United States: Who Should Pay For Dredging?

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.

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.

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:

1. Ports on an inland waterway;
2. Ports not open to public navigation;
3. 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;
4. Channels of the Columbia River upstream of the Bonneville lock and dam;
5. Items carried on vessels other than commercial vessels;
6. Cargo consisting of fish or other aquatic life caught and not previously landed on shore;
7. 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;
8. 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;
9. Cargo or passengers loaded in Alaska, Hawaii, or a U.S. possession and unloaded in the same state or possession;
10. Passengers transported on U.S. flag vessels operating solely within state waters of Alaska or Hawaii and adjacent international waters;
11. Crude oil with respect to Alaska;
12. 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;
13. Bonded commercial cargo entering the U.S. for transportation and direct exportation to a foreign country;
14. Certain cargoes exported to Canada or Mexico;
15. Cargo where the tax would be imposed on the United States or any agency or instrumentality thereof;
16. Unloading of cargo from a vessel where the tax has been paid when the same cargo was loaded on the same vessel;
17. Movement of cargo within the same port;
18. 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;
19. 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;
20. De minimus individual shipments; and
21. 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.