Acting on his vow to significantly boost taxation of the cruise industry, Sen. Jay Rockefeller (D-W.Va.) has introduced two bills: one to end the cruise lines’ exemption from U.S. income tax and another to impose a 5% excise tax on revenue generated by U.S. cruises.
Together, the two measures could generate hundreds of millions of dollars in tax revenue — possibly close to $1 billion, based on the industry’s 2012 results.
The income tax measure (S.1449) would terminate a cruise industry exemption contained in Section 883 of the Internal Revenue Code.
Rockefeller said in a statement that ordinarily the U.S. requires foreign corporations to pay income tax on profits earned in the U.S., but it exempts certain overseas corporations operating foreign-flagged ships.
He said the exemption was designed to avoid multiple taxation, based on the expectation that the affected companies would pay income tax on their international shipping activities in their home countries. In practice, however, he said that doesn’t happen.
His bill would stipulate that international cruises that embark or disembark passengers at U.S. ports are “connected with the conduct of a trade or business within the United States” and therefore subject to income tax.
The provision would apply to ships with berths for 250 or more passengers. It would not apply to ferries, to ships operated by the federal or state governments, to cruises on inland waterways or that operate between U.S. ports with no foreign ports of call.
Although U.S. corporate tax rates vary considerably, depending on various factors, the average effective U.S. corporate tax rate is approximately 13%, according to a Government Accountability Office report based on 2010 data.
The big three cruise companies reported net income of nearly $1.9 billion in 2012, most of which was exempt from federal income tax. Not all of it would have been taxable under Rockefeller’s bill, but a 13% tax rate, if applied to the entire amount, would have created a tax liability on the order of $245 million.
The proposed excise tax could generate even more revenue.
Under Rockefeller’s second bill (S.1450), a 5% levy would apply to “gross receipts derived from cruises,” presumably including passenger fares, onboard sales, tour receipts and other cruise-related revenue.
The tax would apply to 100% of gross receipts when “a majority of the passengers on any covered passenger cruise embark or disembark in the United States.” If less than a majority embark or disembark in the U.S., then the tax would apply to 50% of the gross receipts attributable to that cruise.
As with the income tax, this excise would not apply to ferries, government vessels, ships with fewer than 250 berths, cruises in inland waterways or those that operate solely between U.S. ports.
According to their annual reports, Carnival Corp., Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings generated total revenue of more than $25 billion in 2012. If just half that amount had been subject to the 5% excise tax, the tab would have been $625 million.
The cruise industry “strongly opposes” both bills, according to a statement by CLIA Public Affairs Director David Peikin. He said the measures would make the U.S. “a very unfavorable jurisdiction for cruise lines to operate relative to neighboring countries.”
The CLIA statement continued, “Currently, U.S. tax law is generally in line with other countries which are seeking to attract and retain the very substantial jobs and economic activity generated by the international cruise line industry. S. 1449 and S. 1450 would … [place] the U.S. at a severe competitive disadvantage.”
CLIA also noted that “the cruise industry is a significant contributor to the U.S. economy, providing $42 billion in economic benefits in 2012, including more than $17 billion in wages to American workers.”
A statement issued by the Commerce Committee, which Rockefeller chairs, said the plan for an excise tax “would require cruise lines to begin paying tax levels that most other transportation industries already pay. The tax payments help cover costs of building and maintaining the nation’s infrastructure.” The statement said the tax would be “similar to the passenger taxes in the aviation industry.”
Under Rockefeller’s legislation, money generated by the cruise excise tax would go into a proposed “intermodal transportation infrastructure trust fund,” which would be used to finance infrastructure projects across all transportation modes, including aviation, highways, rail, transit and petroleum pipelines as well as maritime and port and waterway infrastructure projects.
The bill does not specify that funds from any particular mode would be invested in that sector, as is currently the case with aviation taxes.
Rockefeller’s two bills were introduced just as Congress was beginning its August recess. As of last week, they had no cosponsors and no companion bills in the House. They were referred to the Senate Finance Committee, of which Rockefeller is a member.