You may have read about the $1 million donation to the University of Alaska from Princess Cruises and the Holland America Line, two subsidiaries of Carnival Corp., the world’s largest cruise ship operator.
The money will help pay for a variety of university programs in Anchorage, Fairbanks and Juneau.
But the press releases and the news coverage last week all failed to explain the financial reality of the transaction.
When Gov. Sean Parnell took part in a ceremonial acceptance of the gift at an Anchorage Rotary club, he should have passed the check to the cruise companies, not the other way around.
Depending upon how it is structured, as much as $800,000 of the four-year donation could be paid by the state of Alaska. The state contribution comes in the form of reduced revenues to the state treasury, brought about by tax credits provided to the donor companies.
Depending upon how the deal is structured, the donation may cost the companies about $50,000 a year or less, as we don’t know how much of a federal tax break they will earn from the arrangement.
A press release or news story about a big break on state taxes is not headline philanthropic news. But if you focus on the money going to the university, a different picture emerges, as demonstrated by the coverage last week.
The companies, the university, legislators and the governor know how the “Alaska Educational Tax Credit” works, but the public does not.
Here’s an outline:
Companies that pay taxes in Alaska, such as the two Carnival subsidiaries, qualify for tax credits if they donate money to support education in Alaska, under a program established in state law.
For the first $100,000, donors qualify for a 50 percent tax credit, meaning they get half of the gift back in the form of reduced state taxes.
That’s generous, but the sweet spot of the educational tax credit applies to every dollar they donate between $100,001 and $300,000.
The state provides a 100-percent tax credit for that portion of the gift, meaning that a $300,000 donation costs a company as much as a $100,000 donation.
The state picks up the tab for that $200,000 portion, in the form of reduced state revenue, while the companies get more bang for the buck in the public relations department.
Under these terms, any company with a big enough tax bill will make a $300,000 annual gift instead of a $100,000 gift, since the annual cost is the same -- about $50,000 or less. That the source of the donation is money diverted from the state treasury is unnoticed.
For the portion of a donation between $300,001 and $10 million, the state again pays 50 cents on the dollar in tax credits.
One way to look at this program is that the Legislature has delegated to private companies the ability to appropriate a portion of their taxes in the interests of education and good publicity.
The university system said that $585,000 of the donation is to continue renovation work on Cuddy Hall at the University of Alaska Anchorage, while the rest will support a variety of projects, such as scholarships at the University of Alaska Southeast, the Entrepreneurial Edge program at UAA, a museum exhibit at the University of Alaska Fairbanks, the commissioning ceremony for the research vessel Sikuliaq and the Alaska Sea Grant Marine Advisory Program.
A summary of the tax credit provision posted on a university website says that in addition to state tax credits, companies may earn federal tax breaks.
As an example, the chart shows that for a donation of $300,000, a company could get a federal tax reduction of $17,500, assuming the company pays a federal tax rate of 35 percent.
Carnival, the owner of Princess and Holland America, doesn’t pay 35 percent in federal taxes because it is based in Panama.
In a July hearing, Sen. Jay Rockefeller, a West Virginia Democrat, told top executives of Carnival and Royal Caribbean International that he wants to do away with the loophole that has allowed the companies to pay an average income tax rate of about 1.3 percent over the past seven years.
He said the cruise ships fly foreign flags to “maintain the fiction that you earn most of your income outside of U.S. territory” and “you do not pay your fair share of taxes in this country.”
Cruise industry officials don’t like the L word.
“What Sen. Rockefeller is apparently referring to as a loophole is something that has been fairly entrenched in U.S. tax law going back many decades, has been carefully reviewed by Congress with very small changes made as recently as 2003,” Adam Goldstein, the president and CEO of Royal Caribbean International, said in a July conference call with investors.
As with the state tax credit program, the details carefully entrenched in federal law often escape public attention.