Shoring Up Water Transportation

by Tom Yamachika, President, Tax Foundation Hawaii

On July 9, 2021, President Biden issued the “Executive Order on Promoting Competition in the American Economy.”  There wasn’t much media coverage of it outside of the business press, because the order is lengthy and, rather than announcing new law, for the most part focuses on telling his agencies to enforce the laws that are already on the books relating to specific industries.

One of the industries targeted by this order is maritime shipping.  In 2000, the largest 10 shipping companies controlled 12% of the market.  Since then, the shipping companies have gone on a merger and acquisition frenzy.  Today, the largest 10 shipping companies have an 82% market share. 

The Executive Order focuses on one problem in the industry, “detention and demurrage” charges.  Shipping companies impose these charges when goods land at the port but for whatever reason the goods can’t be offloaded right away.  These fees can add up to hundreds of thousands of dollars, leading to complaints by shippers and truckers and, naturally, higher consumer prices for the goods that were transported.

To combat this problem, the Executive Order directs the Federal Maritime Commission to “vigorously enforce the prohibition of unjust and unreasonable practices in the context of detention and demurrage pursuant to” existing shipping laws.  That’s all.  It might be helpful for us here in Hawaii, but we can’t help wondering if they are missing the forest for the trees here.

Here in Hawaii, we are heavily dependent on water transportation to bring us all manner of consumer goods, building supplies, and everything else that we can’t manufacture.  Thus, we are all too familiar with what happens when goods or people need to be transported over the high seas but there isn’t a lot of competition among shipping firms.  There has been an ongoing debate about the need for section 27 of the Merchant Marine Act of 1920, also known as the Jones Act, as well as its older cousin the Passenger Vessel Services Act of 1886.  These are laws whose primary purpose is to restrict competition.  It’s a wonder that neither law is mentioned even once in the Executive Order.

It’s also a wonder that the State of Hawaii, rather than trying to make it easier and cheaper to ship people and cargo, imposes General Excise Tax on shipping charges.  In an earlier article in this space, we pointed out that the federal government prohibited state taxation of transportation by air.  We, of course, were in denial and tried to tax air transportation anyway using a somewhat creative theory, leading to a major smackdown by the U.S. Supreme Court in 1983.  We have since accepted the fact that we can’t tax air transportation.  But we can and do tax other transportation.  Why do we do that?  Because we can, perhaps; because we can get some money by doing it, perhaps.  We question whether that is sound social policy given how heavily we depend on transportation.

Are we serious about trying to make sure that the cost of living for all of us in the Aloha State isn’t outrageously expensive?  If so, then we should be vigorously encouraging our Congressional delegation to give us relief from the 80-year-old and 135-year-old cabotage laws, finding ways to restore competition among transportation companies, and getting our State tax laws out of the industry to help bring down our stratospheric cost of living.