The cruise industry faced a financial jolt last week after a high-ranking official in President Donald Trump’s administration suggested a new taxation policy for cruise ships. U.S. Secretary of Commerce Howard Lutnick, during a Fox News interview on February 19, claimed that cruise companies “don’t pay taxes,” vowing that such an arrangement would end under Trump’s leadership. While the remarks led to a decline in cruise line stocks, analysts argue that implementing such a policy is far from straightforward.
Taxing foreign-flagged cruise ships is not a new discussion. According to Steven Wieczynski, a gaming and leisure analyst at Stifel, “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.” Despite numerous attempts, prior proposals have failed to gain traction.
The main obstacle is that such a change requires legislative action rather than an executive order. Robin Farley, an analyst at UBS, explained that any alteration in cruise taxation would likely be part of a larger tax reform bill, needing approval from Congress. Given the Republican-controlled Senate’s narrow majority, securing votes from lawmakers representing cruise-dependent states like Florida and Alaska could prove difficult.
Lutnick highlighted that cruise ships rarely sail under the American flag, instead registering in countries such as Panama and Liberia. This practice is primarily due to economic and regulatory advantages. Foreign registration allows cruise companies to bypass certain U.S. labor and tax laws, making operations more cost-effective.
One major reason for this trend is the absence of U.S. shipyards capable of building large modern cruise vessels. Additionally, if these ships were registered in the U.S., they would be required to employ an entirely American crew, leading to significantly higher operational costs.
While Lutnick criticized cruise companies for allegedly avoiding U.S. taxes, the Cruise Lines International Association (CLIA) refuted this claim. The trade group reported that cruise lines contribute approximately $2.5 billion in annual U.S. taxes and fees, which accounts for 65% of the taxes they pay worldwide.
Moreover, the cruise industry has a complex tax classification within U.S. law. Wieczynski pointed out that cruise ships are linked to the cargo shipping industry under current IRS regulations, making policy changes difficult without affecting other maritime sectors.
Another complication stems from international tax agreements. Since 1921, U.S. tax law has upheld reciprocal exemptions for foreign-flagged vessels, including both cruise and cargo ships. If the U.S. imposes new taxes on foreign-flagged cruise ships, other countries may retaliate by levying similar taxes on American cargo vessels, potentially disrupting global trade.
Even if the Trump administration were to push forward with this taxation plan, the financial burden may not fall solely on the cruise companies. Robert Kwortnik, a professor at Cornell University’s College of Business, suggested that the costs would likely be passed down to consumers through higher cruise fares. He compared the proposal to the administration’s tariff policies on Mexico and Canada, where businesses adjusted pricing structures to compensate for added costs.
Despite the strong rhetoric from the Trump administration, experts remain skeptical that any real changes will materialize. Patrick Scholes, a securities analyst for Truist Securities, noted that the proposal came “out of the blue,” and while he acknowledges that policy shifts are possible, he believes the likelihood remains low. “Probably nothing will come of it, but the probability is not zero,” he remarked.
Ultimately, while discussions on taxing cruise ships will likely continue, the industry’s deep ties to U.S. tourism, legal complexities, and potential economic repercussions make the implementation of such a policy highly challenging.
