HMT challenged by ports that want it either killed or tapped for other uses.
By Chris Dupin
Support in Congress for better maintenance of U.S. harbors has been steadily gaining strength in recent years, but a countercurrent of opposition to the Harbor Maintenance Tax (HMT) and designs on alternate uses for the money it collects is also quickening.
With many East and Gulf coast ports seeking to deepen their harbors to accommodate larger ships, Congress late last year ordered the Army Corps of Engineers’ Institute for Water Resources to prepare a report by June 30 on how it should address the need to modernize both ports and inland waterways to accommodate post-Panamax vessels. Draft versions of the report indicate it will lay out a wide variety of options, including possibly tapping the Harbor Maintenance Tax for deepening. Today, new construction is funded by the general treasury.
In recent years, funding for coastal and inland navigation by the Corps of Engineers has dropped 22 percent from $2.014 billion in fiscal year 2008 to $1.576 billion in fiscal year 2012. It accounted for just 34 percent of the Corps’ Civil Works budget in fiscal year 2012, compared to 41 percent in fiscal year 2008.
Maintenance of harbors — keeping navigation channels maintained to their authorized depths and widths — is funded through the HMT, a 0.125 percent tax levied on the value of cargo imported or domestically moved through federally maintained channels and harbors.
(Originally the tax was to be collected on exports as well as imports, but in 1998 the U.S. Supreme Court gave that part of the law the boot in United States v. United States Shoe Corp., holding it violated the so-called export clause of the Constitution, which says “No Tax or Duty shall be laid on Articles exported from any State.” The court rejected an argument by Customs that the HMT was a user fee.)
Money collected from the ad valorem tax goes into a Harbor Maintenance Trust Fund (HMTF). Like the tax, it was created by the 1986 Water Resources Development Act.
“If the full allocation
of the Harbor Maintenance Tax was put in the operations and maintenance dredging account, all of these waterways could be
dredged to the fullest extent.”
Rep. Charles W. Boustany
U.S. House Ways and Means Oversight Subcommittee
Funds from the HMTF can only be spent if it’s actually budgeted and appropriated by Congress, but since it was created only about half of the money that’s deposited into the trust fund is actually spent on harbor maintenance.
The low level of HMTF usage has continued, despite the Corps’ estimate that full channel dimensions at the nation’s busiest 59 ports are available less than 35 percent of the time.
As a result, a huge balance has built up in the fund, at least on paper. Legislators say the surplus has been used over the years by presidents, both Democrat and Republican, to help reduce the size of the federal deficit.
According to legislation introduced in the House and Senate earlier this year, annual receipts from the tax in fiscal year 2011, which is collected by Customs and Border Protection, increased 17.3 percent to $1.6 billion. The balance in the trust fund is expected to grow from $6.42 billion to $7 billion in fiscal year 2012.
Identical bills in the House — H.R. 104, the Realize America’s Maritime Promise (RAMP) Act — and the Senate’s S. 412 (2011 Harbor Maintenance Act), call for “the total budget resources (be) made available from the Harbor Maintenance Trust Fund each fiscal year… equal to the level of receipts plus interest credited to the Harbor Maintenance Trust Fund for that fiscal year.”
H.R. 104, introduced by Rep. Charles W. Boustany, R-La., continues to gain support, with 187 co-sponsors (nine joining in March), while S. 412, introduced by Sen. Carl Levin, D-Mich., has 35 co-sponsors.
In late March, language in two versions of the surface transportation bill—one which passed the Senate and another that failed in the House — included “sense of the Senate” and “sense of the House” statements that said “the administration should request full use of the Harbor Maintenance Trust Fund of operating and maintaining the navigation channels of the United States.”
Boustany introduced the bill in 2008 and he told American Shipper
in an interview that he was optimistic about its prospects. He expects language from the RAMP Act to be included in the highway bill when Congress once again takes it up after returning from its Easter holiday break.
When Congress unsuccessfully tried to pass a highway bill before the recess, the RAMP Act was included in both the Senate and House versions, albeit in the Senate without a “point of order” that Boustany thinks is important to make the law more effective.
“Many of our harbors have had silt build up and it is having a drag on the economy,” Boustany said. “It hurts American competiveness, especially as we ramp-up exports.
“As chairman of the Oversight Subcommittee of Ways and Means, I am not happy with the fact that the Harbor Maintenance Tax is being used for other purposes than what it was intended for, and that is maintenance dredging,” he said.
“If the full allocation of the Harbor Maintenance Tax was put in the operations and maintenance dredging account, all of these waterways could be dredged to the fullest extent.”
But Boustany said he is not trying to get Corps’ hands on the $7 billion that is in the trust fund, but fix the problem going forward.
“We know that money has largely been spent in prior budge cycles. It’s really accounting and a trust fund on paper. To try and deal with that would have incurred a major score based on the Congressional Budget Office analysis. The way I wrote the RAMP Act, it would not actually score, we would not have to offset this, it would not add to the deficit, it would simply be putting the money back to use the way it was intended going forward,” he said.
Though Boustany and his allies in industry have methodically built support for the RAMP Act, there are other voices raised in opposition to the HMT, or who would like to see the money it collects be spent differently.
“The Harbor Maintenance Tax is simply not fair,” said Connie Bacon, commissioner for the Port of Tacoma, speaking at the Transpacific Maritime Conference in Long Beach this March.
“U.S. ports on the West Coast don’t have dredging needs and simply don’t get any use out of this,” she said, saying ports such as Seattle and Tacoma get less than one cent of every dollar that’s collected on cargo moving through their ports.
“Who would make that investment?” she asked. “In contrast, one-fifth of all dredging money is spent in one state, in Louisiana.”
But advocates for dredging the lower Mississippi, like Sean Duffy, executive director of the Big River Coalition, noted that some 32 states use the Mississippi River to connect to world markets.
A study for his group by economist Timothy Ryan found 20 percent of the country’s commerce moved through the lower Mississippi. A reduction of one foot of draft in the channel on the Lower Mississippi from 45 feet to 44 feet would lead to a loss of $772 million in direct spending and a $1.4 billion loss in total spending.
Bacon complained Harbor Maintenance Tax funds were being used to maintain ports that are direct competitors of Tacoma, pointing to Savannah, Charleston, and Norfolk.
Keith Hofseth, a technical director for the Corps, said the traditional view of the Office of Management and Budget has been that the money not spent from the HMTF is the money collected from ports which don’t need maintenance dredging and so it is not used and does not cross-subsidize other ports.
During a budget hearing for the Corps earlier this year, Rep. Grace Napolitano, D-Calif., made a similar complaint, saying the HMTF was “egregiously unfair” to ports in southern California, because cargo flowing through Los Angeles and Long Beach resulted in $220 million being contributed to the fund, but they only received $265,000.
The fact the money collected on cargo moving through one port is used to maintain others “is as if the government taxed McDonald’s to build bigger Burger Kings. We must correct and fix this inequity,” she said.
In February, Napolitano introduced an amendment to H.R. 7, the House version of the surface transportation bill, that her office said “would have allowed the ports of Los Angeles and Long Beach to receive a fairer share of funding from the National Harbor Maintenance Trust Fund.” The amendment was ultimately not included in the bill.
“I’m aware of all these arguments,” Boustany said. “There are multiple problems going forward with our maritime infrastructure. Clearly, we have facilities that need to be deepened and widened beyond what current authority allows, but those are separate issues at this stage.”
He said he wants to first fix the maintenance issue “and then we can look at how you fund future maritime infrastructure projects. But to tax the Harbor Maintenance Tax and start diverting its use to do harbor deepening and other sorts of infrastructure projects is not what the tax was created for in the first place.
“We can have an argument about how to fund all those things going forward or even how to fund operation and maintenance dredging when we do tax reform, but the fact of the matter is operation and maintenance dredging should be done with the funds that are dedicated for it. And that is the problem I am trying to fix,” he said.
Paul Anderson, chief executive officer of the Port of Jacksonville and a former Federal Maritime Commissioner, said cross-subsidization of ports was analogous to the federal highway system.
“We have a gas tax and as far as states go, it is regressive. Large states are donor states to make up for the smaller states that couldn’t put in their share. It is a very similar model. Our ports are just as strategic as our interstate highways are to the future of our country to compete globally. It’s a national system; it’s not a state system,” he said
Bacon also said there is a “massive transfer of revenue from deep-water ports to shallow ports, many of whom have nothing to do with the export-import trade that is so important to the United States.”
She pointed to a January 2011 report by the Congressional Research Service which said Corps’ “data indicate that a significant portion of annual HMTF disbursements are directed towards harbors which handle little or no cargo. The Oregon Inlet in North Carolina, Grays Harbor in Washington, Humboldt Harbor in California, and the Lake Washington Ship Canal in Seattle are some of the harbors or waterways that fit this description. Commercial fishermen and recreational boat (or yacht) owners account for most, if not all, of the vessel traffic in these harbors.”
“What would be great is if that money could be used for some of the things that are important to us,” Bacon said.
In 2012, the Obama administration made a proposal in its 2012 budget “to expand the authorized uses of the Harbor Maintenance Trust Fund, so that its receipts are also available to finance the federal share of other federal efforts in support of commercial navigation through our ports.”
Tacoma is one of the ports complaining the harbor maintenance tax is a cost that makes ports in the Northwest less competitive with imports to the United States first routed through Canadian ports, such as Vancouver and Prince Rupert, and then trucked or railed across the Canadian-U.S. border where no similar tax applies.
Bacon pointed to a 2007 study by Leachman & Associates, which said “Puget Sound import volume is very elastic with respect to potential container fees. If unmatched by new fees at other ports, even relatively small fees of $60 per FEU ($30 per TEU) or less would render supply-chain channels using other ports more economically attractive for imports to be consumed in most markets located east of the Rockies.”
“If $30 per TEU has that kind of impact, what happens when the tax averaged a $130 per TEU? It may not be the factor, but it certainly is a factor,” she said.
A similar point was made by the Port of Seattle in a submission to the FMC which is studying the alleged “diversion” of cargo through Canadian ports because of the HMT and other factors.
Seattle said the HMT averages $84 per FEU nationally and $89 at the Port of Seattle.
“While some costs are buried in the overall through-cost charged by carriers, because the HMT is assessed as an individual line item for every import shipment, importers are very conscious of the tax,” Seattle said. It added the “land border loophole is a cost significant enough to incent shippers to divert cargo away from U.S. ports, especially high value cargo.”
Bacon said Tacoma has sought to repeal the HMT or obtain exemptions from it for deep-water ports and for ports near international borders if they agree to forgo HMT money in the future.
Alternately, she would like to see the use of the funds broadened “so ports like Tacoma could get something of value from it. Even 10 cents on the dollar would be better than what we are doing now.”
Anthony M. Pagano, director of the Center for Supply Chain Management and Logistics at the University of Illinois at Chicago, said the HMT “acts as a tax on imports.”
“By not spending all of it, it is something that might violate the World Trade Organization agreements,” he said, adding the European Union looked at the HMT and found it was a discriminatory import tax, but has not taken any action.
“Other trading partners might sue the U.S.,” he said. “I’m wondering why the Chinese have not sued us yet. There is also the possibility of retaliation by our trading partners. And also this is a violation of trust… that they are not spending the money. In God we trust, but in Washington, D.C., I don’t think so.”
He suggested the tax be eliminated, and Bacon seconded the notion.
“I certainly agree with Dr. Pagano, let’s get rid of that tax. But in the meantime we have it. There are other possibilities with expanding the use of the money so that ports like Tacoma, Seattle, Los Angeles and Long Beach can improve their competiveness.”
Hofseth said the goal of the Corps’ post-Panamax vessel study is to “paint the picture of what the realistic need is and where that need exists and the path forward,” he said. “The biggest obstacles to me seem to be the Corps’ procedures take a long time to work, and there are funding issues because the budget is extremely limited.”
The Corps took on the first of those challenges earlier this year when it wanted feasibility studies to follow what it called the “3x3x3 rule” — target completion of studies in 18 months, but no more than three years; keep the cost to less than $3 million; and produce a report of reasonable size, or small enough to fit in a three-inch binder.
While subject to change, a draft of the report posted on the IWR Website in early April listed a plethora of options for funding deep draft ports:
- Business as usual—collecting the HMT and budgeting deepening projects separately according to the budget given the Corps and its priorities.
- Having Congress increase general revenues for harbor deepening whenever Corps analysis reports investment “will be economically justified and environmentally acceptable.”
- Continuing HMTF user fee collection and implementing a harbor deepening tax.
- Increasing local cost share requirements. Today the HMTF funds all operation and maintenance for Corps harbor projects less than 45-feet deep, and half the maintenance for harbors that are deeper than 45 feet. When deepening channels, the federal government funds 80 percent if the project is less than 20-feet deep, 65 percent of those that are 20 to 45 feet, and just 40 percent of those that are deeper than 45 feet
- Increasing the funds collected by the HMTF and then allowing it to be used for harbor deepening. The draft report noted “the logic for such an argument would be that the beneficiaries of the deeper projects can be readily identified and such an increase in fees would simply be a beneficiary tax.” The process for making decisions about which port projects to undertake would remain the same.
- Dissolving the federal role in harbor development and maintenance and transfer all responsibilities to non-federal entities. “Under this option the HMTF could be phased out, as would the current fees creating the revenues that are dedicated to the fund. Individual port authorities would include the costs of maintenance in their overall cost structure and would levy fees in whatever form they deem appropriate for cost recovery for harbor improvements and maintenance.” Individual port authorities would secure the funding they need by borrowing what would be repaid with user fees.
- If ports had to individually pay for deepening, the report says an infrastructure bank might be created and the Corps could “provide a report to the bank on whether the applicant can earn a revenue stream sufficient to repay the loan and on the applicant’s compliance with environmental laws and regulations.”
- Making HMTF allocations based on a competitive grant programs.
- Investment planning based on a national optimization model.
“Regardless of the federal government’s role in financing future critical needs, its regulatory oversight role is expected to remain unchanged,” the report said.
Anderson noted, “Ships are getting bigger, it is the reality of the world and we need to deepen our ports. The system is so broken that every state, every port and every member of Congress is trying to find ways to get the money they need to make infrastructure investments and they are doing it very parochially. They are not doing it with a sense that this is a national system, that this is a strategic, national initiative that we should be pursuing as a nation, not as each state on its own,” he said.
Interest by shippers in moving cargo through multiple ports grew after the 2002 labor dispute between management and the International Longshore and Warehouse Union shut down West Coast ports and the Panama began its project to add a third and wider set of locks. Increasingly, Anderson said, shippers feel they need a choice of ports to protect their supply chains if there is a natural disaster or terrorist incident.