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Cruise tax increase on hold pending audit

Gov. Bill Walker’s attempt to touch every major state industry in his overall plan to balance the state’s upside down budget has hit a snag as it pertains to the visitor industry.

House Bill 252 and its mirror Senate Bill 136, proposed by the Walker administration, would repeal current law that allows cruise operators to deduct the local “head tax” each passenger pays from their state head tax obligation.

While the current deduction is eligible statewide, it applies mainly to Juneau and Ketchikan, as they are the communities with significant cruise traffic that have local head taxes — $8 per passenger in Juneau and $7 in Ketchikan.

The Department of Revenue projects eliminating the tax deduction would bring in an additional $16.6 million per year to the state, which would primarily come from taxing each of the roughly 1 million cruise passengers that stop in Juneau and Ketchikan another $15 in total.

Current state law considers a taxable voyage to be one that includes at least 72 hours in state waters — waters within three miles of shore. HB 252 would remove the state waters requirement and tax all commercial passenger vessels that dock at an Alaska port and including all travel time on a voyage, not just those that spend at least 72 hours in state waters.

The Revenue Department estimates it would collect, as part of the $16.6 million, about $1.8 million per year from cruise voyages that currently are not taxed because of the “state waters” loophole. That money would be shared with the communities in which the vessels were docked.

John Binkley, president of Cruise Lines International Association Alaska, said in an interview that eliminating the local tax deduction is pointless in regards to attempting to balance the state budget because the additional state head tax money is restricted General Fund revenue and therefore could not be used to plug Alaska’s $4 billion budget deficit.

“What’s the point of raising another $15 million if you can’t use it?” Binkley said.

The commerce clause of the U.S. Constitution generally prevents states from taxing interstate travel, which is what most Alaska cruises are because they largely originate from Seattle.

Alaska’s $34.50 per cruise passenger head tax gets around the U.S. Constitution because the revenue is dedicated to the Commercial Vessel Passenger Fund subaccount within the state General Fund and supports dock improvements and other amenities that benefit the cruise industry in the communities that ships call on.

The State of Alaska currently pays $5 per passenger to each of the first seven communities a cruise ship calls on. In fiscal year 2015 the state paid 16 municipalities just more than $15 million based on head tax revenue collected from the prior calendar year’s cruise ship stops in each of the communities that received tax money, according to Revenue’s Shared Taxes and Fees Annual Report.

Prior to a 2010 settlement between the state and industry that reduced the state tax from $46 to $34.50 per passenger and increased the number of ports per voyage eligible for funding from five to seven, communities could either collect their own head tax and be ineligible for state support or allow the state to collect the tax and receive the distributed revenue afterward.

The settlement also established the current head tax sharing guidelines, which allows communities with local taxes — Juneau and Ketchikan — to collect their own taxes while also receiving Commercial Vessel Passenger funds from the state. At the same time, the state allows cruise operators to deduct their local tax payments from their state obligations.

Deputy Revenue Commissioner Jerry Burnett said in an interview that the administration was not only trying to include the cruise industry in its larger budget solution by eliminating the tax deduction, but also that the legislation would fix what he called a “very fundamental problem” that exists in current statute.

“Depending on which seven ports of call you’re sharing $5 with, the way the tax is written now you could be short money to share. In fact, people were afraid we were short of money last year,” Burnett said. “$34.50 is not $35.”

The concerns about the Commercial Vessel Passenger Fund balance, or CPV, were raised in legislative committee hearings last year, according to Burnett.

The fund held $2.1 million after at the end of fiscal year 2015 last June 30 after the just more than $15 million disbursement to local governments. Its ending balance has dipped slightly in recent years. The fund held nearly $2.8 million at the end of 2013 and $2.5 million after 2014, according to the state Tax Division.

Burnett said the fund has to date stayed in the black because not all cruise ships visit seven ports in their voyages across the state.

Community tax audit

Neither of the administration’s head tax bills introduced in January have moved from their original Labor and Commerce Committee referrals at least in part because the Legislature is waiting on an audit to see if local governments have been spending the shared head tax money properly.

Burnett said the administration is not objecting to the Legislature holding up the bills until the audit is released.

Finance Committee co-chair Sen. Anna MacKinnon, R-Eagle River, last March requested the audit be done by Legislative Budget and Audit Committee staff.

MacKinnon wrote in a memo to Budget and Audit chair Rep. Mike Hawker, R-Anchorage, that “it has been asserted that some communities are ‘stock piling’ their CPV shared taxes and not using them on appropriate projects.”

Budget and Audit Committee members in executive session reviewed the preliminary audit March 18 and the final audit should be reviewed by the committee again in a closed-door meeting sometime in mid-April near the end of the regular legislative session before being released to the public, according to committee staff.

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