The U.S. Harbor maintenance tax: a bad idea whose time has passed?
Leather industry
Tax law
Skalberg, Randall K.
Pub Date:
Name: Transportation Journal Publisher: American Society of Transportation and Logistics, Inc. Audience: Academic; Trade Format: Newsletter Subject: Business; Transportation industry Copyright: COPYRIGHT 2007 American Society of Transportation and Logistics, Inc. ISSN: 0041-1612
Date: Summer, 2007 Source Volume: 46 Source Issue: 3
Event Code: 920 Taxes Computer Subject: Tax law
Product Code: 9142281 Ways & Means; 9123183 Army Corps of Engineers; 9101100 Tax Law NAICS Code: 92112 Legislative Bodies; 92811 National Security; 92113 Public Finance Activities SIC Code: 3100 LEATHER AND LEATHER PRODUCTS
Government Agency: United States. Supreme Court; United States. Congress. House. Committee on Ways and Means; United States. Army. Corps of Engineers Company Name: United States Shoe Corp. Organization: American Association of Port Authorities
Geographic Scope: United States

Accession Number:
Full Text:
It's a sunny mid-summer afternoon at South Bass Island on Lake Erie, north of Sandusky, Ohio. The harbor on South Bass Island is filled with hundreds of recreational boaters enjoying the beautiful summer weather, touring the island's historic sites, and stopping for lunch and a cold beverage at the island's many bars and restaurants. If you travel to the south end of the island, you might see an ore carrier traveling through the Great Lakes. The ore carrier will not, however, stop at South Bass Island since the island's shallow water harbor is not suitable for deep water commercial vessels.

The Edward L. Ryerson leaves Duluth Harbor bound for Cleveland with a cargo of 25,000 tons of taconite, a few tons below its maximum capacity. In an unusual attempt to utilize this excess capacity, the Ryerson agrees to accept a small container from St. Jude Medical in Minneapolis. The container (which weighs only a few pounds) holds 500 new heart valves bound for the Cleveland Clinic. The Ryerson can handle the extra weight, and its merchant mariners barely notice the additional cargo. Upon arrival in Cleveland, the two cargo items (taconite and heart valves) are unloaded and forwarded to U.S. Steel and the Cleveland Clinic for further processing. Both products are subject to a tax that few U.S. taxpayers are familiar with, the U.S. Harbor Maintenance Tax (HMT). Here is where the similarity in transport of these two items ends. The HMT is an ad valorem (value based) tax, so the heart valves draw $4,165 in tax ,while the taconite draws $1,836 in tax. It is an anomaly in our tax system that a tax intended to recover the government's cost of canal and port dredging would impose a lower amount of tax on 25,000 tons of unprocessed steel raw materials than it does on a few pounds of heart valves, but that is how the HMT is structured.


It is also an anomaly that the recreational boaters at South Bass Island received $132,310 dollars in dredging services in 1999: an amount paid entirely by the HMT, a tax that is not assessed to them, but rather is borne by the ore carrier and all other forms of commercial maritime transportation. The HMT is one of the most significant contributors to Great Lakes maritime infrastructure. This section of the article will address the problems noted above and explain why the HMT should be abolished.


The United States has a long history of taxing products transported on board ship; some of the first taxes imposed by the southern colonies were import taxes (Treasury Education Office 2002). In 1789, Congress authorized the first improvement projects for navigable channels. The Army Corps of Engineers was established in 1824 as the agency charged with maintaining the nation's water navigation (American Association of Port Authorities 2006).

The HMT was enacted as part of the Water Resources Development Act of 1986 (United States v. United States Shoe Corporation). Prior to the HMT's enactment, general funds from the U.S. Treasury were used to cover the federal government's share of costs to maintain and deepen both inland ports and coastal ports. The HMT was intended to recover a portion of the federal government's cost of maintaining the nation's deep draft navigation channels ("The History of the Harbor Maintenance Tax" 2006). The Act created both the HMT and the Harbor Maintenance Trust Fund (HMTF). The HMTF is the trust fund that holds HMT revenues from the time they are collected until they are disbursed by Congressional appropriation (Kumar 2002).

Originally, the HMT was intended to recover only 40 percent of port maintenance costs. However, in 1990 the HMT was more than tripled by Congress to its current rate, equal to 0.125 percent of the value of the commercial cargo involved (United States v. United States Shoe Corporation). This dramatic increase in the HMT was intended to recover 100 percent of maintenance dredging expenses. The HMT currently is imposed at the time of unloading (United States v. United States Shoe Corporation) on importers and domestic shippers, but the term "domestic shipper" would include foreign flag vessels traveling between U.S. ports (United States v. United States Shoe Corporation). The HMT was created as an ad valorem tax in an attempt to minimize its impact on U.S. exports, especially price-sensitive bulk commodities (American Association of Port Authorities 2006). The impact on U.S. exports was eliminated by a U.S. Supreme Court decision in March 1998, where the court held that the HMT was unconstitutional as applied to exports (United States v. United States Shoe Corporation). One might have expected that this dramatic change in application of the HMT would have resulted in a major drop in HMT revenues. However, the decrease in HMT revenue from 1997 to its low-water mark in 1999 was only 21.99 percent (Kumar 2002). By 2001, HMT revenues had once again exceeded their pre-1998 levels (Kumar 2002).


The principal legal challenge to the HMT began with a constitutional challenge based on the export clause of the U.S. Constitution. The U.S. Shoe Corporation brought an action on November 3, 1994 against the U.S. government in the Court of International Trade (CIT). U.S. Shoe sought a refund of the HMT it had paid on exports, arguing that the HMT was an unconstitutional tax as applied to exports (United States v. United States Shoe Corporation). Both the CIT and the Court of Appeals for the Federal Circuit held that the HMT was a tax, not a user fee, and that as a tax, it violated the Export Clause. The U.S. Supreme Court agreed to hear the case after the decision by the Federal Circuit.

The first step in the Supreme Court's analysis of the HMT was to determine whether the CIT had proper jurisdiction over the case as filed by U.S. Shoe. The scope of the CIT's jurisdiction is established by 28 U.S.C. [section] 1581. The HMT's own jurisdictional provision states that for jurisdictional purposes, the HMT "shall be treated as if such tax were a customs duty" (United States v. United States Shoe Corporation). The CIT's jurisdictional statute states that the CIT has jurisdiction over any civil action against the U.S. that "... arises out of any law of the United States providing for--(1) revenue from imports or tonnage; (4) administration and enforcement with respect to the matters referred to in paragraphs (1) -(3) of this subsection...." (United States v. United States Shoe Corporation). The Supreme Court found HMT claims to be within the jurisdiction of the CIT because at that time, the HMT applied to both imports and exports and its specific jurisdictional provision references revenue from imports. Even though the lawsuit involved the HMT's applicability to exports, it was possible for the CIT to rely on jurisdiction created over imports (United States v. United States Shoe Corporation).

The Supreme Court then turned to the issue of whether the HMT was a tax, which would potentially be impermissible under the Export Clause, or whether it qualified as a user fee, which might survive Export Clause scrutiny. The Court found that the HMT is a tax, basing its decision on the Congressional description of the HMT as a "tax on any port use" (United States v. United States Shoe Corporation). The Court went on to analyze the HMT and determined that it is not a user fee. It distinguished prior cases involving user fees such as the civil aircraft registration fee (Evansville Airport v. Delta Airlines) and other valid user charges that involved either the Dormant Commerce Clause or the Takings Clause, finding that the Export Clause contained a "simple direct and unqualified prohibition on any taxes or duties ... on exports" (United States v. United States Shoe Corporation). The Court then analogized the HMT to the excise tax on tobacco that was the subject of the Court' s 1876 decision in Pace v. Burgess. In Pace, the stamps required to sell tobacco in the export market '"bore no proportion whatever to the quantity or value of the package on which [the stamp] was affixed' and the fee was not excessive" (United States v. United States Shoe Corporation). Since the amount of HMT paid by an exporter "does not correlate reliably with the federal harbor services used or useable exporter" (United States v. United States Shoe Corporation) it imposes a tax, not a user fee, and as such was invalid as applied to exports. The Court invalidated the HMT as it applied to exports, but since the Export Clause does not prohibit taxing imports or domestic transportation, the HMT continues to apply to both imported items and domestic transportation.


Since the Court's decision in U.S. Shoe, the Harbor Maintenance Tax has continued to be controversial. On February 28, 2000, the Court of Appeals for the Federal Circuit ruled that there was no statute of limitations for exporters asserting claims for refund of the HMT. This effectively required the U.S. Customs Service to refund all HMT paid on exports back to April 1, 1987, the original effective date of the HMT (Swisher International v. United States). Exporters, whether they were involved in the U.S. Shoe litigation or not, immediately began to file claims for refund of the HMT paid on exports.

The second post-U.S. Shoe suit involved interest on refunds of HMT. Here the exporters did not fare as well. The Court of Appeals for the Federal Circuit ruled that the U.S. government was not required to pay interest along with refunds of the unconstitutionally collected HMT (United States v. United States Shoe Corporation). The court's decision was based on the principal that "interest may only be recovered in a suit against the government if there has been a clear and express waiver of sovereign immunity by contract or statute, or if interest is part of compensation required by the Constitution" (Library of Congress v. Shaw). The court found that nothing in the HMT statute, the Constitution, or other equitable principals required payment of interest on HMT refunds.


Application to Imports but not Exports

As a result of the U.S. Supreme Court's decision in U.S. Shoe, described above, as it exists today, the Harbor Maintenance Tax applies to imported products and products transported domestically, but it does not apply to exported products. Undoubtedly, exported products put as much burden on U.S. harbors and shipping channels as do imports, but they are exempt from this ad valorem tax. To resolve this imbalance, either of two steps could be taken. The U.S. Constitution could be amended to allow taxation of exports (a very difficult and likely unsuccessful approach), or the HMT could be replaced with another system of taxation that passes constitutional muster.

HMT Discourages the Most Fuel-Efficient Means of Transportation

Water transportation is the most fuel-efficient method of transportation currently available in the United States. Ships can transport a ton of cargo 514 miles using one gallon of diesel fuel, whereas trucks can transport that same ton of cargo only 59 miles on the same gallon of fuel. As an ad valorem tax, the HMT serves to encourage the use of truck transport for higher-value, lower-weight cargo, leaving waterborne transport as a viable option only for lower-value, high-weight cargo. In an era when the U.S. is increasingly dependent on foreign oil, we simply cannot afford to have a tax policy that discourages fuel efficiency in transportation. A recent example of U.S. efforts to make tax policy consistent with fuel efficiency can be found in the modification of {{section}}179. This provision reduced the small business write-off for sport utility vehicles (SUVs) from $100,000 to a maximum of $24,000 ("I.R.C. 179 Expense" 2006). Eliminating the HMT would allow companies to use waterborne transit for items that are currently transported using less fuel-efficient means. This not only reduces America's dependence on foreign oil, but could reduce highway traffic and reduce the number of accidents on our highways (Stewart 2005).

HMT Violates GATT

After the decision in U.S. Shoe, the HMT applies to imports but not to exports. On February 6, 1998, the European Communities brought a Request for Consultations (RC) against the United States in the World Trade Organization's Dispute Settlement Body. Canada, Japan, and Norway ("Request for Consultations ... Canada, Japan, Norway" 1998) also joined in the RC. The RC alleged that the HMT violated Articles I, II, II, VIII, and X of GATT, as well as the Understanding on the Interpretation of Article II: I(B) of GATT ("Dispute Settlement: United States-Harbor Maintenance Tax" 2006). The European Community's RC was introduced a few weeks before the Supreme Court's decision in U.S. Shoe, but the U.S. Shoe decision at least arguably makes the EC's claim against the HMT even stronger. By dropping the HMT on exports, but maintaining it on imports, the U.S. has unintentionally violated the national treatment obligation under GATT ("Request for Consultations by the European Communities" 1998). This in effect allows tax-free port use to products originating in the U.S. but imposes a tax on imported products, a direct violation of the national treatment clause of GATT Article III (Lundell, S., Princess Cruises, Inc. v. United States). One important exception to this rule applies to user fees, which are imposed for services actually rendered. However, as the Supreme Court noted in U.S. Shoe, the HMT is not a valid user fee because it has little or no direct relationship to services provided to importers (United States v. United States Shoe Corporation). The WTO has not acted on the European Community's RC. No panel has been established to act on the Request for Consultations ("Dispute Settlement: United States-Harbor Maintenance Tax" 2006). Abolishing the HMT would clearly be viewed favorably by our European and other trading partners.

HMT Unfairly Taxes High-Value Cargo when Compared to Low-Value Cargo

As noted in the preceding section, one effect of the HMT is to impose a large tax burden on high-value cargo. While the intent of the HMT is to provide a revenue source for dredging and harbor maintenance, its effect is to strongly discourage manufacturers of high value, non-bulk items from using waterborne transportation. While this would appear to suggest that a tonnage tax would be a fairer means of generating harbor maintenance revenue, fuel efficiency and other issues and opportunities indicate that generating this revenue elsewhere actually represents better national tax policy.

HMT has Prevented Some Types of Waterborne Transport from Flourishing in the Great Lakes

Both Roll-On/Roll-Off (RORO) and various truck ferry services have been very difficult to establish on the Great Lakes due in large part to the existence of the HMT. It effectively transfers goods and products that could be shipped on the Great Lakes to both truck- and rail-based transportation systems. The HMT creates a disincentive for maritime shipping of both ferry cargo and containerized cargo. As an ad valorem tax, the HMT imposes a requirement that containerized cargo be valued for the purpose of assessing HMT. The burden of the HMT is twofold: First, the HMT represents an added cost of 0.125 percent for the product shipped. But also, compliance with the HMT requires valuation of items within any container or vehicle transported onboard a ship, requiring a substantial volume of paperwork (Stewart 2005). There is currently one operating truck-only ferry on the Great Lakes, the Detroit/Windsor Truck Ferry, ferry service to various islands such as the Erie Islands and the Apostle Islands, and a RO-Pax (Roll-On/ Roll-Off with Passenger Service), the Michigan Car Ferry Service on Lake Michigan (Price and Vickerman 2004). The opportunities for additional truck ferry and RO/RO service on the Great Lakes are substantially limited by the imposition of the HMT. Previous research has indicated that the HMT (applied to both imports and exports at the time) was an important factor and perhaps even the primary factor in the termination of RO/RO service between Duluth, Minnesota and Thunder Bay, Canada (Stewart, Lavoie, and Shutes 2003).

As Currently Enacted the HMT is Difficult to Properly Enforce

The HMT currently applies to imports and to domestic transportation. With respect to imports, it is collected by the U.S. Customs Service when the goods arrive in a U.S. port and clear customs. Payment is voluntary with respect to domestic shipping. Since the Customs Service doesn't monitor domestic shipping there is no clear enforcement tool for domestically shipped items. While potential compliance problems alone are usually not sufficient to militate elimination of a tax system, when the system is as flawed as the current HMT, it may be better to eliminate the tax altogether than to try to create a new and expensive system to ensure taxpayer compliance.

HMT Is a Barrier to International Trade

Our trading partners in Europe, particularly those who are members of the European Community, have routinely expressed strong opposition to the HMT. Its imposition on imports (many of which come from Europe) but not on exports is perceived as a tariff on imported goods. While this was clearly not the intention of the Supreme Court's U.S. Shoe decision (United States v. United States Shoe Corporation), the decision's effect is unavoidable. Eliminating the HMT would eliminate this inadvertent "tariff."

HMT Results in a Shift in Container-Borne Cargo to Canadian Ports

Port-related jobs currently employ about five million U.S. workers. These workers earn roughly $44 billion in annual personal income. With respect to containerized cargo, the Port of Seattle estimates that each container of goods that arrives in port adds about $1,000 to the local economy ("America's Ports Today" 2006). Containerized cargo (and bulk cargo as well) entering the U.S. through U.S. ports is subject to the HMT. If the cargo is containerized and enters a Canadian port where the container is moved to a truck or train, it avoids the HMT altogether. The HMT puts ports near the Canadian border at a competitive disadvantage. This disadvantage results in job losses at U.S. ports, some of the highest-paid union jobs in the U.S. ("Repeal the Harbor Maintenance Tax Now!" 2006).

HMT Generates Substantially More Revenue than the U.S. Currently Needs for Harbor Maintenance

The HMT has been a very effective (perhaps too effective) vehicle for generating revenue for the Army Corps of Engineers dredging and harbor maintenance activities. There is currently a $3.1 billion surplus in the Harbor Maintenance Trust Fund, an amount sufficient to support the Army Corps of Engineer's dredging and harbor maintenance at the current rate for 3 1/2 years. The HMT could be abolished currently, and a replacement revenue stream could be deferred or phased in over a period as long as three years without risking any of the Corps' ability to complete important dredging and harbor repairs.

Income from HMT is not Fairly Allocated to the Commercial Ports that Generate HMT Revenues

As previously noted, the HMT was enacted to fund dredging and maintenance of commercial ports. Unfortunately, the HMT is used for a variety of waterway projects that are unrelated to dredging and maintenance of commercial ports. Even if the HMT were lowered so that it produced only enough revenue to fund current and future harbor maintenance and dredging expenses, the allocation of funds is currently unfair.

In some cases HMT revenues have been spent on maintenance of harbors that provide little or no commercial trade, and hence contribute virtually nothing to the HMTF. In other cases HMT revenues are collected at ports that do not require or fund maintenance through HMTF expenditures. The Great Lakes Boating Federation, in making a case for federal support for recreational boating, notes that recreational boaters benefit from large breakwaters protecting cities like Cleveland and Chicago, built and maintained by the Army Corps of Engineers (http://www.greatlakesboatingfedera On the other hand, commercial interests, as represented by the AAPA note in testimony before a House subcommittee, "Ports like Seattle and Tacoma, which need little or no maintenance dredging, have long suffered the inequity of competing for cargos that must pay significant fees for essentially no service" (Nagle 1999).

Calculation and direct comparison of collections and expenditures is currently compromised by lack of data; as noted in the arguments for reform of the HMT and for increased intermodal support by the National Ports and Waterways Institute (NPWI) at the University of New Orleans, since all domestic shipment databases are weight-based, almost no information is available on the value of shipments. The NPWI study makes estimates from ACE lake-wise waterborne commerce data for average value per ton, and shows lake-wise commodity tonnage shipped.

HMT does not Allocate its Tax Burden to Either (1) Ports that Require the Largest Dredging Expenditures or (2) Vessels that Require the Deepest Drafts

While the U.S. Supreme Court made it clear that the HMT is to be classed as a tax (United States v. United States Shoe Corporation) and not a user fee, a tax that is enacted to recover the government's cost for providing a specific service should be fairly applied to the users of those services, to be perceived by the public and the stakeholders as an equitable tax. Dredging expenses (but not necessarily other port maintenance) are largely a function of draft depth of ships traveling through the Great Lakes and St. Lawrence Seaway and the amount of sediment deposited in various locations on the system from rivers and other runoff. The HMT does not attempt to account for these differences in its imposition of an ad valorem tax.

Income from the HMT Is Used for Work at Some Ports but not Others

The Port of Seattle incurred $792,500 in HMT-funded expenses for the years 1999-2004. International imports to Seattle incurred $27,966,250 in HMT for 2004 alone. Seattle is a naturally deep water port, containing at least fifteen berths that are at least fifty feet deep. The Port of Seattle handled 20,564,860 metric tons of cargo in 2005 with this minimal amount of HMT ("Container Terminals" 2006). By comparison, the Port of Wilmington, North Carolina incurred $95,015,705 in HMT-funded expenses during the same five-year period, while international imports shipped through Wilmington incurred only $1,790,000 in HMT for 2004. HMT collections were estimated using USACE value of cargo.

HMT Revenue Is a Small Portion of Total Transportation Tax Revenue and a Small Portion of Transportation Spending

The HMT represents only 3 percent of the U.S. government's revenue from transportation sources. While government spending on water transport is 6 percent of the total transportation budget, this apparent "imbalance" is more than justified by the importance of water transport as both a strategic military tool and the fuel efficiency of waterborne transport as identified previously. The significance of these funding levels is that while the HMT stands as a meaningful barrier to specific types of water transport, it actually provides a very small percentage of the federal government's transportation budget.


The argument in this article is far from the first indictment of the HMT. Carriers, port authorities, shippers, manufacturers, and legal scholars have provided almost constant opposition to the HMT (Messer 1998). For most of these stakeholders, the most significant opposition resulted in the U.S. Shoe litigation, which ended in the elimination of the HMT on exports. Since the end of the U.S. Shoe litigation, several attempts have been made to reform the HMT.

1992 Attempt to Reduce the HMT

In August 1992, H.R. 5896 was introduced to reduce the HMT from 0.125 percent to 0.04 percent, its pre-increase level. The bill also attempted to broaden the types of expenses that could be funded by the HMT and to enhance enforcement by turning 10 percent of all HMT revenue over to the IRS to cover costs of IRS enforcement of the HMT. The bill was not reported out of the House Ways and Means Committee's Subcommittee on Water Resources, and enforcement remains an activity of the U.S. Customs Service (Studds and Moakley 1992).

Trust Fund Excess/HMT Rate Reduction Bill

A bill was introduced by Congressman McDermott (D-WA) to reduce the HMT rate to .0105 for 1996, 0.085 for 1997, and 0.065 percent for 1998. It would then have reduced the post-1998 HMT rate by 0.01 percent for each calendar year in which the HMTF remained funded in excess of $100,000,000. The bill was introduced on March 6, 1995 with an effective date of January 1, 1996. It did not pass a vote in the House Ways and Means Committee (McDermott 1995).

Harbor Services Fund

In April 1999, the Clinton Administration proposed a new Harbor Services Fund Tax (HSF) as part of the Harbor Services Fund Act of 1999, H.R. 1947. The Harbor Services Fund Tax was proposed to replace the revenue lost as a result of the Supreme Court's U.S. Shoe decision. This additional tax would have produced roughly $850 million in additional annual revenue ("Organizations Opposed to Harbor Services Fund Proposal" 2000). The HSF met with strong opposition from a wide variety of shipping industry stakeholders. In describing the HSF, Kurt Nagle, President of the American Association of Port Authorities (AAPA), stated, "The Federal Government continues to suggest that it completely abdicate its financial responsibility for federal navigation channel maintenance" ("Organizations Opposed to Harbor Services Fund Proposal" 2000). The Harbor Services Fund proposal failed in 1999 and was reintroduced by the Bush Administration as part of its fiscal year 2001 budget request, where it once again failed.

Support for Harbor Investment Program Act of 1999

On March 24, 1999 Representatives Borski (D-PA) and Oberstar (D-MN) introduced a bill to repeal the HMT, use the funds in the HMTF to fund dredging activities, and once those funds were expended, to fund the Army Corps of Engineers' dredging out of the general fund of the U.S. Treasury (Borski and Oberstar 1999). The bill was referred to the House Ways and Means Committee and the Committee on Transportation and Infrastructure. The Committee on Transportation and Infrastructure referred it to its Subcommittee on Water Resources and Environment on March 26, 1999. The bill was not reported out of the Subcommittee and died there (Borski and Oberstar 1999).

Container Port Exemption Bill of 2002

A bill was introduced in the House, in July 2002, to provide an exemption to the HMT for any port that is within 200 miles of a container port in a foreign country and that does not use harbor maintenance funds from the Treasury. The bill, offered by several members of Washington State's congressional delegation, essentially would have provided an HMT exemption for the Port of Seattle/Tacoma Washington. The bill was not reported out of the House Ways and Means Committee (Dunn 2004).

$100,000,000 Import Value Port Limit Bill of 2003

A 2003 bill attempted to change the definition of exempt port under IRC [section] 4462(a)(2). This section provides that the HMT does not apply to ports that have not received federal funds for construction, maintenance, or operation at any time after 1977. The bill, which was introduced in the Senate by Senator John Kerry (D-Mass.), attempted to remove this exemption for any port that was used to transport more than $100,000,000 of commercial cargo in any year after 2001. The bill was not reported out of the Senate Finance Committee.

Ferry-Borne Trailer Cargo Exemption Bill of 2004

In March 2004 a bill was introduced in the House which would have provided an exemption from the HMT for "qualified container cargo." Qualified container cargo included cargo "in or on a truck trailer or semi-trailer parked on a ferry operating between two ports for the sole purpose of transporting such trailers and trucks between such ports due to traffic congestion on the nearest international bridge serving the area in which such ports are located" (English 2004). This bill, introduced by Congressman Phil English (R-PA) was an attempt to exempt the Detroit-Windsor Truck ferry and other similar ferries from HMT. The bill was not reported out of the House Ways and Means Committee (English 2004).

Short Sea Shipping Tax Exemption Act of 2005

Congressman Dave Weldon, M.D. (R-FL) introduced a bill on July 18, 2005 which would provide an exemption from the HMT for domestic container-based cargo unloaded in U.S. ports transported between U.S. ports via coastal routes or fiver systems (Weldon 2005). This would have effectively eliminated the HMT on products shipped in containers within the U.S. and left the HMT in place for imports and bulk cargo only. The bill has not been reported out of the House Ways and Means Committee.

Great Lakes Short Sea Shipping Enhancement Act of 2006

On July 26, 2006 a bill was introduced in the House to exempt from the HMT commercial non-bulk cargo loaded at a port in the Great Lakes or St. Lawrence Seaway System and unloaded at any other port in the Great Lakes or St. Lawrence Seaway System (Jones 2006). The bill was referred to the House Ways and Means Committee, but has yet to be reported out of that committee.


After at least nine failed reform attempts in a ten-year period, it is time for a major change to the HMT. We suggest three possible proposals for change: The first two reform proposals would provide a permanent solution to the HMT problem and retain the ability to fund Army Corps of Engineers' important dredging and harbor work. The third proposal, while not solving the HMT problem, at least provides a tax incentive for companies engaged in short sea shipping.

Proposal 1: Abolish the HMT and Fund Harbor Maintenance Using General Government Revenue

This proposal calls for a renewal of the Support for Harbor Investment Program Act of 1999. It provides a clear set of appropriations for the Army Corps of Engineers by requiring funding only in years after the funds in the HMTF are fully expended.

Proposal 2: Abolish the HMT and Fund Harbor Maintenance Using an Increase in the Diesel Fuel Excise Tax

This proposal requires abolishing the HMT and replacing its revenue stream with funds generated from an increase in the federal excise tax on diesel fuel sold for over-the-road use. This excise tax is currently $0.245 cents per gallon. In order to fund the Army Corps of Engineers' dredging and maintenance activities, the required increase in the excise tax would be $0.0112 cents per gallon (2005 diesel excise tax taken from National Energy Information Center, Energy Information Administration, Petroleum Marketing Monthly, February 2006, Explanatory Notes, Table EN1). While this tax increase is borne by the over-the-road transportation industry, as opposed to the marine transport industry, it is fair to propose this burden in order to increase overall fuel efficiency, which favors water transport. As suggested, a tax structure of this type would divert traffic to water transportation and thereby reduce our nation' s dependence on foreign oil. This modal shift would potentially reduce congestion on America's highways as well. (See, for instance, Fruin's calculations and conclusions of cost increase incurred by a proposed shift from waterway to land transportation in the Mississippi Metro area, or the recent modal shift from water to truck for New York trash disposal New York is trying reverse ["City Seeks Ideas as Trash Costs Dwarf Estimate" 2003].) A similar approach has been used successfully in Europe, with the support of the trucking industry.

Proposal 3: The Short Sea Shipping Tax Credit

While abolishing the HMT would be ideal from a tax policy standpoint, should Congress choose to leave the HMT in place, a tax credit should be created to provide a tax incentive for Great Lakes and other U.S. short sea shipping. This non-refundable credit, the "Short Sea Shipping Tax Credit," would operate as follows:

* The credit would be offered to companies engaged in transporting either products or people between any two U.S. ports, or originating in a port in either Canada or Mexico, and ending in a U.S. port.

* The credit would be incremental, meaning that companies would claim the credit on their corporate tax return, but it would be based on the increase in products or people shipped in the current tax year over a base period of the preceding three tax years.

* The credit would be the greater of 10 percent of the increase in value of items shipped for the tax year, or an amount based on the increase in tonnage of items shipped. This tonnage portion of the credit would provide different credit amounts per ton for grain, coal, sand, salt, iron ore, or other bulk cargo.

* The credit would be nonrefundable, meaning that it would offset only positive current tax liability of the carrier. If the carrier has a tax loss for the year, the credit could be carried back two years and forward for five years.


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Mr. Skalberg is assistant professor of taxation and business law, University of Minnesota Duluth, Duluth, Minnesota 55812; e-mail
Table 1. Harbor Maintenance Trust Fund Balances
(figures rounded to nearest thousand)

            Beg. Balance   Revenue          Total Balance

FY 97           $866,063         $789,166      $1,655,230
FY 98         $1,112,241         $687,870      $1,800,111
FY 99         $1,289,018      $615,601 *       $1,904,619
FY 00         $1,608,957         $760,554      $2,369,511
FY 01         $1,667,642         $810,769      $2,478,411
FY 02         $1,818,841         $710,789      $2,529,630
FY 03         $1,873,417         $804,518      $2,677,935
FY 04         $2,092,080         $922,383      $3,014,463
FY 05         $2,366,263       $1,122,630      $3,488,892

            Expenditures   Ending Balance   Net Change

FY 97           $549,502       $1,105,728        $239,665
FY 98           $511,093       $1,289,018        $176,777
FY 99           $295,662       $1,608,957        $319,939
FY 00           $701,869       $1,667,642         $58,685
FY 01           $659,570       $1,818,841        $151,199
FY 02           $656,214       $1,873,417         $54,576
FY 03           $585,855       $2,092,080        $218,663
FY 04           $648,200       $2,366,263        $274,183
FY 05           $705,956       $2,782,936        $416,674

* See estimated collections for 1999 (Table 2.3, Tax
Systems and Barriers to Great Lakes Maritime Commerce,
Final Report

Source: Bureau of the Public Debt, Office of Public
Debt Accounting, Trust Fund Management Branch

Table 2. U.S. Fuel Consumption and Demand

                                       (millions of barrels per day)

Demand                          2005         2006         2007
Motor Gasoline                  9.13         9.19         9.28
Jet Fuel                        1.63         1.66         1.70
Distillate Fuel Oil             4.11         4.20         4.31
Residual Fuel Oil               0.91         0.76         0.81
Other Oils                      4.88         4.93         5.08
Total Demand                   20.66        20.74         21.18

Source: Energy Information Administration-Short-Term Energy
Outlook - July 2006, Table 5a

Table 3. Percent Change in U.S. Fuel Consumption

                                   Millions of barrels per day

                             2005-2006    2006-2007     2005-2007
Demand                         change       change       change

Motor gasoline                 0.66%        0.98%         1.64%
Jet fuel                       1.84%        2.41%         4.29%
Distillate fuel oil            2.19%        2.62%         4.87%
Residual fuel oil              16.48%       6.58%        10.99%
Other oils                     1.02%        3.04%         4.10%
Total demand                   0.39%        2.12%         2.52%

* Diesel fuel is projected to have the greatest change
from 2005-2007.

Source: Energy Information Administration\Short-Term Energy
Outlook - July 2006, Table 5a; Bureau of Business and
Economic Research

Table 4. 2005 U.S. Diesel Excise Tax and Daily, Yearly Demand

                             Federal tax: 24.4 cents per gallon

                             State tax: 21.6 cents per gallon

Daily demand                 = 4.11 Million Barrels (Barrel =
                               42 U.S. Gallons)
                             = 172.62 Million Gallons
Yearly demand                = 63,006.3 million gallons

2005 excise tax collection   = $630,063,000

Sources: Diesel Demand from: Energy Information
Administration--Short-Term Energy Outlook - July 2006, Table 5a;
Excise Tax Totals from: Energy Information Administration, Petroleum
Marketing Monthly, February 2006, Explanatory Notes, Table EN1

Table 5. U.S. Tax Collections and Revenue, Diesel Excise
Tax Compared to HMT

Scenario 1        Increase excise
                  tax to cover

Scenario 2        Increase excise
                  tax to cover
                  total revenue

  Rise in Excise Tax (cents)              2005
Scenario 1        1.12              $705,670,560
Scenario 2        1.78              $1,121,512,140

Scenario 1        Amount needed     $705,956,074 *
                  to cover:

Scenario 2        Amount needed     $1,122,629,667 *
                  to cover:

                  HMT Collections

                      2006 **           2007 **
Scenario 1        $721,123,200      $740,009,760
Scenario 2        $1,146,070,800      $1,176,086,940

* Based on 2005 HMT Collections

** Projection based on stable excise tax using the projected
distillated demand provided by the Energy Information
Administration Source: UMD Bureau of Business and Economic Research
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