No boating bailout

Our view: Proposal to cap vessel excise tax for yachts might boost sales, but it would also undermine Maryland's $2 billion boating economy

March 04, 2013

Maryland's boating industry suffered badly in the economic downturn and has yet to fully recover, so it's no surprise that many in the boat business are once again looking for help from Annapolis. Unfortunately, the latest proposal — to cap the vessel excise tax at $10,000 — could do more harm than good.

That's not just some knock against millionaires and their yachts — although they would be the primary beneficiaries of such a tax policy. Since the excise tax is set at 5 percent, that means only boats worth more than $200,000 would be affected.

But that's also a customer base worth retaining. While such boats represent less than 2 percent of annual sales, they account for nearly one-third of excise tax revenue. When those vessels are kept in Maryland marinas, they likely generate a lot more revenue in repairs, service, refueling and other charges.

Considering that boating is estimated to generate about $2 billion in economic activity and accounts for about 35,000 Maryland jobs, why not offer some incentive to buy or keep a boat here? Some even believe that additional boat sales could offset the $3 million in annual revenue that the cap would cost the state.

It won't, and that's not just speculation. That's not just speculation. A study released last week by the University of Maryland's Environmental Finance Center commissioned by the Maryland Department of Natural Resources concludes that the tax cap "will not stimulate enough additional sales to recover lost revenue from decreased tax rates on individual boats sales and registrations."

Any loss in boat excise tax revenue could do serious harm to boating in Maryland. That's because excise tax revenue is how the state finances its Waterway Improvement Fund, which pays to dredge navigation channels and maintain hundreds of boating facilities as well as buoys and piers.

The University of Maryland study found that Waterway Improvement Fund projects are vital for maintaining Maryland's boat economy. "Adequate infrastructure," the authors note, "appears to be an important factor in recreational boaters' location decisions regardless of vessel size."

How bad are the WIF's finances? In the last fiscal year, the fund took in about $13.4 million, yet DNR estimates that Maryland had more than $40 million in needs during the same year — an imbalance that has worsened, in part, because of cutbacks in dredging operations by the U.S. Army Corps of Engineers.

Clearly, the state can't keep running that kind of deficit and expect the boating industry to thrive. As channels silt over and boating facilities fall into disrepair, the consequences are going to be dramatic. Not today or next year, necessarily, but eventually the failure to maintain channels and on-shore facilities is going to have a real impact on the Maryland boating community and its 190,000 registered vessels.

What's needed is a more balanced approach that, if one can pardon the expression, lifts all boats. Promoting the interests of boat makers, dealers and marinas is worthwhile but not at the expense of boating infrastructure. The DNR has pledged to research the issue this summer and propose an alternative (beyond lowering taxes for a few hundred boaters).

Still, it doesn't take a genius to plot this particular course: What Maryland needs is to reduce its dependency on the excise tax generally. One place to start is to raise licensing and registration fees, many of which haven't been adjusted since the 1960s. Many small boats face no registration fee whatsoever.

Applying the state's 6 percent sales tax to boating repair or maintenance labor and directing the revenue to the Waterway Improvement Fund may also be an acceptable alternative — although likely a controversial one. The point is to find the means for boaters to pay for themselves much as Maryland's drivers finance road improvements through the Transportation Trust Fund.

It would be nice to think we lived in a world where reducing taxes could solve every problem, but as the University of Maryland's researchers point out, it doesn't work that way in this instance. Capping the tax might help some businesses in the short-run, but it fails to make the industry self-sustaining, which should be the primary goal of any change in tax policy.

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