The Senate Finance Committee held a hearing Tuesday to examine the impact of tax reform on Native American tribes and U.S. territories such as Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands.
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“Indian governments and the territories are in some ways similar to state governments,” said committee chairman Sen. Max Baucus, D-Mont., in a statement. “Each provides hospitals, public schools and law enforcement. But U.S. policies do not recognize tribal governments or territories as states or fully sovereign nations. Instead, U.S. law is a patchwork of complicated rules for each territory. And for tribal governments, U.S. policies are inconsistent. Tax policy is a microcosm of this inconsistency.”
Baucus noted that the unemployment rate on some reservations, such as the Northern Cheyenne reservation in Montana and the Pine Ridge reservation in South Dakota, is 80 percent. One in four Indians lives below the poverty line. American Indians’ median income is 31 percent less than all other Americans. U.S. territories and commonwealths also suffer from high unemployment.
“In the past, Congress has recognized the special status of tribal governments and the island territories and taken steps through our tax policies to improve their economic conditions,” he added. “We provided accelerated depreciation for capital investments and an employment credit for businesses located in Indian country. Congress also allowed businesses to claim a credit for the production of coal from Indian land. The accelerated depreciation provision brought jobs and economic activity to the Crow Tribe in Montana when Westmoreland Coal used it to boost profits.”
However, Baucus noted that there are issues with these provisions. Two-thirds of the state of Oklahoma qualifies as an eligible Indian reservation under the accelerated depreciation provision and employment tax credit as written. “Perhaps the tax laws need to be better targeted,” he said.
Seneca Nation of Indians President Robert Odawi Porter discussed the history of his tribe and the many broken treaties and promises made by the federal government over more than 200 years.
“We have long believed that our treaties with the United States require that the Seneca Nation, our people and our lands, be treated as immune from federal and state taxation,” he said. “By legislation and agreement, the United States has generally recognized this tax immunity and our Nation’s inherent, sovereign right to regulate all conduct within our territories free of interference by all other governments. Moreover, the Congress has never expressly authorized the direct taxation of individual Indians.
“However, many aspects of our treaty-recognized freedoms have been eroded over time, particularly those that originally protected our individual tribal citizens,” Porter added. “All three branches of the federal government— judiciary, executive, and legislative—have directly caused or allowed this erosion to occur. Without any express congressional authorization, over the last 60 years the Treasury Department has forced tribal citizens to become taxpayers in violation of our treaty status. Forcing us to pay taxes—such as income taxes, payroll taxes, and excise taxes—undermines our treaty-protected immunities. It must be remembered that our treaties with the United States reflect the payment of our ‘tax bill’ in perpetuity. Indian people gave up nearly all of our lands in fulfillment of any and all obligations that might ever be owed to the United States in the future.”
General Welfare Exclusion
A primary area of concern for tribal governments is the application of the general welfare doctrine. The doctrine allows governments to provide benefits to citizens without those benefits counting as taxable income.
“Tribes provide many benefits to their members including educational assistance and cultural awareness, along with housing and meals,” said Baucus. “But it’s often unclear which benefits are eligible for the exemption. That uncertainty is tough on families and tribal governments, and it’s something we should fix.”
“With respect to tribal tax issues, certain of them, such as the general welfare exclusion, seem to have been outstanding for several years, and this committee needs to determine the scope of actions to be taken when fundamental tax reform is finally realized,” said Sen. Orrin Hatch, R-Utah, the ranking Republican member of the committee.
IRS Tax Exempt and Government Entities Commissioner Sarah Hall Ingram testified about the consultations that the IRS and the Treasury Department have been having with tribal leaders on the general welfare exclusion.
“Tribes, like all governments, sponsor social welfare programs designed to support their members,” she said. “Of principal relevance to the IRS is whether payments made through those social welfare programs are taxable. To be very clear, whether this exclusion is or is not applied does not limit what benefits or social programs tribes can provide to their members. The question is whether the provision of those benefits is excludable from general income under the general welfare doctrine.”
She noted that at various times, different tribes and tribal leaders have voiced concerns over the application of the exclusion provided under the general welfare doctrine. Last November, in response to consultation sessions and meetings with tribes and tribal leaders, and internal IRS and Treasury discussions, the IRS issued Notice 2011-94, which invited comments concerning the application of the general welfare exclusion to Indian tribal government programs. The purpose of the Notice was to begin a consultation process with tribes on how to find a solution that addressed their concerns and improved clarity and consistency of the tax law.
The IRS has received over 65 written comments from tribes and tribal leaders submitted in response to Notice 2011-94, Ingram noted, and is still reviewing those comments as it considers the next step in the process. In March, the Treasury and the IRS participated in a consultation session hosted by the National Congress of American Indians in conjunction with their annual conference and attended by approximately 40 tribal representatives. The IRS and Treasury intend to host another consultation session through teleconference on May 30 (see IRS Consults with Tribal Leaders on Welfare Exclusion).
The IRS eventually plans to publish written guidance that will address issues raised by tribes in their comments. “Our intent is that this published guidance, along with improved internal coordination procedures, will provide increased clarity and consistency of the application of the general welfare doctrine,” said Ingram. “In the process of doing so, we will respond to many of the concerns which we have heard through the written and in-person consultation sessions. Our goal is to publish guidance as soon as possible. Tribal concerns are very important to us and we look forward to working with tribes on this item in the future.”
Tax-Exempt Bonds for Tribal Governments
Baucus noted that Congress should level the playing field for tax-exempt bonds for tribal governments. While states are currently allowed to issue tax-exempt bonds for any public purpose, tribal governments can only issue bonds for government buildings, and their bonds have to pass an “essential government test.”
To address this inequity, in 2009 Congress authorized $2 billion of tribal economic development bonds for any purpose other than gambling facilities. The Treasury Department studied the program and recommended that Congress repeal the essential government test. “We should do this as part of tax reform,” said Baucus.
Ingram of the IRS discussed the use of tax-exempt bonds. She noted that the Indian Tribal Governmental Tax Status Act of 1982 added Section 7871 to the Tax Code, which grants Indian tribal governments the authority to issue tax-exempt bonds. This provision does have a limiting provision, however, as it generally requires that proceeds of tribal tax-exempt bonds be “used in the exercise of an essential governmental function.”
Further, Section 7871 also provides that tribes are not allowed to issue private activity bonds except in limited circumstances to finance certain manufacturing facilities, she noted.
“Since enactment in 1982, we have consistently heard from tribes that these requirements significantly limit the ability of tribes to fund certain projects and that these requirements are unfairly restrictive in comparison to the more flexible standard for tax-exempt bond financing that applies to state and local governments,” said Ingram.