Monday, March 28, 2016

Maryland doubles down to permanently cap Vessel Excise Tax.

The Gambler’s Fallacy is the mistaken belief that if a coin-flip comes up “heads” ten times in a row, then it is more likely to come up “tails” on the eleventh flip.  It is a trap that ignores how probability operates. Our legislature is falling victim to a similar fallacy this session, as it works to make permanent the $15,000 cap on Maryland’s Vessel Excise Tax ("VET"). As of this writing, the bill has passed all hurdles in the legislature and is well on its way to becoming law by June.
The cap operates as a subsidy on vessel purchases over $300,000. The cap has no direct impact on the majority of Maryland boaters who buy and sell, as our boats are much less expensive. It will directly benefit a slim number of wealthy boaters.  This issue has been hotly debated among many sectors of the State’s marine industry since 2005. Supporters argue the cap will promote increased spending by the wealthiest boaters, and thus benefit the entire industry. Detractors say the cap will simply deplete income needed to support the Waterway Improvement Fund (“WIF”) and that the cap is a poor bet on an uncertain economic return.
Excise taxes are as old as our Country. Ten years after the British surrender at Yorktown, and only two years after the United States Constitution was adopted, the Congress passed the Distilled Spirits Tax of 1791, an excise tax on whiskey. The federal government had assumed war debt of the thirteen states and sought to offset the burden by taxing grain and spirits. The tax was unpopular, as whiskey was often used for direct trading, like currency. Larger distillers could easily pass the tax to consumers, but smaller distillers and frontier grain producers were directly burdened by the cash payment that could be as much as thirteen cents per gallon. Over three years simmering revolt roiled the frontier, particularly in southwestern Pennsylvania where tax collectors were attacked. President Washington dispatched a militia of close to 13,000 men, including many Marylanders, to preserve order and enforce the tax.
Maryland has collected a vehicle excise tax since 1933, largely without incident. Since 1966, the WIF has been the recipient of the 5% VET collected on the value of watercraft purchased or used in Maryland waters, and a smaller tax on all motor fuels. Through the WIF, our government improves and maintains the infrastructure necessary for safe public boating. The necessity and benefit of the WIF is not disputed by either side of the cap debate. Today, the WIF is funded solely by the VET. A cap on the tax is described as either revenue neutral, or a downright revenue drain. Only one side can be correct.
In 2011, excise taxes generated $15.4 Million for the WIF. In 2012, this declined to $14.2 Million. By 2013, the State Legislature adopted a temporary cap on the VET, with the bald hope of increased registration of high valued boats. In August 2015, the University of Maryland Environmental Finance Center issued an analysis of the cap, with only one concrete conclusion- the cap resulted in $588,000 of lost revenue over 2013 and 2014.
The analysis is coupled with several “may have” conclusions, which amount to little more than wishful thinking:
  • The cap “may have” lead to increased registration of vessels worth $350,000 to $399,999, although “the net impact on VET revenue is estimated to be negative.”
  • The increase in registration of vessels worth $400,000 or more “is likely due” to the cap, but “was not enough to offset the loss in VET revenue.” The increase is attributed to 60 additional registrations in this category.
The cap is justified largely for its claimed trickle down economic effect- it “may have” generated $1 Million in direct spending in the overall economy (citing a survey of “high valued” boat owners who averaged 25 trips per season), with a multiplier effect of $2.5 Million over two years. Instead of reading the data as a general negation of the benefits attributed to the cap, our Legislature has simply doubled down on the initial bet, making the cap permanent on the assurance that good things “may have” resulted from the temporary cap, and they may happen in the future.
With annual VET receipts between $14 Million and $15 Million, it is indisputable that the bulk of WIF revenue is derived from the purchase and registration activities involving vessels well below the $300,000 cap threshold. The cap can only be reasonably construed as a tax break for the wealthiest of boaters who already bear the least economic responsibility for maintaining our waterways. Meanwhile, the loss of revenue intended for the protection of public boating facilities and infrastructure will continue to decline, and the majority of State boaters will suffer.
On your next visit to play the slots, kindly nudge the legislator on the stool next to you. Suggest that it is time for him to go home-he’s playing with your money in a game where the odds remain unreasonably long.