Saturday, November 21, 2009

A Cornucopia of Consequences

Harry Reid’s Senate health care bill includes what is being called the “Botox tax”, a five percent excise tax on the cost of elective cosmetic surgery. That reminded me of a piece of federal excise tax history that should be known (but isn’t) to every Washington reporter and taught in every high school civics class (if we were ever again to teach high school civics) as an abject lesson in the all too common unintended consequences of legislation.

President George H.W. Bush broke his "read-my-lips" pledge to not allow any new taxes (and in doing so probably lost any chance of reelection) when he signed the Budget Reconciliation Act of 1990. Among other new taxes the bill contained a bit of demagogic class warfare embodied in an excise tax on boats costing in excess of $100,000 and other “luxury” items like jewelry and upscale cars. This was heralded far and wide by liberals with full court media support as a means of making the rich pay their “fair share” to reduce the deficit! To provide proper perspective some television news broadcasts would show footage of Donald Trump’s yacht, the Trump Princess while discussing the proposed tax. At 282’ the boat was almost the length of a WWII Evarts Class Destroyer Escort. Any politician opposing that tax risked being demonized as protecting the extravagant lifestyle of the rich against the interests of the common folk.

There were a few sensible but unheeded voices that tried to warn that the torch and pitchfork bearing mob being led up the hill to attack the castle may end up slaying other than the monster. Among the few was the late William F. Buckley. Buckley pointed out the crux of the problem in that it was reasonable to assume that people who were rich did not became or stay rich by paying for something considerably more than its actual value!

In 1990 a Congressional Committee on Taxation projected that the “luxury taxes” would bring in $31 million deficit reducing dollars. The actual result was very different. Revenues in 1991 were only $16.6 million, because sales of such taxable products plummeted. With the boats, people either didn’t buy them or bought them overseas where the tax didn’t apply. Yet that was only the beginning of the unintended consequences:

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

The excise tax caused people to change their behavior and buy fewer of the taxed products. Over the next few years it got even worse. The NY Times reported:

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.’

A trade magazine reported:

According to a survey of the largest boat dealers in Connecticut, conducted by the Marine Retailers Association of America (MRAA), sales of boats costing $100,000 or more have fallen 93 percent… Nationwide, more than 19,000 people have been put out of work at boat making plants.

By 1993 Congressman John Kasich had this to say:

The 1990 budget deal also slapped a hefty luxury tax on boats… to draw more money from wealthy yacht owners. What actually happened? People bought fewer boats. So who really paid the price? The many nonwealthy boat builders who were put out of work by the tax… The [Washington] Post article reported estimates that 25,000 to 30,000 jobs were lost. These effects were so obvious that even the tax raisers in Congress now plan to repeal the yacht tax.

Republican Senator Slade Gorton in 1993 said with biting irony:

What went wrong with the luxury tax was that, in trying to go after the rich guys' toys, Congress put the toymakers out of business.

The Congressional Research Service reported in classic bureaucratic understatement:

The luxury excise taxes enacted in 1990 were all based on sales prices exceeding statutory amounts, suggesting congressional desire to shift some or part of the overall tax increase to upper-income individuals. Opponents argued, however, that the taxes depressed sales and employment in the affected industries and this actually burdened lower-income workers. Congress accepted this argument in 1993, repealing all the taxes except that on automobiles in the Omnibus Budget Reconciliation Act of 1993.

A tax that was intended to raise revenue and soak the rich ended up costing the federal government millions in lost revenue and unemployment payments while devastating thousands of middle class families and hundreds of small businesses. The excise tax on boats was eventually repealed in 1993 (with far less media fanfare than its passage).

Now we may have an excise tax on elective cosmetic surgery, as Politico reports:

The bill levies a 5 percent tax on elective cosmetic surgery. The provision raises $5 billion and was needed to make the numbers work, according to a Democratic Senate aide.

Yes, the $5 billion was needed to make the numbers add up in the Senate health care bill. However, the “global medical tourism” sector has already been growing rapidly for procedures like elective cosmetic surgery. Should anyone be surprised if this excise tax results not only in a revenue shortfall from projections but also in more such surgery being done in places like Costa Rica with commensurate job and income losses in the U.S.?

Having said all of this, while focus on the excise taxes is worthwhile in itself, it can obscure the looming larger danger. Here is the text of the Budget Reconciliation Act of 1990 relating to the tax on boats:

SEC. 4002. BOATS.
`(a) IMPOSITION OF TAX- There is hereby imposed on the 1st retail sale of any boat a tax equal to 10 percent of the price for which so sold to the extent such price exceeds $100,000.
`(b) EXCEPTIONS- The tax imposed by this section shall not apply to the sale of any boat for use by the purchaser exclusively in the active conduct of--
`(1) a trade or business of commercial fishing or transporting persons or property for compensation or hire, or
`(2) any other trade or business unless the boat is to be used predominantly in any activity which is of a type generally considered to constitute entertainment, amusement, or recreation.

That is it, in total. Those relatively few lines, a fraction of a page, caused terrible even if unintended harm to many thousands! The health care bill passed by the House is over 1900 pages. The proposed Senate bill is over 2000. If that passes, the two bills are brought together to breed a kind of mutant offspring in reconciliation. It is hard to imagine that the result of that will be a smaller piece of legislation.

These bills have been rushed, and not widely read or understood even by those who will vote on them. They have been cobbled together by Congressional staff members and lawyers with little or no experience in health care. It is one thing and terrible enough to have thousands of blue collar workers in the ship building industry lose their livelihoods to satisfy other people’s envy made manifest in ill-thought legislation. It is quite another order of magnitude to have thousands of pages of legislation passed that could potentially effect the health, medical care and well being of every American with all manner of unintended consequences lurking in those pages!

NPR’s Mara Liasson accurately summed up the Democrats’ position this way:

… the message that the White House and President Clinton is sending to doubting Democrats is: Swallow hard, vote for this even if it's not perfect. We can fix it later, because this is our chance and probably our one chance in this presidency to get this thing we have wanted for so long.

It took the Congress three years to “fix” the excise tax on boats by repealing it, even in the face of the devastation to thousands of blue collar workers and a decline in tax revenue. Of course, the problem need never have happened in the first place if Congress had thought through their proposed legislation. What damage will have to be done to the health and medical well being of how many American citizens before Congress might “fix” the things they get wrong now, the unintended consequences in those thousands of unread pages they are rushing to pass?


Longwalker said...

A good article on one of the "uns" of legislative action. The unforseen consequences, the unintended consequences and the unexpected consequences. Denis, this has been one of my favorite "talking points' in discussing the effects of tax policy. Another one that most people never heard about was the effects of cutting excise taxes in the last part of the 19th Cntury and the first part of the 20th. The Federal government was "awash" in unneeded revenues from foreign imports. So Congress cut the excise tax. What happened? The foreign companies shipped more goods to the rapidly growing market in the United States. The monies collected on the lower excise taxes was greater than that collected by the prior high excise tax rates. Unforseen, unintended and unexpected by most legislators.

Anonymous said...

It is certainly interesting for me to read the article. Thank author for it. I like such topics and everything connected to them. I definitely want to read a bit more soon.

Denis Keohane said...


Veritably a Laffer curve in that....greater revenue stream from a lower tax rate. Before he was elected Obama was asked about the history of decreases in the capital gains rates resulting in increased revenues and he agreed. He just didn't think it was "fair'!

Denis Keohane said...

Thanks anonymous.

Once upon a time I used to post here rather regularly. Not so much of late but I'm trying.

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