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Audit: Port towns mostly handled state cruise tax properly

By Elwood Brehmer, Alaska Journal of Commerce

A state audit found that municipalities are largely using their share of cruise passenger head taxes appropriately, which is a separate issue from a lawsuit by the industry alleging the City and Borough of Juneau is improperly using the $5 fee it collects on top of the state levy. Photo/File/AP

A state audit found that municipalities are largely using their share of cruise passenger head taxes appropriately, which is a separate issue from a lawsuit by the industry alleging the City and Borough of Juneau is improperly using the $5 fee it collects on top of the state levy. Photo/File/AP

A state audit report released this month concludes more than $270 million in cruise ship passenger tax money collected since 2007 has been used appropriately by the vast majority of Alaska communities the ships visit, with one small exception in Skagway.

The audit, conducted by Legislative Budget and Committee staff, uncovered an instance in the summer of 2013 when the Skagway Borough used $114,000 of cruise passenger tax funds to buy playground equipment for the borough’s elementary school.

The auditors only examined how the state tax money has been handled; the separate taxes imposed by Juneau and Ketchikan were not reviewed.

Those taxes are the subject of a lawsuit filed by Cruise Lines International Association Alaska against the City and Borough of Juneau in Alaska U.S. District Court on April 13 alleging the city has spent $35 million of its own head tax revenue on since 2001 on general government expenses and capital projects that don’t directly benefit cruise vessels or passengers.

Because the cruise passengers are out-of-state visitors, the Commerce Clause of the U.S. Constitution requires that the local and state head tax money be spent on industry-related projects and expenses.

The audit concluded that the Skagway spending on playground equipment was a misuse of the state tax revenue.

The report states local officials believe purchasing the playground equipment was an appropriate use of the funds because it is used by visiting cruise passengers and the children of seasonal tourism industry workers.

Skagway Borough Manager Scott Hahn, who did not hold the position in 2013, wrote in an April 7 letter responding to the report that Skagway intends to continue to be good stewards of the cruise passenger tax funds and that “the comments about our playground project will be kept in mind for the future.”

Sen. Anna MacKinnon, R-Eagle River, requested the audit early in 2015 to determine if local governments were spending the state tax money properly or stockpiling it for other purposes.

The State of Alaska levies a $34.50 per person “head tax” on each of the roughly 1 million passengers that disembark from a cruise ship in the state. However, vessels stopping only in Juneau or Ketchikan are essentially exempt from the state tax because the local head taxes levied by those communities can be credited against the state tax.

State head tax revenue is then distributed to cruise port communities based on the number of cruise passengers that visit each coastal town, with few exceptions. The state head tax has generated $16 million to $18 million annually in recent years and $14 million to $15 million of that has been shared with local governments each year.

In its lawsuit, CLIA Alaska is seeking an injunction to prohibit Juneau from imposing its head tax. Association leaders have indicated the group does not have an issue with how Ketchikan has handled its head tax funds.

The complaint specifically cites a $10 million manmade island and life-sized whale statue Juneau is building partially with head tax funds as the latest example of misspent money, as well as $22 million in government operating expenses.

The city touts the artwork as a tourist attraction, while the cruise association notes it will be nearly a mile from the cruise ship docks.

Private contributions are funding a portion of the project, which is being built in conjunction with a $54 million overhaul of the city’s Downtown waterfront that includes two new floating docks to accommodate larger cruise ships.

The City and Borough of Juneau has yet to file a response with the court.

The state audit found communities have generally used the tax revenue shared by the state for allowable projects, but that some communities lacked the necessary documentation to easily assure the tax expenditures complied with state law.

It also reports that the unspent balances of the shared tax funds held by communities to be reasonable based on efforts to complete the projects the tax money was appropriated to fund.

Gov. Bill Walker introduced legislation this year that would eliminate the local head tax exemption from state law. The administration agreed not to push for the bills until the audit was released. At this point, the legislation appears dead this session, as it has not moved through the committee process.

Cruise industry representatives have said the tax change would be pointless because the additional $15 million or so it would generate could not be used to pay down the state’s $4 billion budget deficit.

The audit report concurs with administration officials who have said something needs to be done to at least close a potential funding gap created by the current tax law, which directs the state to share $5 with each of a vessel’s first seven ports of call, meaning the $34.50 tax could eventually be insufficient. The Commercial Passenger Vessel Fund has remained solvent since the tax was instituted in fiscal year 2007 because not all vessels call on seven ports.

The report also notes that while the $8 per person Juneau and $7 per person Ketchikan local head taxes combine through the state tax exemption to reduce actual state revenue to $19.50 per passenger, the state is still required to share the $5 per passenger with those communities.

Nearly all of the state’s cruise visitors stop in Juneau and Ketchikan and thus the state can share a combined total approaching $10 million per year in good years when Alaska sees about 1 million cruise visitors.

“To date, (Commercial Passenger Vessel) receipts have been sufficient to fund the amounts required to be distributed to port communities,” the report states. “However, significant increases to the number of passengers that visit a high number of ports would threaten the solvency of the CPV Fund.”

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