WASHINGTON - Tribal governments and their advisers urged members of Congress yesterday to pass legislation that would no longer allow the IRS to interpret the tax law in a way that unfairly limits the tax-exempt debt Indian tribes can issue and puts them at a competitive disadvantage to state and local governments.
Indian tribes seeking to issue tax-exempt bonds have been handicapped by the stances the Internal Revenue Service has taken in enforcement audits, which inhibits their ability to issue bonds, secure bond insurance, and ultimately find investors, they told members of the Senate Finance Committee at a hearing on how to improve tax policy for tribal governments.
Under current tax law, tribes generally can issue governmental bonds only if the proceeds are used in the exercise of an "essential government function." The IRS' enforcement division has indicated in audits of tribal transactions that facilities such as golf courses and convention centers are not essential government functions.
But the tribes contend the IRS interpretation is too strict because state and local governments can use tax-exempt bonds for municipal golf courses.
"We've found that because of the disparity in treatment between tribes and the tax code and other governmental entities, most of the investors will shy away," Wayne A. Shammel, general counsel for the Cow Creek Band of Umpqua Tribe of Indians, told lawmakers.
Shammel said discrepancy between tribal and traditional governments forced his tribe in 2006 to reduce a planned $400 million refunding bond issue to $300 million because of the high cost.
At least six tribes issued a total of $572.5 million of debt in 2007, according to data from the Municipal Securities Rulemaking Board, an amount limited by tax rules and public wariness toward tribal governments, said the tribal representatives and advisers.
The public inaccurately believes Indian tribes have gotten rich from casino gaming revenue, they told the committee. In reality, Native Americans remain some of the poorest citizens in the country, and the tax law born from the public misconception essentially discriminates against tribal governments, they said.
"Wall Street is trying to take more money out of the reservations because the government is telling them it's OK," Shammel complained.
The tax disparity at issue derives in part from tax law adopted in 1987 that allowed Indian tribes to use tax-exempt bonds to finance "essential governmental functions."
In a notice of proposed rulemaking in 2006, the IRS stated an essential governmental function does not include any function that is not typically financed with tax-exempt bonds. The IRS reasoned that, since non-municipal golf courses, for example, are not typically financed with tax-exempt bonds, courses owned by tribes should not qualify for tax-exempt financing.
Shammel said that after 10 years of typical governmental status, this ruling essentially gave tribal governments a commercial status in the eyes of the rating agencies, bond insurers, and investors. Although the notice is still pending, the IRS has adopted this position in its enforcement cases.
"Now again, we're here in this limbo," he said.
Because of the tax law, rating agencies grade tribal governments more as commercial entities than governments. This makes it more expensive for tribal governments to buy bond insurance, Shammel said. At least 10 tribal bond issuances in the Northwest have stalled because the deals have become too expensive, he claimed.
A Fitch Ratings analyst said yesterday that Fitch revamped its criteria for rating tribal governments in September 2007 because tribal governments draw most of their revenue from business operations, like casino gaming.
Tribal governments receive a lower rating than most traditional governments because they rely on gaming revenue and not tax revenues for their issuances, said Megan Newburger, a credit analyst with Fitch, in a phone interview. She said there is a "double standard" for tribes and traditional governments for getting a tax-exempt status for golf courses and other public facilities.
Some municipal bond lawyers said the double standard will not survive in court. Thomas D. Vander Molen, a partner lawyer at Dorsey & Whitney LLP in Minneapolis, said that if tribal members were the primary users of their bond-financed golf courses, then that would pass the essential governmental function test.
But many state and local government's publicly financed facilities have "become big tourist Meccas" and would violate the test for their commercial benefits. Torrey Pines golf course, which is owned and operated by San Diego, hosted the U.S. Open this year, he noted.
Furthermore, Vander Molen said section 115 of the tax code states that promoting tourism is a governmental function.
Sen. Gordon Smith, D-Ore., sponsored legislation in July 2007 to amend the tax code for tribal governments.
The legislation, co-sponsored by Sen. Max Baucus, D-Mont., whose home state has a 6.5% Native American population, would allow tribal governments to issue tax-exempt bonds if at least 95% of the bond proceeds are used to finance facilities on a tribal reservation and are used for essential government functions, but not gaming property.
The witnesses said they support this legislation, but it has not come to a vote in the finance committee.