Who Should Pay for Dredging?
February 18, 1999
Dennis L. Bryant- New York
Dredging the ports and waterways of the United States is expensive. This work
is vital if numerous ports are to remain open and safe to modern merchant,
naval, fishing, and recreational vessels. The question is who should pay for
these projects. This paper will examine the current funding situation in the
U.S. and options for the future.
The ninth bill enacted by the First Congress of the United States created the
U.S. Lighthouse Establishment and commenced the long tradition that, since
maritime navigational systems were vital to the entire nation, the nation as a
whole should share in their costs. At that time, dredging was not a factor. As
commerce developed, Congress reacted by passing the General Survey Act of 1824,
assigning responsibility for maintenance of navigational waterways to the U.S.
Army Corps of Engineers. Again, funding came from the general revenues of the
U.S. Treasury.
Following a heated debate of several years, Congress in 1986 broke precedent
and created the Harbor Maintenance Tax (HMT) to recover a portion of the cost of
maintenance dredging. Review of the HMT will be undertaken by examining five
aspects: who pays the tax, who doesn't pay, how much is paid, what the tax pays
for, and the current status of the tax. The paper will then look at the
Administration's proposed Harbor Services User Fee (HSUF) as a replacement
funding mechanism, examining the same basic issues: who would pay the fee, who
would not pay, how much would be paid, what would be paid for, the status of the
Administration's proposal, and the potential impact of the measure if it were to
be enacted.
Harbor Maintenance Tax
Who Pays Now
For domestic shipments, the shipper is liable for the HMT at the time the
cargo is unloaded when cargo has either been loaded on a commercial vessel at a
U.S. port to be transported between U.S. ports or has been unloaded from a
commercial vessel at a U.S. port after having been transported between ports in
the U.S. The shipper for purposes of domestic shipments is defined as the person
or corporation who pays the freight. For export vessel movements, the exporter
is liable for the HMT when cargo is loaded on a commercial vessel for export in
a U.S. port. The exporter for this purpose is defined as the person or
corporation whose name appears on the Shipper's Export Declaration. For import
vessel movements, the importer is liable for the HMT when imported cargo is
unloaded from a commercial vessel at a U.S. port. The importer for this purpose
is defined as the person or corporation responsible for bringing the cargo into
the U.S. For passengers, the operator of the vessel is liable for the HMT when a
passenger boards or disembarks a commercial vessel at a U.S. port.
Who Doesn't Pay
For a variety of reasons, mostly political, numerous exceptions were
established to the obligation to pay the harbor maintenance tax. These
exceptions are listed below:
a. Ports on an inland waterway;
b. Ports not open to public navigation;
c. Any channel or harbor with respect to which no federal funds have been
used since 1977 for construction, maintenance, or operation, or which was
deauthorized by federal law before 1985;
d. Channels of the Columbia River upstream of the Bonneville lock and dam;
e. Items carried on vessels other than commercial vessels;
f. Cargo consisting of fish or other aquatic life caught and not previously
landed on shore;
g. Ferries engaged primarily in the ferrying of passengers (including their
vehicles) between points within the United States, or between the United States
and contiguous countries;
h. Cargo loaded on a vessel in the U.S. mainland for transportation to
Alaska, Hawaii, or a U.S. possession or loaded on a vessel in Alaska, Hawaii, or
a U.S. possession for transportation to the U.S. mainland, Alaska, Hawaii, or a
U.S. possession, or the unloading of any such cargo;
i. Cargo or passengers loaded in Alaska, Hawaii, or a U.S. possession and
unloaded in the same state or possession;
j. Passengers transported on U.S. flag vessels operating solely within state
waters of Alaska or Hawaii and adjacent international waters;
k. Crude oil with respect to Alaska;
l. Cargo loaded on or unloaded from a vessel the fuel for which has been or
will be subject to the tax imposed on fuel used in commercial transportation on
inland waterways;
m. Bonded commercial cargo entering the U.S. for transportation and direct
exportation to a foreign country;
n. Certain cargoes exported to Canada or Mexico;
o. Cargo where the tax would be imposed on the United States or any agency or
instrumentality thereof;
p. Unloading of cargo from a vessel where the tax has been paid when the same
cargo was loaded on the same vessel;
q. Movement of cargo within the same port;
r. Cargo moving under a single bill of lading that is unloaded from one
vessel for reloading on another vessel in a U.S. port for relay to or from any
port in Alaska, Hawaii, or a U.S. possession where the tax has been previously
paid on the same cargo;
s. Cargoes owned or financed by a nonprofit organization or cooperative and
certified by the U.S. Customs Service as intended for use in humanitarian or
development assistance overseas;
t. De minimus individual shipments; and
u. Non-commercial vessel movements.
No assertion has been made with regard to any of these exceptions that the
impact on the harbor or waterway is in any manner less through these uses than
through the uses on which the tax is imposed. The exceptions are based solely
upon a variety of public policy and political grounds.
How Much Is Paid
The HMT was originally imposed at the rate of 0.04 percent of the value of
commercial cargo on any port use, but this rate was increased to 0.125 percent
in 1990. For fiscal year 1998, the federal government collected approximately
$650 million under the HMT program. According to a report of the U.S. Army Corps
of Engineers, the agency that administers the federal government's harbor
dredging program, approximately $534 million were collected under the HMT
program in fiscal year 1992, the first full year after the rate was increased to
the current level, and approximately $790 million was collected in fiscal year
1997, the last year before the tax on exports ceased.
What Is Paid For
When the HMT was established in 1986, the monies (then estimated to be $140
million annually) were used to fund 40% of the federal share of the
"eligible operations and maintenance costs assigned to commercial
navigation of all harbors and inland harbors within the United States."
With minimal discussion in Congress, the assessment rate provided for in the HMT
was more than tripled in 1990 and the fund into which these monies were
deposited began to pay for 100% of the federal share of those commercial
navigation projects. In fact though, the federal government was collecting
through the HMT monies well in excess of what it was spending on harbor
maintenance projects. In fiscal year 1996, for instance, the Harbor Maintenance
Trust Fund collected approximately $740 million while expenditures totaled
approximately $495 million. The excess was being used in a futile attempt to
stem the then ever-increasing federal budget deficit. In fiscal year 1991, the
surplus in the Harbor Maintenance Trust Fund amounted to almost $73 million. By
1998, the surplus had grown to over $1.3 billion. In an attempt to ensure that
monies collected for the Harbor Maintenance Trust Fund are actually expended for
that purpose, rather than utilized for budget-balancing, a bill has been
introduced in Congress to provide for off-budget treatment of the Fund.
While one might think that, with the exception of the Saint Lawrence Seaway
and administrative expenses, all expenditures from the Harbor Maintenance Trust
Fund were for the purpose of maintaining harbors and waterways utilized in the
international and coastwise trade of the United States, that would be erroneous.
While the majority of monies are so expended, a substantial sum is devoted to
shallow draft navigation projects not subject to the Inland Waterways Fuel Tax.
In fiscal year 1995, in excess of $64.7 million was expended from the Trust Fund
on this type of project in harbors and waterways utilized almost exclusively by
commercial fishing and recreational vessels. This expenditure rose to $72.4
million in fiscal year 1996, the last year for which figures are available.
Status
It is no secret that on March 31, 1998, the U.S. Supreme Court, in a
unanimous decision, struck down the Harbor Maintenance Tax as applied to exports
in the case of United States v. United States Shoe Corporation. The Court
held that the HMT was not, as alleged by the federal government, a user fee
because there was no reliable correlation between the amount assessed against
the person and the harbor services used by that person. The Court held that the
HMT was violative of the provision in the U.S. Constitution that "No Tax or
Duty shall be laid on Articles exported from any State." In conclusion, the
Court noted that: "This does not mean that exporters are exempt from any
and all user fees designed to defray the cost of harbor development and
maintenance. It does mean, however, that such a fee must fairly match the
exporters' use of port services and facilities." The U.S. Customs Service
ceased collecting the HMT on cargo loaded for export as of April 25, 1998.
Subsequent to the U.S. Shoe decision, the U.S. Court of International
Trade held that the HMT as applied to passengers boarding and embarking from
cruise ships was also violative of the Export Clause of the U.S. Constitution.
The Court of International Trade is also overseeing the process whereby persons
who previously paid amounts assessed under the HMT are seeking refunds.
Meanwhile, the European Union and various individual nations have commenced
the process for bringing a complaint against the United States before the World
Trade Organization. The substance of the complaint is that the HMT is violative
of the General Agreement on Tariffs and Trade (GATT). Specifically, it is
alleged that the HMT, due in large part to the numerous exceptions and
exemptions in its application and assessment, is discriminatory in its impact on
U.S. imports (e.g., European Union exports to the U.S.). While the European
Union has not yet sought a formal hearing before the WTO, the general consensus
is that it will prevail if the matter is brought to conclusion.
Transition
The result of all these developments is that the federal government must, in
the relatively near future, identify a new funding mechanism to replace the HMT.
The next section of this paper will discuss the Administration's efforts to
date.
Harbor Services User Fee
The White House last summer announced its plan to establish "a new
Harbor Services Fund to hold revenues from a new user fee on shippers (sic) that
would replace the existing harbor maintenance fee." According to the
announcement, revenues would be used to finance harbor dredging, port
construction activities, and navigation safety improvements. In a speech three
days after this announcement, President Clinton stated:
[W]e must create sustainable ports for the 21st century. International trade
will nearly triple over the next two decades, and more than 90 percent of this
trade will move by ocean. I propose a new Harbor Services Fund to help our ports
and harbors remain competitive in the new century, by deepening them for the
newest and largest ships, and by providing state-of-the-art navigation tools for
preventing marine accidents. We must do both.
Just last week, I released – or pledged some extra money to the New
York-New Jersey Harbor Project in the face of clear evidence that if we do not
do it, the harbor will not remain competitive and thousands of American jobs
could be lost. We can do this and make those harbors environmentally safer at
the same time.
The confusion in the White House between shippers and carriers, as reflected
in the Press Release, is symptomatic of the issue. Everyone concedes there is a
problem. Those who understand it generally lack the power to fix it - Those with
the power to fix it generally don't understand it.
While the White House was making vague pronouncements, the Army Corps of
Engineers, under heavy pressure from the Office of Management and Budget (OMB),
was wrestling with the difficult (some might say impossible) task of fashioning
an alternative funding mechanism to replace the HMT. The decision was apparently
made to undertake this task with some input from other federal agencies and with
no input or consultation with the private sectors that would be most affected:
carriers, shippers, and ports. Following is a summary of the Harbor Services
User Fee, as informally proposed by the Corps of Engineers in the summer of
1998. Many of the details of proposal, including draft legislative language,
have never been publicly revealed.
Who Would Pay
The incidence of the Harbor Services User Fee (HSUF) would be placed on the
carrier, rather than the shipper (who pays the current HMT). Consistent with the
concept of the HMT, though, the fee would be paid only by commercial carriers.
The Administration has concocted a unique classification system on which to
base the HSUF. At its heart is a concept denominated Vessel Capacity Units or
VCU's. This is intended to measure the extent of use of and service from
channels derived by different types of commercial vessels. The Corps of
Engineers argues that the VCU has some vague relationship to the volumetric
measurement of a ship's space available for cargo and passengers. The VCU would
be based on either the net registered tonnage (NRT) (for tankers and bulkers) or
the gross registered tonnage (GRT) (for cruise ships and general ships) of the
vessel, with unspecified adjustments for cargo and passenger space not included
in net tonnage.
This whole VCU process is further complicated in that there is no one system
for calculating gross and net tonnages. For U.S. vessels, three systems are
available: measurement under the International Convention on Tonnage Measurement
of Ships, measurement under the U.S. Coast Guard's Formal Measurement system,
and measurement under the Coast Guard's Simplified Measurement system. For non-U.S.
vessels, measurement for purposes of U.S. law may be either under the
International Convention or under the laws and regulations of a foreign country
found to be substantially similar to those provided for in U.S. law and
regulation.
Commercial vessels, under this scheme, would be divided into four groups:
cruise ships, tankers, bulkers, and general (which includes container ships,
general cargo ships, and apparently all other commercial vessels not captured by
the other groups). Cruise ships would pay $0.06-0.09 per VCU, to be assessed
upon the first and last U.S. port use during a given voyage. Tankers would pay
$0.22-0.30 per VCU for each commercial movement. Bulkers would pay $0.08-0.12
per VCU for each commercial movement. General vessels would pay $0.60-0.65 per
VCU for each commercial movement during a given voyage, but with an unusual cap
being employed. The federal government would assume that general vessels would
make an average of 2.25 port calls during each voyage to the United States.
Thus, general vessels would pay approximately $1.35-1.46 per VCU per U.S.
voyage.
Using the lower fee rate for each category, the following representative
numbers are obtained.
For an 80,000 GRT cruise ship making a roundtrip voyage from Miami to the
Caribbean, the HSUF would be $4,800.
For a 150,000 NRT tanker making one U.S. port call, the HSUF would be
$33,000.
For a 50,000 NRT bulker making one U.S. port call, the HSUF would be $4,000.
For a 50,000 GRT container (general) ship making the mythical 2.25 U.S. ports
calls, the HSUF would be $67,500.
Obviously, the above fee calculations are based solely on the use of
representative vessels in each category, assumed voyages, and estimated HSUF
rates. Different vessels on different voyages would incur different user fees,
particularly if the HSUF rate were to change. It does not take a rocket
scientist or an economist to realize, though, that the user fees being bandied
about by the Army Corps of Engineers will have a major impact on the
profitability of ship owners and operators. This is particularly true when, as
now, competition between vessels is fierce and the ability to increase freight
rates is minimal in most markets.
Among the factors considered, according to the Corps of Engineers, in
developing its HSUF proposal were the following:
The four categories were chosen because there are significant differences in
the level of service they require. General vessels predominately move
finished goods. They operate across the largest number of ports in the national
port system. They also operate on set scheduled time-sensitive movements
requiring channels to be maintained at full dimensions. This category of vessels
is also expected to be the driving force behind most future port improvements.
Specialized Bulker ships and barges move dry bulk cargoes, such as grain,
ore, and fertilizer, under contract or proprietary carriage. Tanker
vessels and barges convey liquid bulk cargoes, primarily crude and refined
petroleum, usually as contract or proprietary shipments. In terms of size of the
port system required tankers rank second and bulkers third. Because these
vessels do not operate on strict time schedules, they have the flexibility to
wait for tides or one way traffic scheduling. As a result, these vessels do not
require the level of maintenance required by the General category. Some future
improvements can be attributed to these categories. Cruise ships convey
passengers on scheduled sailings to U.S. and/or foreign ports. This category of
vessels uses the smallest portion of the port system, only about three percent
of the berths nationwide. While they do operate on strict schedules they
generally sail at less controlling depth than the other categories. Because of
these differences a different fee rate is estimated for each of the four vessel
categories and represents a fair approximation of the services provided to each.
This rationale is not being quoted with approval. It is only repeated so that
the reader can obtain a sense of some of the assumptions made by and points of
view of the federal government with regard to this proposal.
Who Wouldn't Pay
While the exemptions under the HSUF have not been specified, it appears that
the basic exemptions existing under the HMT will be carried forward into the
HSUF proposal.
How Much Would Be Paid
The Administration hopes to collect approximately 50% more under the HSUF
than has been collected under the HMT. According to Joseph Westphal, Assistant
Secretary of the Army for Civil Works, the HSUF, if enacted as proposed, would
raise $980 million in its first full year. This compares with the approximate
$650 million collected in fiscal year 1998 under the HMT.
What Would Be Paid For
In addition to the operation and maintenance costs for commercial navigation
projects (and, apparently, the Saint Lawrence Seaway expenses and administrative
costs) currently funded by the HMT, the HSUF would be available to pay several
new and costly items:
100% of the federal share of harbor construction activities, such as channel
and harbor development projects.
The additional costs to the Corps of Engineers of maintaining the reserve
capacity of the Corps dredges to dredge commercial navigation projects.
Audit costs incurred in connection with administration of the user fund.
Funding of up to $50 million per year for the dredging of berthing areas, the
construction and maintenance of bulkheads, and credits toward the non-federal
shares of eligible Corps harbor development or operation & maintenance
(O&M) activities at ports where the average amount of the fee assessed
during the three previous consecutive fiscal years exceeds the average federal
expenditure from the Harbor Services Fund at that port during the same three
fiscal years by $10 million.
Status of Administration Proposal
After setting several deadlines for submittal of the HSUF proposal to the
105th Congress, the Administration finally gave up. It now says it intends to
submit the proposal during the early period of the 106th Congress, which began
in January. Even though the earlier draft proposal encountered significant
criticism, there is no indication that the official version of the HSUF proposal
(when it finally surfaces) will be substantially changed from the earlier draft
version.
Impact
Assuming the HSUF proposal, when officially submitted, closely resembles the
earlier draft version, several things should be anticipated. First, the various
industry sectors impacted by the proposal (e.g., carriers, shippers, ports, and
labor) will immediately make their views known the Capitol Hill. Second, various
Congressional Committees will schedule hearings. Third, the Administration will
attempt to explain why the proposed HSUF is reasonable and how it will avoid the
losing court fight suffered by the HMT. If the measure is enacted by Congress,
look for an immediate court challenge.
In the extremely unlikely event that the HSUF survives both the political
hurdles of Congress and the legal hurdles of the judiciary, the impact on the
various industry sectors could be significant. If, as expected in many
instances, carriers are unable to raise freight rates to cover the new expense,
profit margins will erode or disappear. Monies that might otherwise be devoted
to crew salaries, maintenance, and replacement of older vessels will not be
available. Depending on how the fee is structured, there could be cargo
diversions from one U.S. port requiring dredging to another that doesn't require
dredging. Cargo diversion to nearby ports in Canada and Mexico can be expected
to increase even beyond present trends. Some carriers, for whom U.S. port calls
provide minimal profits, may withdraw from the U.S. trades.
Analysis
The Supreme Court's recent decision striking down the HMT as applied to
exports, combined with the unresolved EU complaint about the tax as applied to
imports, provides Congress with an opportunity to put dredging in the United
States on a sound financial footing and, at the same time, avoid future
litigation. Navigational capability commensurate with commercial needs is vital
to the continued economic growth of our nation. Commercial vessels carry 95% of
this nation's imports and exports and a sizable percentage of our domestic
trade. There is not a person in this country who does not benefit, both directly
and indirectly, from this trade. Various ports, over the years, have developed
into international and regional maritime transportation centers, providing
connecting links to rail, trucking, or inland waterways modes. The naturally
occurring water depth in some of those ports is no longer commensurate with the
drafts and other needs of many modern vessels. These ports must either be
dredged or the vessels will divert elsewhere, in some cases to foreign ports. If
those vessels divert, much of the monies spent previously on the intermodal
infrastructure in those ports over the years will be wasted. Jobs in those ports
will be lost.
In light of the U.S. Shoe decision and the EU challenge, it should be
assumed that the Harbor Maintenance Tax as currently structured will soon cease
to provide a viable funding mechanism for dredging and related harbor
improvements. Thus, an alternative funding method must be developed. At first
blush, shifting the incidence of the tax (or "user
fee")
to the carrier, as suggested by the Administration, may appear to be the answer.
Doing so, though, will only create a new set of problems.
As the Court stated in the U.S. Shoe decision, a "user fee"
is a charge designed as compensation for government-supplied services,
facilities, or benefits. There must be a close approximation between the
government charge and the government service rendered. If the user fee is to be
assessed against the vessel, the charge must fairly match the vessel's use of
the governmental service – in this case, dredging.
Not all ports require dredging. Thus, a proper user fee against vessels for
dredging can not be assessed against a vessel calling at a non-dredged port.
Not all ports that require dredging have recently been dredged or are
scheduled for dredging in the near future. Thus, a proper user fee against
vessels for dredging can not be assessed against a vessel for calling at an undredged
port.
Not all vessels calling at a dredged port have a sufficiently deep
draft to make use of the dredging. Thus, a proper user fee against vessels for
dredging can not be assessed against a vessel that could have safely called at
the port even if it had not been dredged. The intermediate appellate court in
the U.S. Shoe case held that, among other reasons for holding that the
HMT did not constitute a proper user fee, was that that the assessment bore
"no relationship to the size or weight of the vessel or the necessary depth
of the port required by the vessel." Additionally, it is an open question
whether a vessel that might only require that the port be dredged to, say, 40
feet should be assessed a full user fee if the government decides to dredge to,
say, 50 feet. Query why a shallow-draft vessel should be required to pay a fee
so that the harbor can be dredged for the benefit of a competing deep-draft
vessel. A court would also have to decide whether the full cost of dredging can
be assessed against certain commercial vessels when numerous other vessels
utilize the waterway but are assessed no fee.
There is no doubt that dredging is expensive. If this expense is to be spread
over the small number of deep-draft commercial vessels actually calling at
dredged ports, the user fee per vessel will inevitably be so high that vessel
owners and their shippers will seriously consider diverting to a lower-cost
port, undermining the national dredging program. Cargo diversion is already a
growing problem. In 1977, the value of U.S. cargoes imported from or exported to
third nations via Canadian ports was approximately $2.07 billion. In 1987, the
first full year after the HMT was imposed, the value had risen to $9.27 billion.
In 1997, the last year for which calculations are available, the value stood at
approximately 24.57 billion.
Any alternative user fee for dredging assessed against vessels will
inevitably run afoul of the Supreme Court's admonition regarding proper user
fees.
Conclusion
Thus, Congress is faced with a Hobson's choice with respect to user fees in
this regard. If it attempts to impose a proper dredging user fee against
commercial vessels that actually make use of the service, the fee per vessel
will be so high as to result in cargo diversion. If it attempts to spread the
user fee across a broad group of vessels so as to avoid cargo diversion, it
risks having the scheme struck down by the courts.
The alternative is to recognize that a sound national dredging program
benefits the entire nation and all of its citizens. As noted above, the free
flow of merchandise in and out of the United States is vital to our economy.
Since the vast majority of those goods travel by ship, maintaining a proper
navigational capability in our waters is absolutely essential. Dredging is an
integral part of the maintenance of that navigational capability.
This is not to say that every port in the United States needs to be or should
be dredged to accommodate the deepest draft tankers or container vessels.
Rather, the federal, state, and local governments (as the representatives of the
people) should jointly decide which ports should be dredged and how deeply.
Then, since such dredging benefits all the people and the national economy, the
national dredging program should be funded from the general revenues so that all
those who benefit thereby fairly share in the cost.