B.C. cruise tax would hurt Washington and Alaska

When one jurisdiction raises its consumption taxes, it's usually good for the neighbouring jurisdiction. This is common sense — if the cigarette tax is almost four times higher in Montana than neighbouring North Dakota, for example, Montanans will drive to North Dakota to save money on cigarettes. Montana businesses lose cigarette revenue and the government loses tax revenue, while North Dakota gains.

But a potential tax on cruise ship passengers visiting Victoria (hat tip to Andrea Craig), as advocated by consultant and UVic lecturer Brian Scarfe, could actually be a bad thing for neighbouring jurisdictions.

In a report for a Victoria community group, Scarfe estimates there are about $28 million in socio-economic costs for Victoria each year from cruise ships; these include factors such as marine pollution, increased traffic and noise. He finds these outweigh the approximately $24 million in benefits that cruise ships bring to Victoria. To help make up the difference, Scarfe suggests B.C. levy a tax of about $25 on cruise ship passengers that stop in a B.C. port. But this is actually bad for neighbouring jurisdictions — namely Seattle and Alaska.

The majority of Victoria's cruise ship traffic comes from Seattle-to-Alaska cruises. In part, this is because of the U.S. Code of Regulations, Title 19, Chapter I, Part 4, Section 4.80a, (b) (1), (2) and (3), which makes it illegal for a ship not owned or built in the U.S. to travel between two U.S. ports — unless it stops in another country's port along the way. Thus, if you want to go from Seattle or San Francisco to Alaska on a foreign-built ship, you have to stop off in B.C..

The legislation is kind of ironic, because its purpose was to protect the U.S. shipping industry "from foreign competition, in order to encourage the development of an American merchant marine, for both national defense and commercial purposes." But rather than strengthen the American cruise industry, the regulations make the industry somewhat beholden to B.C. policies.

If B.C. levies a tax on cruises, it will increase the price of all Alaskan cruises on foreign ships, since these ships will have no choice other than to stop in B.C. This is bad for Alaska and Seattle since, according to Scarfe, the majority of economic benefits from cruises go to the home and destination ports.

The cruise tax differs from my cigarette tax example because Montana cigarettes and North Dakota cigarettes are substitutes, whereas B.C. and Washington/Alaska cruise stops are complements. Montana and North Dakota cigarettes are identical and can easily be substituted for each other, so when you raise taxes on Montana smokes, people buy fewer Montana cigarettes and more North Dakota ones. But cruise stops are more like shoes and shoelaces — there isn't much use in having one without the other. If the prices of shoes skyrockets, people would buy fewer shoes AND fewer shoelaces — they'd substitute to sandals instead. Likewise, when the price of B.C. cruise stops goes up, people will buy fewer cruises stopping in B.C., which in turn means they'll buy fewer cruises originating or ending up in Seattle and Alaska.

Rather than face decreased demand for cruises, it could be in Alaska and Seattle's interests to offset some of a B.C. cruise tax. They could subsidize cruise lines or cruise passengers by reducing their own docking fees, for example. Or they could write the B.C. government a cheque in exchange for an agreement to limit its cruise ship tax at a certain level — although something tells me that wouldn't be a savvy political move.