How does a state find itself approving a tax exemption just for luxury yachts?
New York’s new budget bill includes an obscure provision, tucked inside section SS, exempting the portion of a boat’s price above $230,000 from the sales tax. That’s about four times as much as the median family in the state earns in a year. The tax break—let’s christen it the SS Giveaway—was quietly inserted into the bill, without public discussion or debate. Some tax cuts are progressive; some are regressive. This one seems almost oppressive.
“Your average Joe in New York who wants to go out and buy a small 16-foot bass fishing boat for his own personal use will actually pay sales tax,” fumed Ron Deutsch, of the progressive Fiscal Policy Institute. “But someone going out and buying a yacht isn’t going to be subject to the same tax.”
There are almost half a million boats already registered in New York. This tax break isn’t aimed at any of them. Instead, it targets the tiny sliver of sales each year in which the most expensive luxury yachts change hands. To dodge state and local sales taxes, their owners set up offshore shell companies, registering their boats in Caribbean islands. So the tax break is aimed at luring these wealthy individuals into registering their boats in New York.
In 2010, Florida capped the total sales tax paid on any boat at $18,000. That number was apparently calibrated to be slightly less than the initial cost of offshore registration. "It's not a tax break," one yacht salesman explained at the time. "It's a revenue generator. Nobody's getting a break here because they're not paying the tax at all.”
The industry claimed that the break brought jobs to the state, as owners stopped shuttling their boats back to the islands to preserve their tax exemptions, and instead kept them in Florida for repairs, renovations, and resupply. But Florida’s move had ripple effects. It made the state more attractive not only to those registering their boats offshore, but also to owners in other East Coast states, who could now seek safe harbor from taxation. Maryland put in place a $15,000 cap in 2013. And just a few weeks ago, New Jersey legislators proposed a $20,000 cap.
New York’s proposal, then, is an effort to keep up in this race to the bottom. “The justification for that is it creates jobs,” Senate Republican Leader Dean Skelos told reporters. “It makes New York State more competitive.”
That mirrors the logic of other tax breaks the state has embraced in recent years. And it enrages critics at both ends of the spectrum. “That's exactly the same argument used in giving away $420 million in credits to film and TV producers,” said E.J. McMahon, president of Empire Center, a group devoted to free-market principles. “These are very wealthy, powerful people they're giving this money to.”
New York is hardly alone. America’s state tax laws are riddled with carve-outs and loopholes aimed at attracting or retaining businesses, or promoting economic growth. Each individual measure may seem compelling to the legislators who support it, but in aggregate, they produce an impossibly convoluted and regressive tax code. The top one percent of Americans pays only half as much of its income in state and local taxes as the bottom twenty percent. And governments end up starved for the very revenues these tax cuts are often aimed at securing.
“Ironically, it’ll attract the most attention just because the word yacht inevitably does,” said McMahon. “As tax breaks for wealthy individuals go, this will be perhaps the smallest one around.” The yacht tax break, in short, is just a particularly glaring example of a much broader issue.
Perhaps the SS Giveaway will succeed in winning this race to the bottom. But if it does, New York legislators may find out that the bottom is not a comfortable place to be in a boat.