competitively design and produce yachts.
In addition to further disadvantaging the American shipbuilding industry, a luxury tax would seriously impede the American market for pre-owned yachts. Indeed, although the 1990s luxury tax did not apply to pre-owned vessels, any modern luxury tax would almost certainly extend to pre-owned ships. In this regard, the tax would have a devastating impact on the yacht brokerage industry, which is largely based out of South Florida.
Finally, because a luxury tax on yachts could (and would) be circumvented rather than paid, this type of tax is not really capable of generating revenue. To the contrary, a luxury tax would likely cost the fisc millions of dollars in unemployment expenses and lost income tax revenue. And with Fort Lauderdale being the yachting capital of the world, these unintended consequences would be felt primarily in South Florida.