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Saturday, January 1, 1994

Shipwrecked In New Jersey

A Federal Luxury Tax Drowned the U.S. Yacht-Building Industry

Mr. Peterson is headmaster at The Pilgrim Academy in Egg Harbor, New Jersey.

I grew up in a town where yacht-making was the chief industry. Indeed, boat-building has been a South Jersey specialty for hundreds of years. The first ships were built with cedar from local cedar swamps, then dragged down nearby streams to be launched on the Mullica, Maurice, and Great Egg Harbor Rivers. By 1776, the Delaware Valley, including South Jersey, was the nation’s leading shipbuilding area, outstripping even New England. In the 1900s entrepreneurs like Charles Leek started making pleasure crafts and sport-fishing yachts for the wealthy. Within a 20-mile radius, four major boat companies emerged: Pacemaker (now Ocean Yachts), Post Marine, Viking Yachts, and Egg Harbor Yacht. Thirty miles distant was another major boat- builder, Silverton Yacht.

As children, we benefited from the yacht companies’ presence in many ways. Sure, many of our parents worked there, but more important to us was the discarded wood pile. We could go there and pick out pieces of teak, mahogany, and other expensive woods to build our tree houses, clubhouses, and go-carts. Even the five o’clock whistle served us, telling us it was time to end our play in the fields and go home for dinner. And of course we were all excited when one of our favorite comedians, Jerry Lewis, came to town to pick out his own yacht. I didn’t understand it at the time, but essentially what Lewis was doing was employing about 30 South Jersey blue-collar workers—paying their insurance bills, feeding their children, and paying their mortgages—for over a month. Lewis, in turn, had made his money by mass-marketing his acting skills, bringing laughter and relaxation to some of those same blue-collar workers who watched him on television at night.

As I grew older, I came to realize more and more the important role the boat-building industry played in our area. In the 1960s, the Pacemaker Yacht Company employed more people than the electric company. Thus, a product that only the rich could afford was fueling the better part of our local economy.

Many local people got their first work experience in a boat factory. Here they learned a trade without having to burden the taxpayer in a job-training program or publicly supported vocational school.

The boat companies also fulfilled a crucial role in training future entrepreneurs and businessmen. Not everyone wants to spend his life working for someone else; millions of Americans want to go out on their own and create their own businesses. But in order to do that, they need start-up money, marketable skills, and solid work experience. For years, the boat companies have provided those goods. The owner of Anchor Custom Upholstery, for example, learned his trade at a boat factory. P. J. Reinhard, a local carpenter’s shop, first made cabinets for yachts. They have since expanded into other mill work. Kauffman-Wimberg Insurance, a 40-year-old insurance firm, got its start when it obtained the insurance contract for one of the boat companies shortly after the insurance firm was started. Many local electricians, plumbers, and other skilled workers picked up their first tools and learned their trades at the boatyard. Today, they are independent businessmen in their own right—spin-offs from the yacht-making industry. Other businesses were either created or prospered as they served the needs of the people who worked on the boats. My father has an independent auto repair shop, and many of his customers over the years were boat-builders. Money in their pockets meant money in my father’ s pocket. And that meant money in my pocket, which I used to help pay for college.

Trickle-Down Philanthropy

Money from the wealthy who bought Egg Harbor-built yachts trickled down in many other ways. Jack Leek, who owns Ocean Yachts, has been a one-man charitable foundation. Sharing the profits made by selling his yachts all over the world, he has donated generously to his church, to Rutgers University, to the Atlantic City Medical Center (where he paid for the emergency room), to the community athletic association, and to Ducks Unlimited.

The physical plants themselves have provided the community with tools and capital equipment that have often been used to help local civic and charitable organizations. At churches and schools, podiums, benches, and other furniture were made by boat carpenters who had permission to stay after work and use some of the big equipment.

Thirty years ago, our church had to expand its main sanctuary. But how could we duplicate the large beams on the ceiling so that the new section would look the same as the original sanctuary? The only place in town that had the equipment to make such a beam was one of the boat factories. Fortunately, one of our church members, a master carpenter, got permission to use the equipment and the beams were replicated. Even the curtains in the private school where I teach were made by school mothers from discontinued bolts of cloth that were once used on some of the world’s finest yachts. When I teach my economics course, I’m continually reminded of the benefits of “trickle-down economics.”

In addition to sponsoring Little League teams, the presence of the boat factories made it easy to conduct fund drives for local charities as well as organize people for the Red Cross blood drive. Ocean Yachts and Egg Harbor Yacht, for example, would let their workers go home early if they agreed to give blood that afternoon. In the early 1980s, the Red Cross typically received 250 pints of blood at each drive. Last year, with the boat factories almost at a standstill, it collected only 60 pints of blood.

With so many benefits “trickling down” to middle-class and poor Americans, it’s hard to understand why Congress would seek to destroy the boat-making industry. Yet that’s exactly what it did in 1990 when, according to a Wall Street Journal report, “Congressional Democrats [were] eager to show they were being tough on the rich.” A ten percent tax was added to the cost of luxury yachts. Since a yacht today costs anywhere from $100,000 to $200,000, this means that at least $10,000 had to be paid to the government before a potential buyer could get his first whiff of salt air. With the economy already heading for trouble, this was the proverbial straw that broke the camel’s back. Ocean Yachts in Weekstown trimmed its workforce from 350 to 50. Egg Harbor Yachts entered Chapter Eleven bankruptcy, going from 200 employees to five. Viking Yachts dropped from 1,400 to 300 employees. According to a Congressional Joint Economic Committee Study, the boat industry nationwide lost 7,600 employees within one year. As Bob Healy, president of Viking Yachts explained on NBC News, “Every six or seven years, you have a down cycle. You might be off 20 percent, 30 percent, or 40 percent at maximum. Our industry is off 90 percent nationally.”

Despite all the talk about stimulating the economy, and the clear evidence that both the luxury taxes and higher taxes in general have pretty much destroyed the yacht-making industry, the tax did not generate any significant revenue, and has only cost taxpayers money by forcing workers onto the government dole. Congress originally estimated that the luxury tax on boats, aircraft, and jewelry would raise $5 million in taxes a year. Instead, the Treasury has lost $24 million through lost income-tax revenues and higher unemployment and welfare payments.

It’s important to realize that yacht-making has been—and could be once again—one of America’s premier industries. It’s something that we Americans do well. South Jersey, crisscrossed by rivers and surrounded by water on three sides, has a comparative advantage in yacht-building. Not only do South Jerseyans have a long heritage of boat-building, but the South Jersey launching docks are close to such major population centers as Philadelphia and New York City. A prospective buyer can leave New York in the morning, take a test drive on the Atlantic Ocean at noon, and be back in New York for dinner that night. Many yachts are exported overseas, as both wealthy Japanese and Europeans acknowledge the skill of our South Jersey craftsmen. This is not an obsolete buggy-whip making industry that needs government subsidies to exist, but a high-tech industry that should be able to thrive as long as men go down to the sea in ships. (The technology involved in making fiber-glass yachts with state-of-the-art navigational equipment and creature comforts destroys the notion that there are certain key high-tech firms that should be targeted for government help. Today, high-tech is involved in everything from making better potato chips to making a safer yacht.)

It should also be noted that jobs traditionally created by South Jersey’s boat-making entrepreneurs are exactly the kinds of jobs that today’s government officials would like to create, but can’t. A teenager with no college education can go to a boat company and get a job that provides full benefits as well as on-the-job training. He’s also in an industry that promises employment well into the future and has and can adapt to changing technology. As a “light industry,” yacht-making represents little threat to the environment; in fact, the invention of the fiber-glass hull years ago makes using tropical woods like mahogany no longer necessary or cost-effective. Finally, it’s an industry that could expand and hire more workers if more people could afford to buy yachts—which is indeed what would happen if we became a low-tax, high-growth society. Just before the luxury tax was passed, Ocean Yachts had opened up a research and development division to build smaller yachts. The idea was to make it possible for more upwardly mobile companies and individuals to afford an Ocean Yacht; once hooked, they would eventually trade up to Ocean’s larger yacht. Today, thanks to high taxes, that research and development building stands idle.

It’s been over three years since the luxury tax was passed, and the boat industry is still reeling from excessive taxation and government-induced recession—a casualty of the socialist rhetoric that “trickle-down economics doesn’t works.”

The 1993 budget finally repealed the luxury tax, but it was the result of a political deal rather than an acknowledgment of what really makes the economy work. At the same time Congressmen and Senators were voting to repeal the luxury tax, they were voting in new taxes against the rich. Since the repeal of the luxury tax was a political deal rather than an economic one, look for continued attacks against America’s most productive citizens.

The story of the destruction of South Jersey’s yacht-making industry poignantly illustrates what happens when policy-makers try to apply the socialism they learned in college to real world situations. Not just the yacht-making industry—but all American industry—would benefit from lower taxes and less government intervention. Until then, boat-builders and other workers will continue to be shipwrecked here in America.

  • Mr. Peterson is headmaster of The Pilgrim Academy in Egg Harbor City, New Jersey. His articles have appeared in a variety of publications, including National Review and Human Events.