Alaska senators help save giant tax loophole for cruise ships

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Carnival Cruise Lines dominates the cruise ship business in Alaska, as it owns Holland America and Princess, big players on land and sea.

The company enjoys many federal government services and can always call on the Coast Guard for help in an emergency, but it has a history of paying next to nothing in federal income taxes.

It does pay federal taxes on such holdings as its Westmark Hotels and Princess Lodges, and those taxes would be reduced sharply under the plan by President Trump and the Republican Party. But it would still evade corporate income taxes on what it earns from cruise ships.

You would think that a U.S. company paying something like 1 percent—courtesy of a loophole endorsed by both parties for decades—would be in line for some kind of tax increase to make things fair.

But the GOP tax plan that Sens. Lisa Murkowski and Dan Sullivan call "reform" preserves the industry loophole.

Some leading Republicans recognized this boondoggle and called for a cruise ship tax, estimated at $70 million a year, with the exact amount to be calculated based on how long ships were in territorial waters. Enacting the plan would have meant an effective tax rate of about 2 percent, an analyst for UBS said.

But Sullivan amended the bill, claiming it would harm Alaska, and the tax disappeared, which is what the industry wanted. The tax would have been a minor offset to the giant tax decrease for corporate America. With the loophole preserved, the deficit will be bigger and the cruise industry will sail on, free from most federal taxes. The measure could have been amended to treat Alaska fairly, if indeed that was an issue.

The GOP tax bill is not really about reform, which is a favorite word of every politician. It could be a TV show. Everybody likes Reform.

The bill is really about preserving and expanding loopholes, some of them big enough for a fleet of cruise ships. It would add $1.5 trillion to the deficit, while laying the groundwork for future cuts in Social Security, Medicare and Medicaid. 

Murkowski and Sullivan continue to claim this bill is all about helping the middle class, repeating the GOP talking points memorized by every Republican, but it's not true.

How does Carnival do so well in avoiding U.S. taxes? The simple answer is that the federal government created a loophole, the industry is powerful and Congress won't risk alienating its wealthy benefactors.

Murkowski collected $27,450 last year in cruise industry contributions, while Sullivan received $23,500, placing them second and third on the list of top recipients among senators, according to Open

Carnival is based in Miami, but legally it exists in Panama and U.S. tax law allows it to evade most federal taxes. Its customers are led to believe that Carnival and its many branches are American firms and the company has the protection of the Coast Guard. The clear loser in this arrangement is the American taxpayer.

"Among large corporations, Carnival is a leader in maintaining a low tax rate, with a ten-year cash effective tax rate of 0.7 percent," the authors of a 2008 study on Long Term Tax Avoidance concluded. (The full text is below.)

Carnival is not shy about this special tax treatment in Section 883 of the IRS code. It tells the Securities and Exchange Commission that favorable tax treatment is subject to change at any time: "It is possible that Carnival Corporation and its ship-owning or operating subsidiaries whose tax exemption is based on Section 883 could lose this exemption."

But the cruise ship industry has enough political clout in Congress to prevent that and it has great power in Alaska. That the  Senate caved without a fight on this minor tax increase—which would have helped in a small way to offset the giant tax decrease the GOP and President Trump support—suggests why our tax laws are littered with loopholes for powerful interests.

For every loophole, there is someone to protect it. In this case it was Sullivan.

He offered the usual folderol about how the tax would harm Alaska communities because the cruise ship companies would go elsewhere.  What he didn't say was that the legal evasion of taxes by the industry harms Alaskans and all other Americans who believe that taxation should be based on reason.

Dermot Cole2 Comments