It can be hard to turn down people who have money when they come asking for more from the government. If elected officials refuse to grant them the tax credits and subsidies they ask for, they can just take their valuable business elsewhere -- a dilemma confronting lawmakers up-and-down the Atlantic Coast as they compete for a share of the yacht market.
Earlier this year, New York state offered to limit the sales tax to $20,000 for any new vessel -- meaning that someone who paid $2 million for a yacht would save more than $150,000 in taxes. Supporters of the legislation argued that the tax break was necessary to protect yacht dealers in New York, since their wealthy clients were buying boats in Florida instead, where sales taxes on yachts were limited to $18,000 in 2010. "Right now they buy the boats, and pay the tax, in Florida, and then bring them up here," Jeff Strong of Strong's Marine on Long Island told The New York Times.
Now, Florida is looking to maintain its advantage. Last week, lawmakers passed a sales tax exclusion on boat repairs as part of a larger tax bill. No owner will pay more than $60,000 in sales tax on a repair, meaning owners will get a break if they spend more than $1 million fixing up their yachts. Other coastal states are moving forward or already have yacht tax breaks as well, and they're competing with Caribbean nations, too.
It turns out that yachts are just another asset that the rich can move from place to place to avoid taxes. These sales tax breaks substantially benefit only relatively few buyers, those able to spend several hundred thousand dollars on a boat and whose sales taxes, and the companies that sell to them. Just 1,632 inboard cruisers were sold for more than $277,000 in 2013, the level that's enough for the tax breaks to make a real difference, according to data from the National Marine Manufacturers Association in Chicago.
Proponents of the tax breaks argue they also benefit workers building the ships. That's the argument in New Jersey, where a state Senate committee recently voted to limit the sales tax on new yachts to $20,000, following in New York's wake. "It's not a bill to help the rich. It's actually a bill to help the blue-collar worker," Jim Donofrio of the Recreational Fishing Alliance in New Gretna, N.J. told the Press of Atlantic City.
Yet in what is becoming a race to the bottom among the states, it's from from certain that workers or taxpayers benefit. If they all have tax breaks of similar sizes, no state would be any more attractive to buyers than the others. Customers may go on making the same decisions about where they buy their yachts as they did before. And the states will have less money for schools, roads, police and other public services.
It's true that lower taxes might bring new customers into the market, which would be great for the yacht industry. Yet every dollar spent on new boats is a dollar that a rich customer isn't spending on something else. Favoritism for yacht manufacturers and dealers helps them only at the expense of all the other businesses that make up the diverse economy of a large state such as New York or Florida.
"The only winners will be the yacht owners," said Matt Gardner, the executive director of the left-leaning Institute on Taxation and Economic Policy, which studies state fiscal policy.
The National Marine Manufacturers Association notes that sales taxes collected on boats increased in Florida after the law was passed. That's true, but the statistic doesn't necessarily lend much support for the argument that reducing sales tax leads to more sales. The past few years have seen boat sales in general recover steadily from the recession, which had caused a 39 percent decline in sales between 2007 and 2010 in Florida.
Gardner said he doubted that wealthy buyers would be so concerned about the sales tax that they would buy enough additional boats in Florida to make up for the money the state forfeited by limiting the tax.
"It's just a deluded approach to tax policy to say that you have to exempt these transactions or else they will move elsewhere," he said.
Florida offers an interesting case study, with its new plan to offer a tax break on boat repairs. Owners who just want to make a seaworthy vessel fancier could conceivably be swayed to get the retrofit done in Florida. But if you're a wealthy New Yorker with a leaky yacht, you can't exactly sail it from the Hamptons to Miami to take advantage of the state's new law.
These exclusions are a relatively small public expense for state governments, compared to all of the money they forfeit in exemptions from the sales tax for other favored industries or in credits for developers. Nevada, for example, gave up $1.3 billion in taxes last year to convince Tesla to locate a new plant outside Reno instead of in a neighboring state.
The only solution for states aiming to protect their tax revenues would be to reach some kind of pact with one another not to hand out subsidies -- but it is unclear who would enforce such an agreement, and how giveaways would be distinguished from subsidies that could legitimately improve a state's economy and not merely at the expense of its neighbors.