Tax Policy and Administration

Beginning in 1991, a new excise tax was imposed on the sale of certain luxury items, including boats, cars, aircraft, jewelry, and furs. Diverse factors have influenced both supply and demand for these five luxury products, and GAO could not untangle the effect of the variables. For instance, the recession probably harmed sales of all five items. Car sales, in particular, were probably affected by an increase in the gas guzzler tax, while plane sales fell during the 1980s as a result of product liability costs. This report examines in detail the effect of the tax on all five luxury product markets and provides information on anticipated tax revenues, the Internal Revenue Service's actual collections, and the costs and issues associated with administering the tax. GAO also discusses other products that have been taxed in the past as luxury items in the United States and abroad.

GAO found that: (1) it did not find any data on any of the five products affected by the tax, with the exception of cars, that were adequate to use in reliably estimating the effect the luxury tax may have had on sales of the taxed products; (2) attempts to measure the impact of the tax by comparing sales before and after the tax was imposed must control for such other factors as the 1990-1991 recession, which likely decreased sales of all five products; (3) it was very likely that the tax alone was not responsible for the sales decline in 1991, since luxury car sales were affected by an increase in the gas guzzler tax, and airplane sales decreased due to product liability costs; (4) the products Congress selected as luxuries and the threshold levels that it established reflected subjective decisions about which products were luxuries; (5) IRS collected about $168 million in luxury excise taxes during fiscal year (FY) 1991, 90 percent of which was from luxury car sales; (6) initial IRS information indicates that taxpayers are informed about the luxury excise tax and are complying with it; (7) IRS does not have an estimate of the cost to taxpayers to comply with the luxury excise tax; and (8) ensuring compliance with the proposed luxury excise tax regulations could vary, depending on factors such as the number of firms and transactions involved and the level of complexity in applying the rules.