Tax Climate At Ports: Changes Needed?

Tax Climate At Ports: Changes Needed?
The Port of Seattle (seen here) and the Port of Tacoma have banded together as the Northwest Seaport Alliance to jointly compete with other North American ports. They'd like to see changes to the U.S. Harbor Maintenance Tax. Photo: James Brooks.

Competition for container ships and their cargo traffic is growing, and the ports of Tacoma and Seattle know they can’t stand still. East Asian shippers are increasingly dialed in to which ports are most timely and economical for getting their exports to destination markets.

Experts say Washington’s ports will have to continue to keep pace not only with U.S. West Coast counterparts, but also those north and south of U.S. borders, in British Columbia, and Panama. Concerns ports have about competitive disadvantages baked into the U.S. Harbor Maintenance Tax (HMT) are a big piece of the puzzle, and an attempted fix is afoot in Congress.

The stakes are high for Washington. Forty percent of Washington jobs are linked to international trade. The gross business income of Washington maritime industries hit $15.2 billion in 2012, with $3.7 billion via logistics and shipping.

There are 75 ports statewide. They actively pursue a joint pro-growth agenda through the Washington Public Ports Association. The association’s motto captures the growth potential and job impacts of trade: “Washington’s products share a single market: the world.”

Shipping Hurt In Recession; Competition Keener

Yet trade and shipping haven’t been immune from economic downturns, which have wrought change. “The shipping industry is the most competitive it has ever been and lost millions of dollars since the recession hit,” said Tara Mattina. She’s communications director for the Northwest Seaport Alliance, the fourth-largest container gateway in North America. She said the Alliance was formed because the ports Seattle and Tacoma wanted to stop competing with each other and join to compete with Southern California and Canada instead.

At top of mind is Prince Rupert’s port in British Columbia, growing to accommodate an additional 500,000 containers each year. In contrast to the U.S., Canadian ports are free of an HMT. Pending legislation in the U.S. Senate and now the House, could help. A provision would allow HMT rebates to customers who otherwise would likely not call.

The HMT charges cargo owners or importers .125% of the value of each container once it clears customs. It’s collected on imports, domestic shipments, Foreign-Trade Zone (FTZ) admissions, and cruise ship passengers. The vast bulk of revenues are from imported cargo. The Harbor Maintenance Tax added $71 million in fees to the cost of goods entering the ports of Seattle and Tacoma last year.

Routing U.S.-bound Cargo Through Canada

The Canadian-entry alternative to North American markets is proving costly for U.S. ports, including the Alliance’s. According to a 2012 study done by the Federal Maritime Commission, the HMT accounts for approximately 50 percent of the U.S.-bound cargo that shippers decided to route through Canadian ports.

Sean Eagan, Director of Government Affairs for the Port of Tacoma, recently told the Washington State Senate’s Government Operations and Security Committee that the tax creates a competitive disadvantage. He explained, customers have to make a choice: “Come into Puget Sound or hang a left and go to a Canadian port where it’s cheaper, one of the reasons being…the Harbor Maintenance Tax.”

Prince Rupert’s Selling Points Strong

The Port of Prince Rupert constitutes the largest single source of American cargo diversion. Among its other advantages to northeast Asian shippers and customers are its geographic location, and its naturally deep, ice-free harbor.

The port claims that customers choose it because its usage “cuts cargo’s transit time by days.” It cites as advantages the fast, fluid transit of cargo to terminals, and the ability for land carriers of shipped cargo to avoid urban region traffic congestion. That’s something which continues to cripple Central Puget Sound’s highways during peak, and now some off-peak, travel hours.

A $200 million project is underway to expand Prince Rupert. Capacity there by 2017 will grow to 1.3 million twenty-foot equivalent units (TEUs) per year, from 776,412 in 2015.

Kurt Beckett, the Alliance’s CEO, told KING5-TV: “When we see volumes that certainly exist in Prince Rupert today on intermodal cargo bound for Chicago, that 10 years ago wasn’t the case, clearly that’s a competitive challenge and it’s part of why the Seaport Alliance has been formed – to really address that threat,” he said.

“Prince Rupert is a really interesting case,” Mattina said. “It is in a really unique area. It has a nice rail line that drops right down into the mid-range U.S.”

Canada Wants Port-Related Jobs: Does Washington?

Herb Krohn, Washington Director of the International Association of Sheet Metal, Air, Rail and Transportation (SMART) Workers Union, Transportation Division, told Lens that unlike in America, Canadian public officials are on the same page.

“They want the jobs and they’re singularly focused on the economic betterment of the citizens of Canada. You don’t have entities fighting each other like you have here,” he said. The Washington Department of Ecology and in some instances the federal government have continued to block or delay several key port or shipping terminal expansions in Washington State, because they would facilitate shipping of fossil fuels.

Port growth and tax climate aren’t the whole of it. Another concern is fair return on HMT revenues to ports where they’re collected. When “Congress collects the tax” at the ports of Tacoma and Seattle and other deep-water harbors “…they divert the money elsewhere,” Eagan told the state Senate committee. A 2013 report by the research arm of Congress underscores the point.

Legislation Seeks to Fix the Harbor Maintenance Tax

Last week, a group of Washington U.S. representatives introduced the Harbor Maintenance Trust Fund Reform Act of 2016. It’s a companion to a Senate bill introduced by U.S. Senators Patty Murray and Maria Cantwell, both Washington Democrats, in March of this year.

“This bipartisan bill will introduce a degree of equity into the HMT system that has long been lacking,” said Connie Bacon, President of the Port of Tacoma Commission. “By allowing our ports to finally receive a fair return, this proposal will help The Northwest Seaport Alliance maintain a competitive trade gateway for manufacturers and growers throughout the state.”

Eagan told Lens that the legislation builds off of the 2014 enactment of the U.S. Water Resources Reform and Development Act. Some key improvements include allowing the tax to pay for maintenance dredging at berths instead of just navigation channels, benefitting deep-water harbors like Seattle and Tacoma. Another change would permit HMT funding for disposal of contaminated sediment, which has been paid for directly by the ports.

A key feature of the proposed legislation is that it would allow the use of HMT revenues for customer rebates, according to Eagan. He said that will “level the playing field” with competitors in Canada who don’t charge a similar tax. He told Lens that the legislation will also benefit smaller harbors, which typically get “little to nothing at all” from the HMT trust fund, by making sure ten percent of related spending is available to them.

The next step is to build support for the legislation, according to Eagan. He said Washington lawmakers are having conversations with legislators around the country in similar donor port regions in states such as California and New York.

Panama Canal Expansion: Game Changer?

Washington’s biggest ports are also looking south. The $5.25 billion Panama Canal Expansion project is scheduled to finish by the end of June and will double the canal’s capacity by adding a third lane of traffic and a new set of locks.

Existing locks allow the passage of vessels carrying up to 5,000 TEUs. Once the expansion project is done, “Post-Panamax” vessels will be able to transit through the Canal carrying more than double the amount of cargo, up to 13,000 or 14,000 TEUs.

Mattina said that East Coast and Gulf Coast ports are preparing for bigger ships coming through the widened Panama Canal, and are developing terminals and dredging to have deeper berths. She added the Alliance is aiming to improve the ports in the Puget Sound by phasing investments strategically to make sure they are ready when the bigger ships come.

David Matsuda is the former U.S. maritime administrator to the Obama Administration. He is now working on a report for the Washington Maritime Association on how to increase the competitiveness of Washington’s ports. He said there won’t be an overnight threat from Panama.

“Even if you could start running these giant vessels through the Panama Canal, you need the cargo to run these ships, otherwise you’re losing money,” he told Lens. Matsuda said one factor for shippers to consider is how much the Panama Canal will charge to use the wider lane. Some might avoid the Canal if it’s too expensive.

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