Taxing the Cruise Companies: What Are the Options? What's the Impact?

U.S. Commerce Secretary Howard Lutnick called out cruise lines earlier this month for their “flag of convenience” status that allows them to avoid U.S. income taxes, and pledged that the Trump administration would make them pay.

The debate around taxation of cruise operators has been around for years. 

Norwegian Cruise Lines, Royal Caribbean, and Carnival are all based in South Florida but incorporated abroad. Royal, for example, is a corporation of Liberia, in West Africa. Norwegian is incorporated in the Bahamas. That means the operators aren’t subject to U.S. corporate income tax, currently 21%.

Five years ago, when Congress was mulling which industries to aid amid the Covid-19 pandemic, the cruise lines were left out and borrowed billions to survive the industry shutdown. Post-pandemic, their business has been booming. 

Critics contend that these companies source a large portion of their business – and income – from America and should not be allowed to escape U.S. tax obligations or to hire predominantly foreign workers who generally earn lower wages and benefits than Americans do. 

What options does the Trump administration have? And what would the impact be on the cruise lines?

The Impact of Congressional Legislation

Any administration effort to tax cruise ships would not come via presidential fiat, but require legislation in Congress. And representatives from three of the largest states with major cruise operations – Alaska, Florida, and Texas – would likely support the industry’s position, said Sharon Zackfia, a William Blair partner and consumer analyst.

“All of the states that are the main ports are all Republican states,” Zackfia said. 

The taxation issue is also complicated because any effort to target cruise lines’ taxation would affect larger issues, such as cargo and oil tankers.

“It’s difficult to carve the cruise companies out and not affect broader international trade,” Zackfia said. “Now maybe part of the goal is to affect broader international trade, but there’s no section of the internal revenue code that’s specific to cruise companies, its maritime operations.” 

Changes made to enact cruise taxes could trigger reciprocal foreign taxes levied abroad on U.S. shippers, such as the ability of U.S. companies to not pay local taxes abroad.  

About 75% of Royal Caribbean’s sales are from U.S. cruisers “but we expect that profit % could be deemed far lower given the time spent in foreign ports, on private islands, etc,” Bernstein analysts said in a client update. 

The current largest cruise ship, Royal’s Icon of the Seas, which can carry as many as 7,600 people, is registered in the Bahamas. So are the half dozen ships at Disney Cruise Line, and numerous others across the industry, including most of the Norwegian Cruise Line Holdings fleet.

Other countries offering ship registration include Panama, the Marshall Islands and Liberia – which calls itself the world’s largest ship registry, with more than 16% of the global fleet of sea vessels.

Norwegian’s Pride of America, for example, is the only U.S.-flagged cruise ship, with a large percentage of U.S. employees, so that the company can operate cruises around the Hawaiian islands. 

Norwegian President and CEO Harry Sommer declined to speculate on the possible impact during an earnings call this week.

“Considering how many moving pieces there are and the complexity of our business… and the relatively short amount of time our ships are in U.S. waters, it’s really hard for us to speculate on what this would mean to us. So I won’t,” he said.

The industry’s trade group, Cruise Lines International Association, says operators pay nearly $2.5 billion in taxes and fees in the U.S., or 65% of the total taxes cruise lines pay worldwide. 

“In addition to taxes paid by the industry, cruises generate meaningful economic contributions to the U.S. economy each year – $65 billion in 2023, which supported 290,000 U.S. jobs,” CLIA said in a statement responding to Lutnick’s comments.

How Would Cruise Lines Respond?

If a new tax scheme affected cruises departing from U.S. waters, the major cruise lines such as Carnival, Royal Caribbean Cruises and Norwegian Cruise Line could shift more departures to, for example, the Caribbean or Mexico, said Sharon Zackfia, a William Blair partner and consumer analyst.

“Do you develop different ports where people are flying a little bit further? Do you try to change itineraries somewhat so that you’re not as taxed?” Zackfia said. “That’s more along the hypothetical line.”

The analyst also noted that the companies have offsets that could reduce their tax burden. 

Henry Harteveldt, a travel analyst with Atmosphere Research, predicts that cruise lines would look for ways around the tax. “If the government implements the equivalent of an airline ticket-like ‘federal excise tax’ on U.S.-originating or terminating bookings, we could see fewer cruises sailing from U.S. ports, and possibly smaller ships using U.S. ports,” he said.

The cruise companies would also likely deepen their “already strong appetite” to develop and own foreign destinations, such as private islands, where they collect 100% of the revenue, Zackfia said.

A good example of a private destination is Perfect Day at CocoCay, Royal Caribbean International's resort in the Bahamas, around 140 miles east of Miami. It has more in the pipeline and Carnival is investing in a $100 million pier extension for its private destination at Celebration Key on Grand Bahama.

Is the policy shift worth it? “The cruise industry is an interesting soundbite, but it’s not a big industry,” Zackfia said. “Even if you taxed the whole industry, I’m not sure the juice is worth the squeeze. You’d maybe get $2 billion of revenue per year – maybe.”