Three years after Alaska citizens decided that anyone visiting the state on cruise ships should pay a $46 head tax, the cruise industry has raised a loud objection in federal court.

The Alaska Cruise Association, the industry's state lobbying arm, filed suit on Sept. 18 in federal district court in Anchorage, arguing that the tax "blatantly violates" federal laws that prevent states from charging marine passengers fees to pay local expenses.

The suit also claims that the tax violates constitutional prohibitions against interfering in interstate commerce and that it discriminates against non-Alaskans.

"The ACA therefore brings this action to prevent the continued collection of this unlawful entry fee," the suit states.

Named as the defendant is the Alaska Department of Revenue, the agency responsible for collecting the tax.

The suit claims that the tax violates the language of the initiative by diverting a portion of the cruise tax revenue to localities that are not ports of call and to projects that provide no benefits to passengers.

Court documents cite as examples $800,000 for improvements to the zoo in Anchorage and $1 million for the Morris Thompson Cultural and Visitors Center in Fairbanks, which lies about 400 miles from the closest cruise port.

"The cruise lines expect to pay the costs associated with the services" that are provided to them by the state and its ports, said John Binkley, the former Alaska gubernatorial candidate who now heads the cruise association. "Typically, the way a fee is charged is you first have an assessment of what the needs are. It strikes us as a little backwards to put out an arbitrary number and then decide how to spend it."

Earlier this year, Responsible Cruising in Alaska, the organization that sponsored the ballot initiative in 2006, also voiced concerns about how the funds were being appropriated.

In April, Responsible Cruising raised the issue with then-Gov. Sarah Palin in a letter from the group's president, Chip Thoma, which listed several appropriations that the organization felt were not "consistent with applicable state and federal law."

"We believe that the revenues derived from the various taxes ... should, to the greatest extent possible, be spent on projects and activities that have a strong nexus with cruise ships and cruise ship passenger activities," Thoma wrote.

He also cited the financing of the Fairbanks cultural center and other projects, as something that "may be inconsistent with the stated purposes of state law." Thoma offered examples of projects that the group felt merited the funds, such as the $1 million cruise ship mooring buoy system in Hoonah and $2.5 million worth of dock improvements in Juneau.

Thoma told Palin that the "basic rule of thumb" should be to "build a wharf or other infrastructure as close to a wharf as possible. This has proven to be an effective filter for evaluating the many proposals when there is competition for scarce capital funding."

In its lawsuit, the cruise association offered evidence that this rule of thumb was not employed when the Alaska Legislature appropriated the cruise tax revenue collected by the department of revenue.

"The thing that is maddening is that there are a lot of people who say 'build wharves and docks,' which are clearly legal, but people are yammering for money," said Joe Geldhof, one of the authors of the 2006 initiative. "The excise tax represents a significant amount of money, new money in one sense, and they started divvying it up based on political factors rather than legal factors."

Geldhof also said that because cruise officials did not press the state legislature early on about how the revenue would be spent, "the attorney general will say, 'Where were you during the appropriations sessions?' They were sitting on their hands."

For his part, Alaska Attorney General Dan Sullivan told a Juneau newspaper that the state would fight the suit.

"The cruise ship industry has been threatening to sue the state ever since Alaska citizens voted to require passengers to pay their fair share of the costs of services and facilities provided to host them," he told the Juneau Empire.

The suit should have come as no surprise to anyone.

Back in June, Carnival Corp. CEO Micky Arison warned that Alaska should expect the cruise industry to sue to repeal the initiative.

"While we have tried everything we can to get leadership in Alaska to address the issue to the best interest of our industry and tourism in general to Alaska, we have been unsuccessful, and in the end we may have to litigate," Arison said.

The suit addresses only the head tax, but the Cruise Ship Initiative also slapped the cruise lines with a host of regulations and other levies, such as corporate income taxes and taxes on gambling revenues, that they are not required to pay in other destinations.

In recent months, cruise lines have cited the high cost of doing business in Alaska as their reason for removing capacity from the state's waters in the 2010 season. This year, the number of cruise passengers in Alaska is down by 140,000, or 14%, compared with last year.

Most major cruise lines operating in Alaska, including Royal Caribbean Cruises Ltd., Norwegian Cruise Lines and Carnival's Holland America Line and Princess Cruises brands, have announced they will redeployed vessels elsewhere for the 2010 season. In each case, they have noted the high cost of doing business in Alaska.

During last week's Carnival earnings call, Arison told analysts, "When we compare Alaska to other premium cruise markets during the peak summer months, it is now far less profitable than it has been in the past. If it pays to pull a ship from Alaska and put it in Europe or pull a ship from Alaska and put it in the Far East, [the brands] will do that. That is exactly what they did in 2010, and we are going through those reviews right now. It is likely we are going to do more [redeployments] in 2011, because you are talking the peak July and August period, where we can make a lot of money on a lot of different itineraries. And you can't make a lot of money in Alaska because of this initiative."


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