Hawaii faces constitutional showdown over climate tax on cruise ships

The cruise industry claims potential economic fallout if Hawaii’s first-in-the-nation levy targeting cruise passengers to fund climate adaptation takes effect in 2026.

by Jeremy Yurow, Court House News, November 14, 2025

HONOLULU (CN) — The cruised industry clashed with the Hawaii Department of Taxation on Friday over the state’s attempt to tax cruise ships to fund climate change initiatives in a case that could determine whether states can impose special levies on maritime commerce.

Act 96, a recently enacted state law set to take effect Jan. 1, would impose an 11% state surcharge and 3% county fees on cruise fares — potentially generating nearly $100 million annually intended for shoreline protection, wildfire prevention and other climate adaptation measures.

Asking for a preliminary injunction to block the law, Ben Snyder of Paul Hastings — representing the Cruise Lines International Association and several Hawaii tour operators — argued that Act 96 “clearly violates the Constitution and federal law by taxing cruise ships for the privilege of navigating Hawaii ports.”

“A fundamental right enshrined in the Constitution is freedom of navigation,” Snyder said, invoking the Constitution’s tonnage clause, which prohibits states from imposing duties on vessels without congressional consent. He argued that both the $15 registration fee and the percentage-based surcharges constitute unconstitutional taxes on the privilege of entering ports.

But U.S. District Judge Jill Otake pushed the cruise industry on whether eliminating the tax would give ships preferential treatment over hotels and challenging the state on how quickly a taxpayer could actually obtain relief through Hawaii’s court system.

Snyder emphasized that the tax treats cruise ships worse than land-based hotels because ships must include meals and entertainment in their ticket prices — which are taxed under Act 96 — while hotels can exclude those costs. He also noted that transportation costs on cruise ships are taxed at 14% while inter-island flights face only a 4.5% general excise tax.

“Taxing ocean transportation by ship, rather than transportation by plane, by definition is a disparate discriminatory impact, and is unconstitutional under any view of Polar Tankers,” Snyder argued, citing a 2009 Supreme Court ruling over an Alaska tax on oil tankers.

“What weight should I give Polar Tankers given that there was no majority there?" Otake, a Donald Trump appointee, asked, noting that Justice John Roberts’s cited opinion was a concurrence, not a majority holding.

She also challenged the industry’s core argument: “If the tax were lifted, how is it that they aren’t given preferential treatment?”

Snyder insisted the industry wasn’t seeking preferential treatment but rather equal treatment, arguing that cruise ships face discriminatory taxation compared to hotels.

Hawaii pushed for Otake to dismiss the case entirely — Kacyn Fujii, Deputy Attorney General of Hawaii’s Tax and Charities Division, countered that Act 96 is simply a tax on transient accommodations that should be resolved in state court, not federal court.

“This is a state tax issue that should be decided in the state court,” Fujii told Otake. “If plaintiffs were to succeed today in federal court, the state would be prevented from enforcing and collecting its transient accommodation tax.”

Fujii invoked the Tax Injunction Act, a Depression-era law that generally prohibits federal courts from interfering with state tax collection when adequate state court remedies exist. She argued that Hawaii’s Tax Appeal Court provides a “plain, speedy and efficient” remedy for constitutional challenges.

When Otake asked Fujii about the $15 registration fee specifically, the state attorney suggested it was “more of an administrative fee than a tax” based on various factors.

Snyder pushed back on the state court remedy argument, noting that Hawaii is one of a small handful of states that does not allow declaratory judgment actions related to taxes.

“There’s nowhere else for them to go,” he said.

Fujii also challenged whether the plaintiffs — which include a Honolulu ship supply company, a Kauai tour operator, and a Big Island tour business — even have standing to bring the lawsuit, since none actually operates cruise ships or would pay the disputed tax directly.

Fujii also argued it was speculative that cruise lines would pass the tax on to passengers.

“If they’re concerned about losing customers, then it’s entirely reasonable for them to absorb all or part of the cost of the tax,” she said.

Otake appeared skeptical of that argument, asking why it wasn’t common sense to conclude the tax would be passed to passengers. Fujii responded that economic forces could work either way, citing Walmart’s decision to absorb some of Trump’s recent tariff costs rather than raise prices.

On rebuttal, Snyder offered, “The Pride of America, which sails weekly around the Hawaiian Islands, has seen about a 30% reduction in bookings for 2026 compared to this time last year.” He offered to provide a formal declaration documenting the decline.

In a surprise development revealed at the hearing’s conclusion, the U.S. Department of Justice filed a motion to intervene in the case Thursday night — just hours before the Friday morning hearing.

Bradley Bondi, another attorney for the plaintiffs, explained that the Justice Department’s Office of Legal Policy had posted on LinkedIn asking about state laws that might violate the commerce clause, and the cruise industry had responded about Act 96.

“We hoped the government would have intervened sooner, but they were shut down,” Bondi told Otake. “As soon as the government reopened, they decided to proceed.”

Otake said she would “endeavor to work on this in a short time frame” given the procedural posture but did not indicate when she would rule. The state and counties said they needed time to respond to the federal government’s intervention motion.