How tribes, unlike states, face major obstacles in accessing the most basic public finance tools
Economic development benefits communities through job growth, higher living standards and improving subjective well-being. Fiscal capacity, which enables governments to deliver programs and services such as health care, education, workforce development and law enforcement, is also the product of growing economies. As a result, state and local governments are using an artillery of public finance tools such as subsidized loans and tax incentives to spur development. Constantly neglected and largely underestimated, the responsibilities of tribal governments reflect those of state and local governments. Yet unlike these subnational governments, tribal governments face barriers when accessing the most basic forms of public finance tools. This lack of parity is particularly harmful today, as recent research shows the COVID-19 pandemic has crippled tribal government income and had a disproportionate impact on age-adjusted mortality and prime-age employment among American Indians and Alaska Natives. In this short article, we summarize three distinct ways tribes have been excluded from tax-based economic development tools that are readily available to state and local governments.
Obstacle # 1: Tribal access to subsidized finance
State and local governments use considerable amounts of tax-free debt securities (i.e. municipal bonds) to provide public goods such as highways, bridges and parks as well as private goods such as hotels, golf course, and sports stadiums. In addition, these governments can issue [i] that let the benefits of low-cost borrowing go directly to the private sector – provided those bonds are used for specific projects such as airports, educational institutions and affordable rentals. These bonds benefit the public by building economic infrastructure without raising taxes.
For decades, however, tribes have been effectively excluded from the possibility of issuing the two non-taxable government bonds and private activity bonds. Starting with the passage of Indian Tribal Governments Tax Status Act in 1982, which was later amended in 1987, the US tax code restricted the use of tax-free tribal government bonds to only “core government functions”, effectively reducing the pool of eligible projects to those generally funded by the states through tax revenue, and prohibited the use of tribal private activity bonds (the only exception was the construction of manufacturing facilities). These restrictions are particularly onerous for tribes because, unlike local governments, tribes cannot levy property taxes on land held in confidence and, following the Supreme Court decisions, even when the land is owned by individuals on a reserve, property tax revenues accrue to local communities.
The marked difference in the use of tax-exempt debt instruments between state and tribal governments is illustrated in Figure 1. Using data from 2014 to 2020, state governments issue a total of $ 47 billion per year. year in tax-free municipal bonds, compared to a total of $ 84 million per year by tribal governments. This equates to a 559-fold difference in the use of tax-exempt government bonds.
The lack of involvement in the financing of tax-exempt bonds is not due to the lack of potential investments in the Indian country. In fact, as part of a stimulus package during the Great Recession, the federal government launched a pilot program, called the Tribal Economic Development (TED) bond program. This gave all federally recognized tribes access to a national cap of $ 2 billion to issue tax-free debt in the same manner as states and local governments. Thus, for the first time since the 1980s, the tribal government was able to issue tax-exempt bonds to encourage essential investments in infrastructure on reserve lands without passing the test of core government functions. The core government functions test has been lifted for tax-free and tribal bond funding. Unsurprisingly, the allocation pool was effectively exhausted, which highlights the need for greater fiscal parity between states (and other subnational rulers) and tribes. The permanent deviation from the âcore government functionsâ standard for tribal governments even has the backing of the Treasury Department which, as part of an evaluation of the TED program, advised its repeal ten years ago.
Unless this standard is eliminated or the TED program is expanded, tribes will continue to face different standards in accessing the tax-exempt bond market.[ii]
Figure 1: Differences in tax-exempt government bond issuance, 2014-2020
Notes: Calculations constructed by the authors. Source: Statistics for the year 2015-2020 of the buyer of bonds, inflation calculator of Best Inflation Calculator (2021) – Historical and Future Value | SmartAsset.com.
Obstacle # 2: Tribal access to tax incentives
Tribes and states are often pitted against each other when tax non-tribal activities within the limits of the reserve. If nothing is done, the two sovereigns can levy taxes on the same activity, which will effectively deter any economic development. This situation is called double taxation and a practical solution is for tribes and states to enter into fiscal agreements called fiscal pacts between the state and the tribes, where the two governments agree to set a single tax on non-tribal activities within reserve boundaries and share the.
For the tribes, these agreements have advantages and disadvantages.[iii] The advantage of fiscal pacts is that essential revenues from non-tribal economic activity within reserve boundaries are redistributed to the tribes. The consequence is that states often set the negotiated tax rate to state sales tax. As a result, if a state chooses to reduce its sales tax without the consent of the tribe, two problems may arise: (1.) tribal tax revenues may decline and (2.) tribal loans tied to income generated by the agreements. will become inherently unstable. In addition, when the reserve tax rate mirrors that of the state, tribes lose their ability to use taxes as development rights.
While state and local governments spend almost $ 50 billion per year in tax incentives which include, among other things, property tax allowances and tax credits for job creation, tribal governments are forced to use a more limited set of tax tools, where appropriate. A logical solution, as a recent report by the Treasury Tribal Advisory Committee (TTAC), is to recognize that tribal sovereignty predates the sovereignty of the United States and to allow the tribes to be the sole fiscal authority on their reservations.
Although the obstacles to the full use of subsidized funding and tribal tax incentives are idiosyncratic in nature, they all share a similar theme: each obstacle is the consequence of an infringement of the sovereign rights inherent in tribes. Until we resolve the decrease in tribal sovereignty, tribal governments will continue to navigate these structural barriers in search of a stopgap. These tribal constraints on public funding instruments – which are imposed on tribes by the federal government – affect the ability to govern and deliver public goods that are widely recognized as a fundamental obstacle to development.
Matthew has researched a wide range of topics related to tribal economic development and published work on historical development, Indian displacement, land rights and agricultural productivity. Matthew is a member of the Indigenous Peoples Economic Research Association.
[i] Private Activity Bonds (PABs) are tax-exempt bonds issued by state and local governments on behalf of private entities as long as they serve a “qualified project” such as those mentioned in the article (airports, educational institutions and rental housing). Technically, these tax-exempt bonds are sold by state and local governments in the bond market, and the proceeds from the sale are used to provide low-cost loans to private entities. Hence the term âprivate activity obligationsâ. Each state can issue PABs up to its volume cap which varies by state and is based on its population.
[ii] To put the size of the TED program volume cap in perspective, since the adoption of the TED program in 2009, state and local governments have issued a total of $ 189 billion (in 2009 dollars adjusted for inflation) in private activity bonds only.
[iii] The pros and cons of entering into a tribal-state tax deal can be seen in Blackfeet Nation and Montana Tobacco Tax Agreement where taxes are set by the state rather than the tribe, but returned to the tribe. For a more complete list of the characteristics of many tax agreements between tribal states, see research by Mark Cowen at Boise State University.