Calculating Luxury Taxes on Automobiles

By Christian Wardlaw

Ever since a group of angry colonists dumped crates full of tea into Boston Harbor back in 1773, Americans' emotions about taxes levied by the government have run high. Most of the time, however, our grumbling gets no response from Washington. Well, hold on to your Celestial Seasonings packets because just before the 225th anniversary of the Boston Tea Party, American citizens once again showed lawmakers how they really felt, and our government actually responded in a favorable and reasonable manner.

Granted, thousands of pounds of tea weren't dumped into any harbor (the EPA would be out for blood), but when Congress put a luxury tax on yachts, jewelry, furs and expensive cars back in 1990, consumers were outraged. It seemed like the Democrat-controlled House was playing Robin Hood -- taxing the rich for being...well, rich. But the wealthy boat buyers wouldn't put up with it and an impromptu boycott began. New England yacht sales dropped, then stagnated, workers were laid off, and the tax was quickly repealed on everything except automobiles. This turn of events upset both auto dealers and auto buyers alike.

Enough is Enough

Originally, a 10 percent luxury tax was added onto cars priced above $30,000. You could buy $30,000 worth of any car luxury-tax free, but if you bought a $40,000 car, you'd be charged an extra 10 percent on $10,000. Doesn't quite seem fair, does it? Especially when the average new car in those days was approaching the $20,000 mark. Well, consumers didn't think it was fair either. In response, sales of those luxury vehicles dropped significantly, and Congress took note.

In 1993, the luxury-taxable purchase price of a vehicle was raised to $32,000 and in 1996, it soared to $34,000. But accounting for inflation simply wasn't enough to appease consumers who resented what they deemed to be a "success penalty" in the first place. Although luxury-car buyers didn't go to the extremes that the yacht buyers did, they did fight back with their greatest weapon of all: purchasing power.

The continued dip in luxury-car sales, along with the support of organizations like the American International Automobile Dealers Association (AIADA), >who lobbied for the repeal of the tax, finally got some attention. In August of 1996, the "envy tax" as some call it, got pushed a little bit further out the door after President Clinton signed the Small Business Job Protection Act, sending the ill-favored luxury tax on a seven-year phase-out plan.

Phasing Out the Tax

After January 1, 1997, the luxury tax was applied only to cars costing more than $36,000 (except electric vehicles) and the tax rate was lowered from 10 to 8 percent. On the first day of each successive year, it was deemed, the rate would be lowered one percentage point until 2003, when the tax will be phased out completely. In 1999, the threshold price after which tax could be applied remained $36,000. For 2000, a 5 percent tax will be levied for that portion paid over $38,000.

Regulations and Loopholes

Dealerships collect the tax from consumers and report it to the government, so you don't need to be bothered with that part of the equation. What you do need to keep in mind is that if you add $1,000 or more in aftermarket parts to a car within six months of purchase, and the value of the vehicle and the new parts exceeds $38,000, you are liable for luxury tax (unless the parts convert the car to an electric or clean-fuel vehicle).

You can avoid luxury taxes by purchasing a truck, van or SUV with a gross vehicle weight rating of 6,000 pounds or more, which makes the Ford Excursion exempt (and, sadly, that much more attractive to full-size 'ute buyers).

Although the memory of this tax will leave a bad taste in everyone's mouth for a while, it is actually a success story reaffirming the beliefs on which America was founded. Just don't tell that to Jaguar dealers, who will likely suffer a huge drop in sales during 2002 as buyers wait for the tax to expire on January 1, 2003.

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