Revenues generated by the tax are distributed across various government programs that benefit the population at large, not just those individuals who can afford to make purchases that would trigger the tax. Supporters of the tax often argue that it also bolsters the U.S. auto industry because many high-priced cars are subject to this tax, and they’re imported from other countries.
Examples of a Luxury Tax
A luxury tax is a percentage that’s added to the purchase price of an applicable product. You don’t have to concern yourself with paying it unless you make that particular purchase. Congress enacted a 10% federal luxury tax in 1991. It was imposed on the first sales price of a number of items that sold for more than a specific amount, including:
Furs and jewelry that sold for $10,000 or moreVehicles that sold for $30,000 or moreBoats that cost more than $100,000Aircraft with price tags of more than $250,000
New Jersey imposes a one-time 0.4% surcharge on vehicles that cost more than $45,000 or those that have a fuel efficiency rating of less than 19 miles per gallon, as of 2022. Let’s say you purchase a luxury vehicle with a sticker price of $50,000 in this state. You’d pay 0.4% extra on that car simply because it cost more than $45,000. You would also have to pay any other state sales taxes and fees.
How Much Are Luxury Taxes?
The federal government’s 1990s luxury tax on expensive cars, furs, jewelry, and more was 10% until it was repealed. It then only applied to cars at a rate of 3%, until it was phased out entirely in 2003. Your state or municipality may impose a luxury tax, and state luxury taxes are not necessarily just imposed on vehicles. For example, you’ll pay a tax of 9.625% for an alcoholic beverage bought on the premises of a casino in Atlantic City, New Jersey because ordering a glass at a drinking, dining, or gaming establishment is considered a luxury. You’d pay only the state’s sales and use tax if you bought a bottle of wine at a liquor store instead.
Criticism of Luxury Taxes
Critics of the luxury tax argue that it has a damaging effect on the market for luxury goods, and that it can’t be relied upon to generate necessary revenues. The tax may depend too much on personal choice. Consumers can simply opt not to make purchases that would incur this type of tax. The federal government figured this out with the 1991 luxury tax that was set at 10%. The tax was imposed with the expectation that it would raise about $9 billion in revenues. In reality, it brought in negligible tax dollars and it was eliminated just a couple of years later. Consumers simply changed their buying habits in response to the tax. They bought slightly used yachts rather than brand new ones, and the yacht industry suffered significantly in the early 1990s as a result.
