Luxury loophole disputed

When Republicans killed a recent effort to close a loophole on luxury boats, recreational vehicles and planes, they argued that a tax change would chase away working-class jobs.

"The immigrant who sprays fiberglass on a boat will lose his job. The small-business owner who installs avionics on an airplane will lose his business," state Sen. Dennis Hollingsworth of Temecula told GOP members during a Feb. 15 floor debate. "Those are the people who are going to be affected by this. It's not the rich."

Yet when the state's nonpartisan fiscal analyst looked at the proposal, she came to a different conclusion. Legislative Analyst Elizabeth Hill supported closing the loophole because she found it could generate $21 million a year for the state without causing serious harm to the economy.

"I haven't been able to conclude which argument makes the most sense," said Assemblyman Roger Niello, R-Fair Oaks, who abstained from the vote.

Republicans are so opposed to taxes in principle that both sides are bracing for rough waters ahead as Gov. Arnold Schwarzenegger and the Legislature try to steer the state through the remaining $8 billion state shortfall projected for the fiscal year starting July 1. Though Democrats hold a majority, budget changes require GOP support to pass on a two-thirds vote.

Schwarzenegger and Democratic lawmakers support a tax change that would make it more difficult for wealthy Californians to dodge the state sales and use tax, which is 7.75 percent in Sacramento County.

The proposal calls for boosting from 90 days to one year the time a large private vehicle, vessel or aircraft would have to be kept out of state in order for residents to claim a tax exemption. The 12-month requirement had expired June 30, and the governor proposed making the tax change permanent.

Schwarzenegger has argued that owners of luxury items shouldn't be able to avoid sales tax when ordinary Californians must pay taxes on everything from clothing to furniture. The money, he said, could be spent on education.

"The governor has said the yacht tax is an unfair, special treatment of a very limited, small group of people for reasons that aren't clear why we're doing it," said his finance director, Michael Genest.

The analyst's report found in 2006 that sales of luxury items continued to rise under the 12-month requirement even though fewer residents qualified for the exemption.

According to the Board of Equalization, exemption filings dropped 80 percent, and the state brought in more money – another $33.7 million a year.

Senate Republican leader Dick Ackerman, a boating aficionado whose nickname is "Commodore," challenged the legislative analyst's conclusion. He said the report did not account for lost jobs and sales in related industries, such as marinas, boatyards and suppliers.

When Congress imposed a 10 percent federal luxury tax on yachts back in the 1990s, Ackerman said, "they drove yacht manufacturers completely out of the United States, losing hundreds of thousands of jobs."

A congressional study concluded yacht sales were actually greater than expected, according to the legislative analyst's report.

The analyst's report found that a longer exemption period had little impact on manufacturers and sellers because their products sell nationwide.

Tim DeMartini, owner of DeMartini RV in Grass Valley, said the length of the exemption doesn't affect his business because two-thirds of his orders come from outside California. The average 40-foot big diesel, he said, sells for $150,000.

"It won't make that much difference to us," DeMartini said, adding that the impact might be greater for the buyer.

Despite the analyst's findings, Republican lawmakers have argued against any change that would require residents to pay more in taxes.

"Any tax … has a negative impact on the economy," Niello said on the floor.

He and a dozen Republicans abstained from voting, in part, due to conflicting evidence on the economic impact. The bill, which cleared the Senate, failed in the Assembly twice – once on Feb. 15 and again on Feb. 19.

Tax-savvy residents who use the exemption say they are simply following the law.

Chuck Lenert, 57, of Sacramento saved nearly $30,000 in taxes when he bought a used 58-foot Kha Shing motorboat near Victoria, Canada, three years ago. It came with a docking slip in Canada, he said, so it was cheaper to leave it there and pay an attorney $2,500 to ensure his tax status was in order with the state.

"I was just following the rules of the state of California, so why should I pay sales tax?" Lenert said. "I wasn't trying to do anything but follow the law."

For a year, Lenert, who sells hardware for a living, would travel every few weeks with his family and friends and take the $376,000 vessel, named Knots and Bolts, around the waters off Vancouver Island to catch crabs, salmon, oysters and shrimp. After a year, he moved the boat to Washington state.

"I would say that the 90-day guys are more cheaters," said Lenert, who has since brought the boat down to Sacramento. "I had a bona fide use."

One law enforcement official suggested the 90-day exemption period could make it harder for prosecutors to document cases against tax evaders.

Robert Morgester, who chases tax cheats for the state attorney general's office, said that under the one-year requirement, law enforcement officers had more time to show violations, such as when a resident brought an RV back to the state early.

He said the current law could have the counter effect of encouraging residents to buy big-ticket items out of state because they only have to wait 90 days to avoid paying thousands of dollars in taxes. Tax collectors estimate the state is already losing millions in sales tax and registration fees.

"By reducing the amount of time the vehicle has to be out of California," Morgester said, "it makes it easier to justify their bad behavior."

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• Call Judy Lin, Bee Capitol Bureau, (916) 321-1115.