that is subject to review by the congressional committees and agencies concerned with maritime policy". It has not been the history of our country to have appropriated funds used to

subsidize domestic offshore ocean transportation serving Hawaii. The Proposal does not explain how a regulatory program could take the place of the CCF Program and provide the same long-term investment incentives for specific maritime

purposes. The CCF Program is a promotional program, not a regulatory program. It has been administered by the Maritime Administration in the Department of Transportation smoothly and effectively with a very small amount of governmental

administration.

The President's Proposal also does not explain:

1. Why repeal of the CCF Program would not cause an

unconstitutional breach of a long standing contract between the United States of America and Matson?

2.

Why a very successful CCF Program that produces substantial investments in vessels which are essential for a strong United States Merchant Marine and an essential support of the Hawaiian economy with de minimis tax cost to the Government should be repealed, but other tax deferral programs which do not generally result in substantial investments in new essential equipment are retained?

3. Why a program that results in building vessels in United States shipyards for operation under the United States flag with American crews serving offshore domestic communities of the United States should be terminated, but the tax deferral program under 26 U.S.C. S 883 for foreign-built, foreign-flag vessels with foreign crews serving only foreign countries is retained?

The substantial detriment to the State of Hawaii, the United States Merchant Marine and the national defense which would result from repeal of the CCF Program is not justified by any national interest so far presented to support such repeal.

As a minimum and prior to dismantling one of the few remaining effective maritime aids, the consequences of such action should be reviewed in light of the objectives embodied in the 1936 Merchant Marine Act. That is, rather than creating in this piecemeal fashion another impediment to maintenance of a strong merchant marine, the CCF Program should be evaluated in the context of the nation's overall maritime policies.

Cargo Capacity

819 (24 ft.)/248 (40 ft.);

ISLANDER

4,834

1963

MAUNA LOA

4,304

1984

176 (24 ft.)/40 (40 ft.) (e); 1,900 tons Molasses

To be taken out of reserve status and reconstructed.

Placed in reserve status due to decreased fleet requirements.

To be disposed of.

Container cell structures can be adjusted to carry a different mix of container sizes.

The Treasury Department, in your report to the President "Tax Reform for Fairness, Simplicity, and Economic Growth", has misinterpreted the key defens role to be played by our U.S.-flag merchant marine. Currently, our military planning depends upon the U.S. merchant marine to provide more than two-third: of the U.S.-flag sealift. In their Fiscal Year 1986 Posture Statement to the Congress, the Joint Chiefs of Staff stated:

In any major overseas deployment, sealift will deliver about 95% el all dry cargo and 99% of all petroleum products. Ships from the U.S. merchant marine represent the largest domestic source of sealift, making them an important strategic resource.

Volume II of your report, when explaining your proposal to eliminate the merchant marine Capital Construction Funds, states:

"The special tax treatment of Capital Construction Funds originated,
along with a direct appropriations program, to assure an adequate
supply of shipping in the event of war. It was thus feared that

because of comparative shipbuilding and operating cost
disadvantages, peacetime demand for U.S.-flag vessels would not
reflect possible wartime needs."

As justification for repeal of the special tax treatment for Capital
Construction Funds, the proposal goes on to say:

"A national security justification for subsidies of U.S. maritime construction is today very much in doubt. U.S. citizens own or control large numbers of ships registered in Panama, Liberia, and Honduras, that would be available to the United States in an emergency, and most U.S. allfes possess substantial fleets of ocean going cargo ships that would be available in any common emergency."

This gross oversimplification of the role of the merchant marine misses the point that the most useful ships for military purposes are under U.S.-flag while the flags of convenience cited here are used primarily to support the national economy rather than direct military support. The conclusion that foreign flag ships would be available to support U.S. operations is not supported by fact or agreement. In fact this rationale is in direct contradiction with the President's recent statement on the merchant marine (attached).

In short any issues you may have with the Capital Construction Fund need to be approached as a matter of tax policy, not defense policy. I would be pleased to discuss this issue with you if you desire.

Attachment

Sincerely,

Елесготвзеят

EVERETT PYATT

ASSISTANT SECRETARY OF THE NAVY
(SHIPBUILDING AND LOGISTICS)

STATEMENT OF ALBERT E. MAY

BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS

Introduction

These

Mr. Chairman, I am Albert E. May, Executive Vice President of the Council of American-Flag Ship Operators (CASO), and I am submitting this statement on behalf of CASO and Matson Navigation Company, Inc., (Matson). CASO is an association whose member companies operate U.S.-flag liner vessels and are dedicated to preserving and expanding the U.S.-flag merchant marine. companies represent the majority of U.S.-flag liner companies serving the foreign commerce of the United States. They own and operate a modern and diversified fleet of breakbulk, container, barge-carrying, and roll-on, roll-off vessels, all of which are available under various programs for use by the United States during times of military emergency. Matson is a domestic offshore shipping company with headquarters in San Francisco, California, whose primary business is the ocean transportation of cargo between the United States Pacific Coast and Hawaii. CASO and Matson appreciate the opportunity to submit this statement opposing certain aspects of the Administration's tax proposal which will adversely affect the maritime industry.

We believe that four specific elements of the

Administration's tax proposal will have an adverse impact on our industry. These include the (1) repeal of the Capital Construction Fund (CCF) Program; (2) extension of the

depreciation period for vessels; (3) repeal of the the Investment