Harbor Maintenance Funding

CRS Report for Congress
Received through t he CRS W e b
Harbor Maintenance Funding
Upda ted Janua ry 13, 2004
JohnF.Frittelli
Analys t in Transportation
Resources, Sc ience, and Industry Division

Congressional Research Service ˜ The Library of Congress

Harbor Maintenance Funding
Summary
The Harbor Maintenance Tax (HMT) was instituted by t he Water R es ources
Development Act of 1986 (P.L. 99-662) to pay for the routine m aintenance and
operations costs o f h arbors. Numerous legal challenges to the HMT raise questions
about it s f u t ure and the i ssue o f possible l egislative changes. In M arch 1998, the
Supreme C ourt s truck down t he applica tion of t he HM T w ith respect to ex ports,
finding that it violat ed the C onstitution’s ban on ex port t ax es . C as es regarding t he
constitutionality of the HMT on imports remain in litigation. The European Union
sees the application of t h e H M T t o imports as a discriminat ory import t ariff t hat
vi ol at es t h e G eneral Agreem ent o n T ari ffs and T rade (GATT).
Th e current Harbor Maintenance T rust Fund balance, in conjunction with the
revenue st ream from t he rem ai n i n g HMT col l ect i ons and i nt erest p aym ent s, are
consi d ered suffi ci ent t o cover ex p endi t u res for t h e foreseeabl e fut u re. However, t he
results of the l egal and t rade challenges could reduce o r h alt i ncoming revenue.
Harbor maintenance d redging requi rem ent s are ex pect ed t o i n crease i n t he near-t erm
over recent l evel s due t o current deepeni n g p ro j ect s at m any port s . Larger
containerships a ppear to be the p rimary driving force behind current dredgi ng
activity.
Issues for t he 108^th C o n g ress include how to finance h arbor maintenance i n a
manner t hat i s both constitutional and not in violation of t rade agreem ents, and how
to finance t h e f e d eral portion o f h arbor-d eepeni n g p roj ect s. Key pol i cy quest i ons
include: S hould t he federal government return to using t he general fund to finance
h a r bor maintenance? Should a new u ser f ee be established t o p ay for h arbo r
maintenance? The l arger i ssue t hat m ay need to be r e s o l v ed before a funding
solution can be found is: what s hould t he role of the federal government be in port
maintenance and dredgi ng? The W ater R esources Development Act of 2003 (H.R.
2557), which passed t he House, would i ncrease t he role of the federal go v e r n ment
by increas ing its share of t he cost in h a rbor deepening and maintenance project s.
This report will be updated as warranted.

Contents
W h y Is Harbor Maintenance Funding Currently an Issue? ..................1
Background ..................................................1
LegislativeHistory .............................................2
The C urrent Status of Harbor Maintenance Funding .......................3
TheImpact ofContainerships on DredgingNeeds ........................5
Alternative Funding Options That Have Been Considered ..................6
ACarrier-Based UserFee .......................................6
GeneralRevenues .............................................7
Issues forCongress ................................................7
TheStatusQuo ................................................8
EconomicEfficiency ...........................................8
EconomicDevelopment ........................................10
CargoDiversion ..............................................11
StakeholderPerspectives .......................................12
Cost ShareFormulas ..........................................12
DredgingFees andShort-SeaShipping ............................14
ListofTables
Table1.MaximumFederal Cost-ShareRequirementsforHarbors ...........3
Table2.HMTFBalances andTransfers* ...............................5

Harbor Maintenance Funding
W hy I s H arbor Maintenance Funding
Currently an Issue?
Ports h andle m or e t han 35% (by v alue) of t he Nation’s imports and ex ports,¹
and t he role of water t ransport i n t he national economy i s growing as trade policies
increase t he quantity of goods transported. A recent assessment o f t he U.S. marine
transportation s ys tem by t he Department of Transportation predi ct s t hat t he total
tonnage of U.S. domestic and i nternational m arine t rade will more than double b y
2020.² Ocean carri ers are depl oyi n g l arger s hi ps wi t h deeper draft s t o handl e t he
robust growth i n m aritime trade.
The Harbor Maintenance Tax (HMT) was instituted by the Water Resources
Development Act of 1986 (W RDA 1986, P.L. 99-662) to pay for routine
maintenance and operations costs o f h arbors.³ The funds are d eposited i n t he Harbor
Maintenance Trust Fund (HMTF). N u m ero u s legal challenges to the HMT raise
questions about its future and possible l e g islative changes. Harbor maintenance
dredgi ng requi rem ent s are ex pect ed t o i n crease i n t he near-t erm due t o current
channel d eepeni n g p roj ect s at m any port s .⁴
Thi s report revi ews recent d evel opm ent s i n harbor m ai n t enance l egi s l at i o n and
the current status of harbor maintenance funding. R ecent t rends in container s hipping
and t heir impact on port d redging requirements are discussed. T h e report also
describes alternative funding proposals t hat h ave b een considered. T he last section
ex amines the impact these and other funding alternatives may h ave o n t he geography
of U.S. maritime commerce. The deci sion on how best to finance harbor dredgi ng
requi res b al anci ng nat i onal econom i c effi ci ency concerns wi t h l o cal port econom i c
development concerns.
Background
Two points o f clarification are helpful i n a discussion about the HMT. The first
is the distinction bet ween harbor maintenance and harbor-deepening project s. Thes e
projects are approved under d ifferent procedures and are funded from s ep a r ate
appropriations accounts. Harbor maintenance refers t o t he routine d redging o f h arbor

¹ Bureau of Transportation Statistics, Pocket Guide t o Transportation, December 2000, p.

23.

² U.S. DOT , An Assessment of t he U.S. Marine Transportation System, Sept. 1999, p.44.
³ For a n ove rview of t he HMT a nd Inland Waterway T r ust Fund, see CRS Report RL32192,
Harbors and Inland Waterways: An Overview of Federal Financing.
⁴ U.S. DOT , An Assessment of t he U.S. Marine Transportation System, Sept. 1999, p.33.

channels to their ex i sting d epth. Funds in the HMTF are used to pay t he f e d eral
portion o f routine d redging which Congre ss makes available t hrough Energy and
W ater Development Appropriations. Harbor-deepening (or widening) p rojects are
new p rojects t hat i ncrease t he authoriz ed depth/width o f h arbor channels. C ongress
authoriz es new channel d epths t hrough t he biennial W ater R esources Development
Act. Funds for t he federal s hare of harbor-deepening p rojects are provided from U.S.
Treasury general funds.
The U.S. Army C orps of Engi neers h as t h e r esponsibility for both t he
m ai n t enance and deepeni n g o f f e d e ral wat erway channel s .⁵ Funding for d redging
harbor berths, t h e w aterside area along the wharf where a v essel i s docked, is the
responsibility of state o r l ocal port authorities.
A s econd useful point of clarification i s the di st i n ct i o n b et ween “shi pper” and
“carri er”. In everyd ay usage, t h e t erm “shi pper” can refer t o bot h t he cargo owner
and t he t r a n sporter o f goods. In t he transportation i ndustry, the t erm “shipper” is
used to identify t he owner of t he cargo in motion, e.g. the party that pays the freight
bill. The t erm “carrier” i s d efined as the p arty providing the t ransportation s ervice.
In a m aritime contex t, the carrier would be t he shipowner or operator. Under t he
current HMT s cheme, the s hipper i s liable for paym ent o f t he tax resultant from cargo
vessel m ovements. Fo r p assenger vessels, t he carrier is liable for the t ax .
Legi sl ati ve Hi s tor y
Prior t o 1986, U.S. Treasury general funds were used to pay t he federal s hare for
operation and maintenance (O&M) of harbors and for t he deepening o f channels.⁶ In
1986, Congress enacted cost-share requi rements for harbo r deepening and
maintenance (as shown i n t he Table 1 below). The HMT was devised t o p r o v i de
stable federal funding for t his purpose. Th e t a x was o rigi nally applied o n an ad
val o rem⁷ basis o n commercial cargo for any use o f federally-maintained ports (e.g.,
the l oading of ex ports and unloading of im ports, domestic as well as i n t e rnational
cargo ). In 1986, the HMT was established at 0.04% of the cargo value. This revenue
was i ntended t o p ay for 40% of O&M costs incurred b y t he Army Corps o f Engineers
and 100% of O&M costs of the S t. Lawrence Seaway. S ection 11214 of the Omnibus
Budget Reconciliation Act of 1990 (P.L. 101-508) increased the HMT from 0.04%
to 0.125% in order t o recover 100% of the C orps’ port O&M ex penditures.

⁵ For f urther information on t he Army Corps , s e e C R S Report IB10120, Army Corps o f
Engineers Civil Works Program: I ssues for Congress.
⁶ Prior to1986, the federal share of operations, maintenance, and deepening of ocean and
inland ports was 65%. T he rema ining 35% was paid by t he ports, or by s tate and l o c al
government.
⁷ Ad val orem means based on the value of real property.

Table 1. M aximum F ederal Cost-Share Requirements
forHarbors
Harbor De pth Construction O perations and Maintenance
<20 f t. Harbor 80% 100%

20-45 ft. Harbor 65% 100%

>45 f t. Deep Harbor 40% 50%
^Source:^Wat^e^r^R^es^ou^rces^D^e^v^e^l^opm^en^t^A^ct^of¹⁹⁸⁶^(P.L^.^99-^662).
In March 1998 , t h e U.S. Supreme C ourt struck down t he application o f t he
HMT with respect to ex ports, finding that i t v i o l ated Article I, Section 9, C lause 5
of the C onstitution which stat es that , “No tax or duty shall be laid on articles
ex port ed from any st at e.”⁸ Ex ports generated about a third of the fund’s revenues.
Other court d ecisions (including decisions by the U.S. C ourt o f International Trade
(CIT), the U.S. C ourt o f Appeals, and t he U. S. Supreme C ourt) have established t hat
HMT i s constitutional as applied t o domes tic shipments and the embarkation of
cruise line passengers. Cases regarding the constitutionality of the HMT on imports
remain in litigation.⁹
The federal government is statutorily required t o continue collecting t he HMT
from non-ex port cargo a n d p assenger categories. The E uropean Union s ees the
application of t he HMT t o imports as a discriminat ory import t ariff t hat violates U.S.
obligations under t he W o rld Trade Organiz ation (W TO). Approx imately 80% of
HMT collections in FY 1999 were derived from imports, with the remaining revenue
coming from collections on domest i c cargo (11%), foreign t rade z one cargo (8%),
and crui s e s hi p p assengers (1%).¹⁰ In February 1998, the E uropean Union requested
W TO consultations on the i ssue. A first r ound of consultations took place in March
1998. Second round nego tiations, which incl uded J apan, Norway, and C anada, took
place in J une 1998. The European Union i ndicat ed that if satisfactory l egislation was
not p a s s e d b y J a nuary 1, 2000, it would ask for a dispute resolution p anel. As o f
December 2003, however, t he European Union h as not requested a p anel.
The Current Status of Harbor Maintenance Funding
The revenues collected from t he HMT a r e deposited i nto t he HMTF. M uch
uncertainty about the future o f t he HMTF ex ists because of th e v arious legal
challenges. The HMTF balance was $1.85 billion at t he end o f FY2002, as shown i n
Tabl e 2 . C urrent l y, revenue deposi t ed i nt o t he HMTF ex ceeds t ransfers out of t h e
fund. The HMTF b alance increased in FY 1999 as a result o f t he Energy and W ater

⁸ U.S. Supreme Court, United States v . United States Shoe Corp., 523 U.S. 360 (1998).
⁹ U.S. Departme nt of the Army. Annual Report t o t he Congress on t he Status of the Harbor
Maintenance Trust Fund for FY 1999. February 2001 (most r ecent r eport available). For
a discussion of the l egal challenges that have been brought against t he HMT , see pp. 9-10.
¹⁰ U.S. Departme nt of the Army, Annual Report t o Congr e s s on t he Status of the Harbor
Maintenance Trust Fund for FY 1999, February 2001, available at:
[http://www.wr sc.usace.army.mil/iwr/Products/re ports/reports.htm#navi gation]

Development Appropriations Act o f FY 1999 (P.L. 105-245), which did not require
the recovery of Corps o f E ngineers O&M ex penditures from t he fund for t hat year.
The current HMTF balance, in conjunction with the revenue s t r e am from t he
re m a i n i n g HMT col l ect i ons and i nt erest p aym ent s, are consi d ered suffi ci ent t o
recover ex p endi t u res for t h e foreseeab l e f u t u r e. However, t he resul t s of t h e
aforem ent i oned l egal and t rade chal l enges coul d reduce o r h al t i ncom i n g rev enue.
Should t hat o ccur, the fund could quickly be depleted at which point policym akers
would h ave t o d ecide whether t he federal government would continue to fund harbor
m ai n t enance and i f affi rm at i v e, woul d h ave t o d evel op a m echani s m t o d o s o.
There are a number o f s ignificant channel d eepen i n g ( o r wi deni ng) p roj ect s
nearing completion, under way, o r i n t he planning stage.¹¹ An obvious concern i s t he
effect t h ese d eepeni n g p roj ect s w i l l have on future harbor maintenance cost s . T he
DOT ex pect s m ai nt enance cost s w i l l l i k el y i ncrease, at l east i n t he near t erm :
Overall, however, t he Nation’s f uture dre dging r equirements can be expected to
gr o w above r ecent highs followi ng the completion of c urrent and f u t u r e
deepening proj ects and the ongoing maintenance r equirements associated with
these deeper channels.... Upon completion of j ustified deepening work, an initial
increase i n maintenance dredgi ng requir e ments can be expected until the
hydrodynami cs of the deeper channels begi n t o s tabilize t o t he new dimensions.
T he l ong-t e r m i mpacts of deeper channels on annual maintenance dredgi ng is
somewh at more uncertain, with dredgi ng needs highly s pecific t o each proj ect
location and subj ect t o a complex s et of variables i nvolvi ng the natural coastal
and r iver processes t hat affect sediment movement.¹²
In addition t o t he total amount of materi al dredged, total ex p enditures m ay
increase due to an increase i n t he per unit cost o f d redged material. The port i ndustry
cites U.S. Army C orps of Engi neers’ figures which show that over t he last 30 years,
the t otal cost of dredgi ng has i ncreased while the volume o f m ateria l d r e d g e d has¹³
act ual l y decreased. A review o f t he Corps O&M budget on dredgi ng for fiscal years
1990 to 1999 s h o ws a steady i ncrease i n t otal ex penditures from $370 million i n
1990 to $684 million i n 1999. The yearly amount of mat e r i al d r edged for
maintenance over t his s ame p eriod fluct uates around an average o f 236 million cubic¹⁴
ya r d s . C o m p l i cat i n g t he dredgi ng process i s t he fact t h at port s are o ft en l o cat ed i n
or near environmentally sensitive areas such as wetlands, estuaries , and fisheries. A
growing concern i s a shortage of disposal sites and a l ack of disposal options. The
volume o f s ediments classified as contamin ated has i ncreased but this may b e due to
new t esting requirements.

¹¹ For a current listing of dredging proj ects s ee “U.S. Ports - W h i c h i s the Deepest?” JoC
Week, Aug. 27-Sept. 2, 2001, p. 24. Also see, “Big S h i p s , B i g Problems,” Ameri c an
Shipper, Aug. 2001.
¹² U.S. DOT , An Assessment of t he U.S. Marine Transportation System, Sept. 1999, p. 33.
¹³ American Association of Port Authorities, Partnering in Infrastru c t u r e Investment,
avai l a bl e a t [ ht t p: / / www.aapa-por t s .or g/ govr el at i ons/ r esour ces/ i ndex.ht ml ]
¹⁴ U.S. Ar my Cor p s o f Engi n e e r s , Annual Report t o Congress on t he Status of the Harbor
Maintenance Trust Fund for FY 1999, Feb. 2001, p. 25-26.

Table 2. H M T F B alances and T ransfers*
(millionsofUS$)
FY2002 Actual FY2003 Est. FY2004 Est.
Start of Year Balance 1,777 1,854 1,912
TransfersIn
HMT653733787
Interest779493
T otal T ransfers In 730 827 880
TransfersOut
Corps O&M 640 755 812
Saint Lawrence 13 14 14
T otal T ransfers Out 653 769 826
End of Year Balance 1,854 1,912 1,966
^Source:^Ex^ecu^tiv^e^O^f^fⁱ^ce^of^th^e^P^resⁱ^den^t^,^Fi^s^c^al^Y^e^ar²⁰⁰⁴^Budget^o^f^t^he^Uⁿⁱ^t^e^d^S^t^a^t^e^s^G^over^nm^ent^,
^2003.
^*^D^iscr^ep^an^ciesⁱⁿ^to^tals^ar^e^d^u^e^to^r^o^uⁿ^dⁱⁿ^g^.
The Impact of Containerships on Dredging Needs
In the early 1980s, d eep draft colliers (coal s hips) fueled d ebate over U.S. port
dredgi ng needs. Today, however, ever-larger containerships are t he primary driving
f o r c e b ehind current dredgi ng activity. Although o il tankers are among the l argest
vessels in the world fleet, t heir siz e peaked in the 1970s and 1980s. A supertanker
often t ransfers its cargo at sea rather t han i n port. Typically, a supertanker s tays at
sea for ex tended p eriods, l oading at offshore p latforms or single-point moorings and
discharging at designated “lightering” z ones o ffshore where a s upertanker t ransfers
part of its cargo to a s maller s huttle tanker. The s huttle tanker delivers t he crude oil
to the refinery o n s hore. Dry bulk v essels (ships t h a t c a r r y grain, soyb ean, o re, o r
coal) h ave also grown in siz e since W orld W ar II but at present t here does not appear
to be a t rend towards l arger vessels in this cat egory.
In the container s hip category, however , “the 1990s ushered i n a wave of vessel
size increases that seems to have no limit.”¹⁵ As the volume o f containeriz ed cargo
increases, t he liner industry i s replacing sm aller v essels with drafts of 38-40 feet with
larger ships requiring drafts of 45-50+ feet. T he larger ships can carry 2,000 to 3,000
additional contai ners saving the carrier an es timated $25 per contai ner o n v o yage
costs. The economic a d v a n t a ge o f t hese mega-ships derives from t he principle o f

¹⁵ Br ian Slack, “Globalization i n M aritime Transportation: Competition, Uncertainty, and
Implications for Port Development Strategy,” Aug. 2001.

econom i es o f s cal e as s hi p cost s do not i n crease as fast as capaci t y.¹⁶ Ship size in the
past was restricted b y t he dimensions of t h e P anam a C anal . T he devel opm ent o f a
d ouble-stack train (DST) network t hat b egan in the early 1980s allowed s hipping
l i n es t o m ove cont ai ners effi ci ent l y across t he continent b y rail, reducing t he need to
move traffic t hrough t he Canal. By forming alliances or merging, carriers are better
ab l e to absorb the risk of m ega-ship investment. In addition t o getting bi gger,
container s hips are ex p ected to be more prevalent i n t he near future. T oday, 55% of
general cargo in international m arine t rade is being m oved i n containers. By 2010,
i t i s ex pect ed t h at cont ai neri z ed m arket s hare wi l l i n crease t o 90%.¹⁷
Di fferences i n servi ce p at t erns b et ween cont ai ner and l i qui d o r d ry bul k carri ers
also account for t he greater need of contai ner s hips for d eeper access channels. Bulk
tankers are usually ch artered per voyage and therefore have m ore flex i bility in
waiting for tidal actio n t o eas e t heir passage in port. Contai ner ships, however,
operate in a m ore time-sensitive environment, calling various ports on a rigid and
advert i z ed schedul e. Ti dal rest ri ct i ons wo u l d s everel y d i s rupt t h ei r s ervi ce
performance.
Al ternative Funding Options
That Have Been Considered
A Carrier-Based User Fee
In its decision the U.S. S upreme C ourt s tat ed t hat a user fee b ased on t h e v al ue
of service provided t o a marine carrier would not violat e t he Constitution. In August

1998, the C linton Administration proposed a n ew revenue generating s ys tem u sing^th

a H arbor S ervi ces User Fee (106 Congress, H.R. 1947). The paym ent o f t he Harbor
S ervi ces User Fee (HS UF) w oul d b e p l aced o n t h e carri er, rat her t han t he shi pper
(who pays the current HMT). T he HSUF was b ased on a v es s e l ’ s c a p acity, as
m easured by vessel capaci t y uni t s , whi ch are a vol um et ri c m easurem ent o f s hi p s i z e
based o n n et tonnage or gross t onnage as a ppropriate, and its frequency o f port u se
per voyage. Revenues from t he fee would b e d eposited i n t o t he Harbor Services
Fund, which would f u n d b o t h routine m ainten ance and h arbor-deepening p rojects.
The p roposal was aimed at s atisfying t he Supreme C ourt ruling b y establishing a
close link b etween t h e r e v enue collection and the s ervice provided, while being
consistent with trade obligations.
Industry observers have noted that s h ifting t he tax burden from s hippers to
shipowners concentrates the t ax burden. W ith the HMT, a large number o f s hippers
pay a rel at i v el y s m al l fee, but wi t h a H S U F, because t h ere are m any m o re shi ppers
t h an t h ere are shi powners, a few (shi powners) w oul d p ay a rel at i v el y l arge fee. Thi s
reality has political i m p l i cat i ons. P orts and carriers opposed having the federal
contribution for deepening p rojects t ak en from an i n dustry-supported fund, rather

¹⁶ “T he Ne w Wave i n Giant Ships,” Fortune, Nov. 12, 2001.
¹⁷ U.S. DOT , The I mpacts of Changes i n Ship Design on Transportation I nfrastructure and
Operations, Feb. 1998, p. 1.

than from general revenue. Another criticism rai sed of t he Clinton Administration’s
proposal was t hat a user fee would p lace U. S. ports at a competitive d isadvantage t o
foreign ports and t hat bulk commodities, such as grai n and coal , would be
disproportionately affected. The European Union h as indicated that it considered the
Clinton Administration’s proposed fee t o b e an unfair t rade practice.
GeneralRevenues
The 106^th Congress did not pursue t h e C linton Administration’s p roposal nor
other p roposals, such as a return t o funding maintenance and dredgi ng from general
revenues (H.R. 1260). S upporters of H.R. 1260 claimed t hat general revenues w ere
t h e onl y opt i o n b ecause no user-fee s ys t em coul d equi t abl y rai se revenues from t he
users of navigation facilities. Citing GAO figures, they al so maintain that waterborne
t r a d e i s al ready h eavi l y t ax ed b y 1 1 federal agenci es col l ect i n g124 fees.¹⁸ U. S .
Customs collects over $20 billion annually in assessments on the commercial
maritime industry, most of which are import duties.
The revenues t hat U.S. C ustoms generates are deposited directly into the general
fund of the U.S. Treasury. Some have proposed design ating a portion o f t hese
revenues t o fund harbor maintenance. Opponents o f t his p lan assert that since m ost
Customs duties are coll ect ed from importers, ex porters would not be contributing
thei r s hare for harbor maintenance. In its decision the S upreme C ourt s tated, “This
does not m ean t h at ex port ers are ex em p t from any and al l user fees desi gn ed t o defray
the cost o f h arbor maintenance. It does m ean , however, t hat s uch a fee m ust fairly
match t he ex porters’ use of port s ervices and facilities.”¹⁹
Issues for C ongress
There are a number of policy questions that are i ntertwined with the question
of how to finance harbor maintenance i n a manner t hat i s both constitutional and not
in violation of trade agreements. The fundam e nt al ques tion i s who should pay for
dredgi ng: port u sers or tax p ayers? If it is decided t hat port u sers should p ay, which
users i n p articular: s hippers or carriers? W h ether t he f e deral government or local
port authorities s hould administer t he fee and whether a nationally uniform fee o r a
port-speci fic fee is more equitable and effici ent are al so key questions. In addition
t o t h e s e i ssues, pol i cym akers m ay revi si t t he cost shari n g arrangem ent b et ween
federal and non-federal s ources.
Answering t hese questions involves a trade-off b etween max imizing t he overall
efficiency of the U.S. m aritime transportation s ys tem and the economic development
of speci fi c coast al ci t i e s . W hi l e econo mic analys is provides a framework for

¹⁸ U.S. General Accounting Office, Commercial M aritime I ndustry, Updated Information
on Federal Assessments, testimony before the House Subcommittee on Water Resources and
Envi ronment, Committee on T ransportation and Infrastructure, Nov. 3, 1999, T -RCED-00-

36.

¹⁹ U.S. Supreme Court, United States v . United States Shoe Corp., 523 U.S. 360 (1998).

eval uat i n g fi n anci n g o p t i o n s , t he answer t o each of t h ese quest i ons i s i nherent l y a
political choice. As one study on dredgi ng ex pl ai n s , “ T h e conflict over funding is
a conflict o f v a l u e s and go als, a conflict about who p ays and who b enefits. Those
conflicts can only be res olved i n t he political proces s with political compromises .”²⁰
TheStatusQuo
One option i s t o m aintain t he status quo - t hat i s, to con t i n u e f u n d ing h arbor
dredgi ng t h rough a cargo -val ue-based t ax . Some observers view the p resent system
as at least one step more e fficient t han funding from general revenues. If port u sers
are requi red t o p ay at l east p art o f t he cost of dredgi ng, t hey argue, i t p rom o t es a m o re
e f f i ci ent u se of resources because t h e u sers are not l i k el y t o p ay m o re i n fees t h a n
they hope to save in shipping costs. Also, i f p o r t u s e r s a r e required t o p ay for
dredgi ng, t hey are likely t o require that th e government spend t heir resources on the
most worthwhile projects. Con v ersely, they argue, i f general t ax p ayer revenue i s
used to pay t he full cost of dredgi ng, funds will more likely b e wasted o n unjustified
or marginally useful projects.
Others contend t hat t h e present funding system is broken and must be
overhaul ed b ecause t h e o r i gi nal i nt ent o f C ongress was t o h ave bot h ex port ers and
i m p o r t e r s payi ng the t ax . T hey argue that it is unfai r t hat importers are essentiall y
payi ng for t he dredgi ng needs o f ex porters. S ome also contend t hat t he legal and
trade challenges to the HMT make it an unstable funding source. Some economists
bel i eve a u ser fee syst em coul d b e re-st ruct ured i n s u ch a way as t o prom ot e b et t er
use o f t he nation’s m arine t ransportation s ys tem.
Economi c Effi ci ency
Advocat es of a port -speci fi c, carri er-based fee argue t h at , from an econom i c
e f ficiency point of view, t he user fee m odel would b e s uperior to other fun d i n g
models.²¹ They argu e t hat (1) the s hipowners rather than the s hippers should p ay the
fee and (2) t he fee b e port-specific rat her t han n ationally uniform. This funding
scheme would, they claim, optimiz e t ransportation efficiency because it would allow
m a rk et forces to allocat e cargo to the m ost effici ent ports. The rationale for t h e i r
argument is as follows.
They argu e t hat t he present HMT funding scheme inflates the s upply o f l arger
ships. Although l arger s hips save money o n t he ocean leg, they increase costs at port
because, am ong ot her t hi ngs, t h ey requi re deeper channel s and b e r t h s. However,
shipowners do not fully cal culate these costs in thei r deci sion to build larger ships
because dredgi ng costs are borne by others , n amely port authorities , s h i p p e rs, and

²⁰ National Research Council, Dredging Coastal Ports: An Assessment of t he I s s u e s ,
Washington, D.C. (Nati onal Academy Press) 1985.
²¹ See Alan L. Blume , “ A Proposal for Funding Port Dredgi ng to Improve t he Efficiency of
the Nation’s Marine T ransportation System,” Journal of Maritime Law and Comme rce, v.
33, no. 1, J a nuary 2002; and Shashi N. K umar, “ User Charge s f or Port Cost Recove ry: T he
U.S. Harbor Maintenance T ax Controve rsy,” International Journal of Maritime Economics,
v. 4, no. 2, J une 2002.

t ax p ayers. To t h e ex t ent t hat d redgi n g cost s are ex t er n a l t o a s h i powner’s cost -
benefit analysis, their d ecisions regarding fleet investment will be biased in favor of
larger ships. On the other hand, if thes e costs were internalized by the s hipowners
through p ayment of a d redging fee b a s e d o n s hip s iz e, ship investment decisions
would m ore accurately reflect the t rue cost o f b igger s hips. S upporters of a carrier-
based fee ask why U.S. tax p ayers s hould finance deeper channels only t o h elp
(m ost l y forei gn) cont ai ner carri ers real i z e m argi nal cost effi ci enci es on t h e o cean l eg
oftheirvoyages.
They also argu e t hat t he present s chem e, which creates a n ational pool of funds
for channel dredging, results in naturally d eep harbors s ubsidiz ing s hallower ports.
Naturally deep harbors, they argu e, should b e allowed t o reflect their l ower dredgi ng
cost s i n t he rat e st ruct u r e t h e y o ffer o cean carri ers. C arri ers w oul d b e at t ract ed t o
those ports that require the least amount of dredging because t h e u ser fees at t hose
ports would b e l ess. The p resent system, they s ay, l e v e l s t he playing field among
ports with different dredgi ng requirements. It draws t raffi c away from m ore efficient
ports to less efficient ports, t hereby raising t he Nation’s overall cost of moving goods
through t he marine transportation s ys tem. In general, East Coas t a n d G u l f Coas t
ports are s hallower and require more dredgi ng than West Coast ports which t end t o
have naturally deeper channels. In addition, since ex porters currently are not payi ng
the HMT, ports with traffic profiles heavily skewed toward imports contribute m ore
to the fund than do ports that primarily rely on ex port cargo. C ross-subsidies among
ports would b e eliminated if funds generated at a particular port were reserved s olely
for t hat port’s l ocal dredgi ng needs rather t han b ecoming p art o f a system-wide fund.
Some o b s e r v ers defend cross-subsidies among ports asserting t hat t he HMT
facilitates t h e d e v e lopment of a maritime network t hat i s national i n s cope. They
note t hat t he High way Trust Fund also redistrib u t e s ga s t ax monies from h eavily
populated states to sparsely popul ated states. This redistribution i s j ustified o n t he
grounds that populated states share an i nter e s t with rural s tates i n d eveloping and
maintaining an i nterstat e highway system that provides national i nter-connectivity.
Other observers argu e t hat while the t rust fund mechanism m ay be suitabl e for
developing a n ational h ighway system it is not suitable for seaport d evelopment. A
Transport at i o n R esearch Board re port p resents t he following view:
Arguments for cross-subsidies based on scale economies, whatever their validity for
highways , do not apply t o ports. U.S. s eaports do not constitute a network that is analogous
to the highway system, s ince the value of a port does not depend on the e xistence of other
ports in the same way that the value of a r oad i n c reases if its connectivity to other r oads
increases. T herefore the highway program cannot be used as a model f or j ustifyi ng the use
of revenues generated at high-volume ports to subsidize maintenance and i mprovements at
low-volume ports.²²
Supporters of a carrier-based, port-speci fic u ser fee b e lieve there i s s ufficient
competition among ports to allow for a m arket s olution t o t he problem . S ince ports
compete with one another o n t heir populat i o n b a s e , intermodal connections, and
labor c o s t s , t h ese observers ask why ports should not compete o n t he costs o f

²² T r ansportation Research Board, Freight Capacity for t he 21^st Century, Washingt on, D.C.,

2003,p.38.

dredgi ng their h arbors as well.²³ The i ntermodal facility of contai nerized cargo and
the d evelopment o f a double-stack trai n n etwork in m u ch of the country has
generated competition not only bet ween nearby rival ports, but even ports on
opposite coasts.²⁴ The t erm “di scret i onary cargo ” refers t o frei ght t h at can be rout ed
economically through m ore t han one port, typically cargo originating or des tined for
the i nterior o f t he country or the far coast. Port rationaliz ation b y t he liner carriers,
w h i ch consolidat es cargo at fewer ports, has al so intensified competition bet ween
ports. Bas ed on the competitive climate ports face today, some believe the m arket
prov ides enough i ncentive for ports to invest in dredgi ng without federal
involvement. Advocates of a port-specifi c, carrier-based fee a rgue that this
repl acem ent fee i s t h e m ost appropri at e schem e for ensuri n g adequat e harbor dept hs
while at the s am e time preventing ex ces s dredging.
Economi c Devel opment
W h ile the replacement fee described above may b e an economic prescription for
financing po rt dredging, it does rai se distributional i ssues . Harbor communities
generally vie w t h e i r ports as engi nes of economic development for the city and
surrounding regi on.²⁵ W h ile containeriz ation h as reduced the number o f j obs onsite,
ports still generate jobs offsite with the m any businesses t hat s erve the ports, s uch as
freight forwarders, custom house b roker s , warehouses, t rucking firms, etc. In
addition, there are the importe r s and ex porters that choose t o l ocate n ear a port t o
save on shipping costs. However, a port-specific funding system is likely t o favor
large p o r t s o ver smal l ports. W ith more ship traffic, large ports would not have to
charge as m u ch per s hi p o r s hi pm ent t o recover d redging costs as smaller ports.
Some smal l ports might either have to cl ose or service only small ships.
Economic development i s a sign ifican t public policy goal with respect to ports
and, in fact, was a rationale for t he creation of port authorities i n t he late 1800s and
early 1900s. At t h a t t i m e, marine terminal s were l argely owned and controlled b y
private railroads. As ra ilroads merged, each railroad acquired additional port
terminals as nodes i n t heir track network. Rather than develop i nfrastructure at each
port, railroads found it advantageous to consolidate t heir investment at only s elected
ports. Not unex pect edly, port communities wi t h n e gl ect ed harbor facilities were
dissatisfied with railroad control over l ocal port d evel opm ent . Therefore, t h ey
creat ed a cent ral publ i c aut hori t y t o ensure t h at port d evel opm ent woul d b e m ore i n
line with the public interest.
The railroads’ s trategy o f concentra t i n g cargo flow through fewer ports is not
unlike t he strategy container carriers h av e adopted today. As carriers d eploy l arger
ships t o achieve economies of s cal e on t he high seas , t hes e s h ips are calling fewer

²³ T heodore Prince, “Dredging Up Problems,” Journal of Commerce, Feb. 18, 1999, p. 5A.
²⁴ Davi d Newman and J ay H. Walder, “Federal P o r t s P olicy,” Maritime Policy and
Management, v. 30, no. 2, 2003.
²⁵ See, Amy Helling and T heodore H. Poister, “U.S. M a r itime Ports: T rends, Policy
Implications, and Research Needs,” Economic Development Quarterly, v. 14, no. 3, August

2000.

ports becaus e t h ere are dis-economies o f s cale while the s hip i s i n port. S o me
industry observers note t he emergence o f a “h u b and s poke” s ys tem consisting o f
l o ad cent er port s where t he l argest s hi ps cal l and a s ys t e m o f feeder port s servi ced
either by smaller coastal ships or, more likel y i n t he United S tates, by railroads. If
the m aritime industry i s m oving towards a mark et-oriented s election p rocess o f l arge
ports and feeder ports, a port-specific fundi ng scheme is likely t o compliment or even
accel erat e t hi s t rend whi l e a s ys t em w i d e fee i s l i k el y t o i m p ede i t , t o t h e ex t ent t hat
it levels the playi ng field among ports. The issue o f h arbor maintenance funding,
therefore, appears t o i nvolve a t rade-off between a n ational i nt e r e s t i n economic
effici ency and t he local interests of s ome harbor communities not to be relegated t o
feeder port s t at u s.
CargoDiversion
As can be gl eaned from t he above discussio n , m uch o f t he debate regarding
harbor maintenance funding revolves around the i ssue o f how i t w o u l d affect the
geography of U.S. maritime commerce. In addition t o i nter-port competition among
U.S. ports, however, t here is al so the i ssu e o f c o m p etition with ports in Canada,
Mex i c o , o r i n t he Carribean. W ith regard to the p resent funding mechanism, the
HMT, U.S . port s near t h e C anadi an and Mex i can borders cl ai m t hat i t d i v ert s cargo
to nearby ports across t he border. W R DA 1986, which establi s h e d the HMT,
required t he DOT to submit an annual report quantifyi ng the amount of U.S. cargo
transhipped t hrough C anada.²⁶ The report s hows t hat s ince the l ate 1980s, when t he
report was first published, 4% to 6% of U.S. liner trade h as been transhipped t hrough
Canadian ports on a ye a r l y b a s i s . The report also notes that Canadian cargo is
transhipped t hrough U.S. p orts. However , cargo diversion m ay be attributable to
other factor s t h at outweigh any influence o f t he HMT. Regi ons in northern New
Engl and m ay det erm i n e t hat rout i n g cargo t h rough M ont real , w hi ch i s cl oser t h an
New Y o r k o r Boston, is the m ost economic choice. Carriers (and ex porters) m ay
prefer to route E uropean bound cargo from p articular U.S. origins t hrough Halifax
because i t offers a l at er sa iling d ate (and cargo cut-off time) than New York or
Bo s t o n . In addition t o t hese considerations, rai l rat es , t rucking costs, or po r t
throughput rates m ay be cheaper via C anad a for particular U.S. cities o r t owns.
S o m e observers argu e t hat whi l e di versi o n o f cargo t h rough port s of an adj acent
country may b e l ost business for a p articul ar U.S. port, the Nation as a wh o l e , and
U.S. shippers in particular, m ay benefit from routing cargo i n t his manner. If
importe r s a n d e x porters in the upper M idwest, for instance, can move cargo more
economically to and from Europe through t he ports of Montreal or Halifax , one could
argue t hat t hey have benefitted from importing t he transportation s ervices of Canada.
As wi t h a cargo -val ue-based t ax , pol i cym akers m i ght consi d er what effect a
carri er-based fee w oul d h ave o n cargo flow through domestic ports. As a ports
ex pert has assert ed, a fee b ased on shi p capaci t y m ay h ave a v ery d i fferent effect on

²⁶ U.S. DOT , Maritime Administration, U. S. Exports & I mports Transhipped Via Canada
& M exico, 1999. Available a t [ http ://www.ma rad.dot .gov/publications/pubs.html ]

cargo fl ow t h an a t ax based o n cargo val u e.²⁷ A fee that is based on vessel size might
induce car r i e r s t o a void t he tax b y d iverting t heir largest s hips to a n earby foreign
port, such as Vancouver, Halifax , o r Freepor t, in the Bahamas. By t ranshipping U.S.
bound cargo from l arge ships t o s maller, feeder vessels at these foreign ports, carriers
could s ave a s ubstantial amount in harbor user fees. T ranshipment at t hese foreign
ports would not necessarily mean less cargo for U.S. ports. The same amount of
cargo might arrive but on smal l e r , c o astal feeder shi p s. P aradox i cal l y, i f t he fee
reduced the s ize of s hips callin g a t U.S. ports, t here would be l es s need for deeper
channels.
C arri ers cont end t hat a carri er-based fee could b e r o u gh ly equivalent to a
container s hip’s d aily operating cost and would t hus sign ificantly influence t heir port
rotation deci sions. However, t here are additional cost considerations that may limit
transshipments. The cost of l oad and discharge h andling at a n a d d itional port i s
sign ificant. Transhipment could also increase t ransit time due to missed connections
or increase t he risk of cargo damage due to additional handling. Ports with a l arge
local population b ase, such as New York, w ould presumably s till attract vessel calls
with or without a u ser fee.
Stakeholder Perspectives
No matter which party a dredgi ng fee i s l evied upon (carriers o r s hippers), and
regardless of how it is administered (at the port l evel or federal l evel ), the ultimate
payers of the fee or tax are import consum ers and ex port p roducers. However, how
the t ax is levied and administered does m ake a difference politically. W ith regard to
shipper groups, one can say t hat s hippers of high -value, l ow volume commodities are
likely t o p refer a tax b ased on cargo tonnage rather than c a r go v a l u e . Conversely,
high -volume, low-value s hippers are likel y t o p refer a t ax b ased on cargo val u e rat her
than cargo tonnage. It i s also worth noting t hat s hifting t he user fee from s hippers to
shi powners woul d conc e n t rat e t he t ax b ecause t h ere are m any m o re shi ppers and
shipments t han t here are s hipowners and v e ssel port calls. C oncentrating t he tax m ay
i n fl uence t he deci si on m aki ng process b ecause, as s om e observers m ai n t ai n , a sm al l
group t h at has m ore t o l o s e m a y have m o re i n cent i v e t o o rgani z e, and m ake
them selves felt politically, t han a larger, m ore diverse gro u p t h at h a s l es s at s take
individually. According t o s ome, this political dynamic partly ex plai ns the failure of
the HSUF proposed d u r i n g t he Clinton Ad ministration. W ith regard to ports, one
could ex p ect that low-volume ports with h i gh-cost dredgi ng requirements would
prefer a s ys tem-wide, uniform fee while hi gh -volume ports with low-cost dredgi ng
needs w oul d p refer a port -speci fi c fee.
Cost Share Formulas
Those who view ports as a public good, generating n ationwide b enefits, b elieve
p o rt m aintenance and improvement shoul d b e financed through general revenues .
Ports argue that they are a v ital component of the n ation’s economy. To the ex t ent
t h at deeper shi p channel s l o wer t ransport a tion costs, t hey argue, t hey reduce t he cost

²⁷ Asaf Ashar, “Misunderstanding the Harbor T a x,” Journal of Commerce, May 26, 1999,
p.5A.

of commodities, making imported i nputs l ess ex pens i v e an d m aking ex ports more
price competitive. The m aritime industry als o does not like t he fact that the HMT is
running a surplus - that more money is collected by the tax than is used to pay for
dredging.
Some economists argue t hat, while federal aid may be j ustified i n t he early stage
of an industry’s d evelopment, shipping is now a m ature i ndustry and therefore s hould
be self-supporting. They argu e t hat returning financing o f h arbor dredgi ng to general
revenues amounts t o a corporate s ubsidy and leads t o overcapacity in port facilities.²⁸
The strong demand for channel deepening has b een charact erized by critics as “a
race to the bottom.” They argue that overcapacity puts downward p ressure on port
revenues l eading t o unhealthy port facilities requiring more public assistance. Some
anal ys t s cont end t hat not every port n eeds t o b ecom e a s up e r - p o r t . It i s l ess l i k el y
that U.S. tax p ayers will squander m oney on unnecessa r y d r e d gi ng, t hey argue, i f
great er market discipline i s brought to the proces s of ex amining i nvestment risk in
port i nfrastructure.²⁹
Some believe that the cost-share re quirements o f W RDA 1986 are out of date
due t o t h e growi ng preval ence of l arger c ontainerships. T h e y b elieve the federal
government should i ncrease its investment in harbor dredgi ng by eliminating t he 45-
foot threshold, essentially revising the t hree-tier cost s hare form u l a t o a two-tier
formula. In other words, t he non-federa l cost -share woul d d ecrease from 60% t o
35% for d eepe n i n g p r o j ect s and from 50% t o 0% for m ai nt enance proj ect s wi t h
harbor depths between 45 feet and 5 3 feet . T he W ater R esources Development Act
of 2003 (H.R. 2557, sec. 2003), which passed t he House, would authoriz e t his change
i n cost share arrangem ent s .
In 1986, when the cost s haring formula was established, vessels requiring more
than 45-foot draft were considered high ly speci al i z ed shi p s. W h i l e cont ai ner s hi ps
were increasing i n s iz e during t he 1980s as well, it was b elieved that t he dimensions
of the P anam a C anal would limit the draft requirements of m ost of t he contai ner fleet
to under 4 0 feet. The emergence o f double-stack container t rains i n t he mid-1980s
made transcontinental t ransport by rai l m ore competitive as compared with the all-
water route t hrough t he Panama Canal. The size restrictions of the P anam a C anal ,
therefore, became l ess o f a limiting factor a n d c arriers b egan deploying “post-
Panamax ” ships - ships t oo big to fit through t he Panama Canal.
Opponents o f reducing t he local cost share argue that it is only at t he “first in”
or “last out” port o f call t hat container s hips are likel y t o be fully loaded. W hen
cont ai ner s hi ps cal l at port s i n bet ween t h e fi rst and l ast port s of cal l , t h ey are u sual l y
not fully loaded and t heref o r e d o not require their full d raft. They caution t hat

²⁸ One economic study of WRDA 1986 proj ects c oncl uded t hat r equiring local cost sharing
decreased overall s pendin g o n t h e s e proj ects. See Alison DelRossi and Robert Inman,
Changing the Price of Pork: The Impact of L o c a l C ost Sharing on Legislator’s Demands
for Distributive Public Goods, NBER Working Paper 6440, Ma r . 1 9 98. Available a t
[http://www.nber.org/ papers/w6440].
²⁹ Davi d Luberoff and J ay Walder, “U.S. Ports and the Funding of Intermodal Facilities: An
Overvi ew of Key Issues,” Transportation Quarterly, v. 54, no. 4, Fall 2000.

lowering the l ocal cost share requirem e n t w i l l level t he competitive field between
ports, impeding t he market ’s natural s el ection proces s of allocating cargo to the m ost
efficientports.
Dr edgi ng Fees and S hor t-Sea Shi ppi ng
Coas tal s hipping interests also s eek to return financing o f h arbor dredgi ng to
general funds. They b elieve more containeriz ed cargo could b e t aken off congested
high ways , s uch as I-95 along the eastern s eaboard, and m oved b y b arges o r fast -speed
ferri es al ong t h e coast . T hey b el i eve a fee syst em , w het h er pai d by carri ers o r
shi ppers, i s an i m p edi m ent t o coast al s hi ppi ng because i t rai s es t h e p ri ce of coast al
shipping relative t o t ruck and rai l alternatives . Others disagree, noting t hat t rucks
contribute t o t he cost of their i nfrastruct ure b y p aying fuel and other t ax es into the
High way Trust Fund and railroads pa y f o r thei r i nfrastruct ure p rimarily by
t h em sel v es. S om e b el i eve chargi ng port u sers for h arbor i n frast ruct u r e p r o m o t es
equity among competing m odes and reduces price distortions in modal choice.