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Article Excerpt
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.
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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.
HISTORY OF THE HARBOR MAINTENANCE TAX
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).
LEGAL CHALLENGES TO THE HMT's VALIDITY
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...
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