Harbors and Inland Waterways: An Overview of Federal Financing

Harbors and Inland Waterways:
An Overview of Federal Financing
January 12, 2004
Nicole T. Carter
Analyst in Environmental Policy
Resources, Science, and Industry Division
John F. Frittelli
Analyst in Transportation
Resources, Science, and Industry Division

Harbors and Inland Waterways:
An Overview of Federal Financing
Summary
Harbors and waterways are a significant part of the nation’s transportation
system. Because of the national economic benefits of maritime transport, the federal
government has invested in navigation infrastructure for two centuries. The future
direction of federal financing of the system, however, remains uncertain. A recent
proposal by the Bush Administration and proposed legislation are in opposite
directions: the Administration proposed reducing the navigation system’s draw on
general revenue funds, while H.R. 2557 (passed by the House, September 24, 2003)
could increase federal investment in the nation’s harbors.
There are also many other areas of debate, such as how to balance navigation
uses and other river uses and how to improve the efficacy and environmental
sensitivity of federal investments. Moreover, there is much debate over individual
projects and the planning processes used to justify them.
This report outlines the commercial navigation system, how the federal
government finances the system, some of the proposals to change federal financing,
and current challenges to the future of harbors and inland waterways. The
contentious policy issues related to the harbor maintenance tax are not addressed in
this report; see CRS Report RL31264, Harbor Maintenance Funding, by John F.
Frittelli. This report will be updated as developments warrant.

Contents
Introduction to the U.S. Commercial Navigation System...............1
Inland Waterway and Harbor Financing............................2
Inland Waterway and Harbor Maintenance Trust Fund Status...........3
Recent Financing Proposals .....................................4
Bush Administration’s Proposal..............................4
Proposed Legislation.......................................5
Issues Shaping the Future Financing of Harbors and Inland Waterways....5
List of Tables
Table 1. Cost-Share Requirements for Commercial Navigation Projects of the Army
Corps of Engineers.............................................2

Harbors and Inland Waterways:
An Overview of Federal Financing
Introduction to the U.S. Commercial Navigation System
Harbors and waterways are a significant part of the nation’s transportation
system. More than 900 deep and shallow draft harbor projects are estimated to
handle foreign trade representing 25% of the nation’s economic activity. The inland
waterway system carries one-sixth of the national volume of intercity cargo, primarily
via nearly 12,000 miles of commercially-active inland and intracoastal waterways.
In addition to its commercial role, the U.S. navigation system also supports the
mobilization of the military. The U.S. Army Corps of Engineers develops and
maintains much of the system for the federal government.¹
The navigation system in the United States today evolved largely out of the
federal government’s interest in improving interstate and international commerce.
The maritime transportation system remains dynamic because of evolving uses of the
system (e.g., which cargoes are transported and to what final destinations) and
evolving national priorities and values (e.g., rivers increasingly valued for
recreational uses and ecosystem benefits).
The federal government continues to invest in navigation because of its benefit
to the national economy. The distribution of cost between the federal government
and the local project sponsor (i.e., the cost-share) for harbors and waterways was
established in the Water Resources Development Act (WRDA) of 1986 (P.L. 99-
662). Nonetheless, how the costs are allocated between the federal government and
private beneficiaries continues to be debated. Recently, various proposals would
change how some harbor and waterway expenses are shared and funded. Also, the
federal investment in the construction and maintenance of specific projects has come
under scrutiny by environmental and taxpayer advocacy groups. Because of the
continuing congressional role in authorizing and funding specific projects, as well as
establishing navigation policies, it is useful to review the current funding sources of
navigation infrastructure, recent proposals to change federal funding, and issues
shaping the congressional debate about the future federal role in harbors and
waterways. Controversial aspects of the harbor maintenance tax are discussed
elsewhere; see CRS Report RL31264, Harbor Maintenance Funding, by John F.
Frittelli.

¹ For more information on the role of the Army Corps of Engineers in water resources, see
CRS Report RS20866 The Civil Works Program of the Army Corps of Engineers: A Primer,
by Nicole T. Carter and Betsy A. Cody.

Inland Waterway and Harbor Financing
Prior to 1986, harbor and inland waterway infrastructure was almost entirely a
federal expense. Congress through WRDA 1986 fundamentally transformed the
financing of Corps water projects, including its commercial navigation projects. The
Act established cost-share requirements for harbor and inland waterway projects that
resulted in a greater financial and decision-making role for non-federal stakeholders,
such as port authorities. The maximum federal share of costs for harbor and inland
waterway projects are shown in Table 1; the remaining expenses are paid by non-
federal project sponsors. Federal spending on inland waterway construction averages
$200 million annually; on harbor construction it ranges from $150 million to $300
million annually, with the variation largely due to activity on a few large harbor
deepening projects (e.g., New York and New Jersey Harbor, Houston-Galveston
Navigation Channels, and Oakland Harbor). Major rehabilitation is typically
considered a construction activity, and the costs are shared according to construction
cost-share arrangements. Navigation channel dredging to maintain the channel at its
congressionally-authorized depth and width is considered a maintenance cost; in
contrast, the deepening of navigation channels is cost-shared as a construction
project. Operation and maintenance (O&M) expenses for the inland waterway
system average around $500 million annually. O&M expenses for harbors average
$700 million annually.
Table 1. Cost-Share Requirements for Commercial Navigation
Projects of the Army Corps of Engineers
Commercial Maxi mum Maxi mum Maxi mum
Navigation ProjectsFederal Share ofFederal Share ofFederal Share
Feasibility Studies Constructionof O&M
Coastal Ports —
<20 foot harbor50% (GR)80% (GR)*100% (HMTF)

20-45 foot harbor50% (GR)65% (GR)*100% (HMTF)

>45 foot harbor 50% (GR)40% (GR)*50% (HMTF)
Inland Waterways100% (GR)100% (50% IWTF;100% (GR)

50% GR)

^Source:^{33 U}^.^S^.^C^.^2211-^2212.
^G^R^-^G^eⁿ^e^r^a^l^Re^ve^nue^,^H^M^T^F^{- H}^a^r^b^o^r^M^aⁱⁿ^t^e^na^nc^e^T^r^ust^Fund^,^I^W^T^F^{- I}ⁿ^l^a^nd^W^a^t^e^r^w^a^y^T^r^ust
^Fund^.
^*^T^h^{e n}^oⁿ^-^f^e^deral^s^pon^s^o^r^pay^s^10%^of^t^h^{e cos}^t^of^t^h^{e g}^eⁿ^e^ralⁿ^a^vⁱ^g^a^tⁱ^oⁿ^f^eat^u^r^es^of^t^h^{e h}^a^{rbor proj}^ect
^ov^er^a^{period n}^o^{t to ex}^{ceed 30 y}^ears^.^{For ex}^am^{ple, of}^th^{e 20% paid by}^{a n}^oⁿ^-^f^e^{deral s}^pon^s^o^{r f}^o^{r th}^e
^con^s^t^r^u^c^tⁱ^oⁿ^of^a^h^a^rbor^of^l^e^s^s^t^h^an^{20 f}^eet^{, 10%}^of^t^h^{e t}^o^t^a^l^(h^al^f^of^t^h^{e n}^oⁿ^-^f^e^deral^s^pon^s^o^r’^s^cos^t^s⁾
ⁱ^s^pai^d^ov^{er 30 y}^ears^.
The source of the federal funds used to cover these expenses varies. In general,
Congress appropriates funds from the federal general revenue fund (GR) as part of
the annual process in the Energy and Water Development Appropriations bill. (See
CRS Report RL31807 for more on this appropriations legislation.) There are two
significant exceptions for harbors and waterways. Congress created two trust funds
to cover some navigation expenses — the Harbor Maintenance Trust Fund (HMTF)
and the Inland Waterway Trust Fund (IWTF). The information provided in

parentheses in Table 1 indicates the source of the federal funds for the various
expenses.
Inland Waterway and Harbor Maintenance Trust Fund Status
Expenses associated with construction and major rehabilitation of inland
waterways is 100% a federal responsibility as shown in Table 1; 50% of the federal
monies are from the IWTF and 50% from the federal general revenue fund. The
IWTF monies derive from a fuel tax imposed on vessels engaged in commercial
waterway transportation on designated waterways, plus investment interest on the
balance.² The fund was originally authorized under the Inland Waterways Revenue
Act of 1978 (P.L. 95-502). As currently authorized in §1404 of WRDA 1986, the tax
is 20 cents per gallon and is collected by the Internal Revenue Service.
In contrast to the IWTF, which is used for construction expenses, the HMTF
historically has been limited to financing 100% of expenditure for operation and
maintenance of federally-authorized channels for commercial navigation.³ The
HMTF does not cover the O&M expenses for facilities that are part of the inland
waterways fuel tax system described above. That is, the use of the HMTF has been
largely limited to funding O&M expenses for access channels to deep-draft harbors
and for shallow-draft waterways and harbors not subject to the fuel tax.⁴ Historically,
the HMTF has been limited to expenditures for maintenance dredging and excludes
channel deepening projects. The HMTF was authorized by WRDA 1986. To date,
the HMTF has provided for the O&M of more than 650 commercial navigation
projects maintained by the federal government.
The HMTF monies derive from receipts of a 0.125% ad valorem (i.e., percent⁵
of value) tax imposed upon commercial users of specified ports. The tax revenues
are collected by U.S. Customs and transferred to the HMTF. This tax has been
highly contentious and is now applied only to imports, domestic shipments, and
cruise line passengers at designated ports. Exports have been exempt from the tax
since the U.S. Supreme Court found that the tax on exports violated the export clause
of the Constitution.⁶ The tax as currently applied continues to be contentious; for
example, the European Union sees the current application of the tax as a
discriminatory import tariff that violates U.S. obligations under the World Trade

² The waterways that compose the inland waterways fuel tax system are indicated on a map
at: [http://www.mvr.usace.army.mil/PA_brochure20558/PA20558_01a.htm].
³ The Corps uses HMTF monies to maintain the public facilities; maintenance expenses for
private slips or private channels are the responsibility of the private entity.
⁴ The HMTF is also used to cover 100% of the O&M cost of the St. Lawrence Seaway by
the St. Lawrence Development Corporation. As of FY1998, the federal share of
construction of dredged material disposal facilities is also eligible for recovery in
accordance with §201 of WRDA 1996 (P.L. 104-303).
⁵ Some shallow-water ports are excluded from the HMTF collections; the exclusion is
reportedly due to the practicality of collections at facilities that handle relatively small
values of cargo.
⁶ United States v. United States Shoe Corp., 523 U.S. 360 (1998).

Organization, while the federal government represents it as a user fee. Consequently,
many view the current tax as a short-term measure until a long-term revenue source
is devised.⁷
Dispersals from inland waterway and harbor maintenance trust funds require
annual appropriation by Congress. Spending from the trust funds is considered part
of the Corps budget and is subject to the congressional budget ceiling for Energy and
Water Development Appropriations. Because Congress has appropriated less than
collections have been, the IWTF and HMTF have built up authorized, unappropriated
balances since the early 1990s. The Inland Waterways Users Board — an 11-
member advisory committee made up of barge and towboat operators and shippers
established by WRDA 1986 to advise the Corps on construction and rehabilitation
priorities — argues that the IWTF’s growing balance is not due to a lack of needed
construction but results from what it believes are insufficient appropriations by the
federal government for waterway construction projects.⁸ Port industry groups
similarly argue that the HMTF’s growing balance is the result of insufficient
appropriations for harbor maintenance. Other stakeholders argue that congressional
appropriations reflect the national interest and that the current balance in the trust
funds should be put to use by expanding the scope of activities eligible for IWTF and
HMTF monies.
Recent Financing Proposals
Bush Administration’s Proposal. In its FY2004 budget request, the
Administration set out a proposal for expanding the types of activities covered by the
HMTF and the IWTF, with the intent of reducing the general revenues used to pay
for the maritime transportation system. Under the Administration’s proposal for
FY2004, the IWTF would have financed 25% of the O&M cost of eight waterways
that have averaged annually more than five billion ton-miles of traffic over the past
five years, and 50% of the O&M cost for the other 20 waterways in the inland and
intracoastal waterway system. The IWTF, therefore, would have been used not only
for construction but also for O&M. The Administration’s proposal would have
increased the amount spent from the trust fund from $104 million in FY2002 and an
estimated $84 million in FY2003 to $256 million in FY2004 — $110 million for
construction and $146 million for O&M. According to the President’s FY2004
budget documents, the increased withdrawal would have reduced the IWTF balance
from an estimated $433 million at the end of FY2003 to $287 million at the end of
FY2004. The Inland Waterways User Board calculated that the Administration’s
proposal would empty the fund in three years, if current collections were maintained;
the Board also expressed concerns that this proposal would eventually lead to a
dramatic increase in the fuel tax.

⁷ For more information on the HMTF and the tax supporting it, see CRS Report RL31264,
Harbor Maintenance Funding, by John F. Frittelli.
⁸ Inland Waterways Users Board, 17^th Annual Report to the Secretary of the Army and the
United States Congress with Appendices (Alexandria, VA: February 2003), available at
[http://www.iwr.usace.army.mil/usersboard/UBAR2003final.pdf].

Under the Administration’s proposal for FY2004, the HMTF would have
financed all federal costs associated with the construction of coastal ports and
channels. The Administration’s proposal would have increased the use of the trust
fund from $653 million in FY2002 and an estimated $769 million in FY2003 to $826
million in FY2004 — $212 million for construction and $600 million for O&M. Port
and river trade groups responded quickly to the FY2004 budget request with
criticisms that the Administration was raiding these funds for an unprecedented use
of the money that had not been endorsed by the users paying the fees. They also
expressed concern about the impact of this expansion on O&M spending. One of
their primary arguments against the expanded use of the HMTF was that the federal
government would be covering all of its fiscal responsibilities for harbors through a
trust fund financed by users even though harbors provide national benefits. The
increased withdrawal would not have caused the HMTF balance to drop, since
revenues are expected to be $880 million in FY2004. Neither the House nor the
Senate included the President’s proposal in appropriations bills for FY2004.
Proposed Legislation. The Administration’s proposal for the trust funds
appears to be in the opposite direction of the language passed by the House in H.R.

2557 — the Water Resources Development Act of 2003 — related to harbors.

Section 2003 of H.R. 2557 would increase the depth of projects eligible for the
federal cost-share of 65% for construction and 100% for O&M from 45 feet to 53
feet. The harbor projects with depths between 45 and 53 feet would require
additional federal general revenue appropriations for construction (from 40% to 65%)
and for O&M (from 50% to 100%). This would increase the demand for general
revenue appropriations for construction and the demand for funds from the HMTF
for O&M. According to the bill language, the change would be applied to projects
for “which a contract for physical construction has not been awarded before the date
of enactment of this Act.”
Although both the proposed legislation and the Administration’s proposal would
likely put a greater amount of the HMTF monies to use, the impact on general
revenues would likely be opposite. The Administration’s proposal would likely
decrease the draw on general revenues by substituting HMTF for general revenue
appropriations while the proposed legislation would likely increase demand for
general revenue funds by reducing the fiscal demands on non-federal sponsors. The
proposed legislation, however, would likely lead to greater investment in navigation
infrastructure, and the anticipated economic benefits of those investments. The
conflicting signals from the two proposals reflect the larger debate about the future
federal role in the maritime transportation system.
Issues Shaping the Future Financing of Harbors and Inland
Waterways
The two proposals discussed above bring attention to the underlying question
of what is the appropriate role for the federal government in maritime transportation
investments.⁹ Navigation industry groups argue that the current system makes a

⁹ Green Scissors 2003 by Friends of the Earth, Taxpayers for Common Sense, and U.S.
(continued...)

significant contribution to the national economy and that the aging infrastructure
warrants increased investment by the federal government. Some taxpayer advocacy
groups, however, oppose even current levels of federal investment and argue for a
greater share of the financial burden to be borne by the users of these facilities.
Environmental groups also oppose many individual projects because of possible
environmental harm from the projects and from the disposal of the dredged material
to maintain the harbor and waterway channels. For example, these groups question
if segments of the inland waterway system with lower cargo movement, such as the
Apalachicola-Chattahoochee Flint River Project, should be managed for purposes
other than navigation because current operations harm the environment, limit other
uses, and are economically unjustified.
Taxpayer advocacy and environmental groups have also criticized the project
development and evaluation process that the Corps uses for harbor and inland
waterway projects; specifically, they have criticized the economic analyses justifying
federal investments in navigation projects such as the Delaware River Deepening and
the Upper Mississippi Navigation Study. Supporters of these projects argue that the
projects are economically justified, that the economics of maritime transportation is
complicated both to model and to understand, and that the U.S. consumer is the
ultimate beneficiary of these investments.
There are also disputes over planning efforts on how best to allocate federal
investments. For example, some observers are interested in optimizing federal
spending through system-wide planning of harbor deepening projects that are
necessary to accommodate the larger container ships being adopted. Planning efforts
of this sort, however, are opposed by those arguing that the federal government
should not be deciding which ports are going to be the winners and the losers in
attracting these container ships. Overall, the challenges that the navigation system
is facing grow out of the current climate of fiscal responsibility and government
accountability and the evolving perception of the nation’s harbors and waterways as
natural resources as well as transportation routes.

⁹ (...continued)
Public Interest Research Group provides an example of the arguments made to change
current practices and investments in the navigation system. The document is available at
[http://www.greenscissors.org/publications/gs2003.pdf]. The arguments to maintain current
investment levels or to increase investment levels are made by industry groups. Some
examples of these groups and the information they provide are the Midwest Area River
Coalition 2000 at [http://www.marc2000.org/] and the American Association of Port
Authorities at [http://www.aapa-ports.org/govrelations/resources/index.html].