Cruise line stocks tumbled last week after a high-ranking member of President Donald Trump's cabinet set his sights on taxing cruise ships. But industry analysts said that changing the tax code for cruise vessels is trickier than it sounds.
U.S. Secretary of Commerce Howard Lutnick called out the cruise industry during a Fox News interview on Feb. 19, saying "none of them pay taxes," which would end under the Trump administration.
Analysts were skeptical.
"This is probably the 10th time in the last 15 years we have seen a politician (or other D.C. bureaucrat) talk about changing the tax structure of the cruise industry," said Steven Wieczynski, a gaming and leisure analyst for Stifel. "Each time it was presented, it didn't get very far."
The effort would require legislative action from Congress as opposed to an executive order from President Trump, said Robin Farley, an analyst from UBS. Such action would likely be part of a comprehensive tax bill that would require votes from Republicans in states like Florida and Alaska that depend on the cruise industry, she added, and thus face difficulty passing in a Congress with a narrow Republican majority.
Lutnick said in the interview that the administration is "getting rid of tax scams that hammer agaist America" and is looking to raise $1 trillion in revenue. He then turned his attention to cruises.
"You ever see a cruise ship with an American flag on the back? They have flags of like, Liberia or Panama. None of them pay taxes," he said. "This is going to end under Donald Trump, and those taxes are going to be paid and Americans' tax rates are going to come down."
The vast majority of oceangoing cruise ships that sail to and from the U.S. are foreign-flagged, mostly because there are no shipyards in the U.S. capable of building large cruise ships. And if they were U.S.-flagged, the ships would have to have an all-American crew.
Most cruise companies, however, maintain headquarters in the U.S., the largest passenger source market for the industry.
CLIA asserts that cruise lines pay "substantial" taxes and fees in the U.S., to the tune of almost $2.5 billion annually. Furthermore, CLIA said, that number represents 65% of the total taxes cruise lines pay worldwide, even though the ships spend little time in U.S. waters.
Another issue with trying to tax cruise ships is that they are embedded with the cargo industry in the eyes of the IRS, Wieczynski said. That reality could make it a difficult policy to change without affecting cargo operations.
Beyond that, foreign-flagged ships that visit the U.S. have been given the same tax exemptions that U.S.-flagged ships visiting foreign ports have since 1921, a reciprocity in U.S. tax law that exists across international shipping, CLIA said. If the U.S. taxes foreign-flagged cruise ships, those countries may do the same to U.S.-flagged cargo vessels.
Patrick Scholes, a securities analyst for Truist Securities, said the administration's comments about taxing cruise ships came "out of the blue." And while he agrees change is unlikely, it is possible.
"Probably nothing will come of it, but the probability is not zero," he said.
Robert Kwortnik, an associate professor at Cornell University's college of business, likened the administration's desire to tax cruise ships with foreign flags to its current tariff policy aimed at Mexico and Canada, which could affect consumers. It won't be cruise lines that necessarily pay any imposed tax, he said.
"I think the public needs to understand that if there is this kind of income tax, that's going to get passed on to the consumer."