Native Group Urges Easing Way for Tax-Exempt Deals

The National Congress of American Indians is urging the Treasury Department to revoke the burdensome “essential governmental function” test for tribal tax-exempt financings, as well as allow tribes to take advantage of private-activity bonds and use federal guarantees.

The group made the plea in a 15-page letter last month that responded to Treasury’s July request for public comment on the $2 billion tribal economic development bond program created by the American Recovery and Reinvestment Act.

The Treasury Department asked for comments on such issues as whether it should repeal the essential-governmental standard test that is currently applied to tribal tax-exempt bond deals.

The NCAI lamented the “separate and unequal” standards tribal governments must meet, compared to state and local governments. It called for Indian nations to be given the same options as states and localities, but noted that tribes also have special needs that should be accounted for when considering their tax-exempt financing options.

“These standards are not only inequitable, but also have proven to be difficult to administer,” the group wrote.

The Treasury should apply the same standard to tribes it does to state and local governments, NCAI said.

However, even if tribal governments are granted more flexibility in using tax-exempt debt, they still would be hampered by an inability to regularly access the credit markets because of “special needs and unique circumstances,” the NCAI said.

It urged the government to improve tribal access to the credit markets by allowing their tax-exempt obligations to be federally guaranteed. Currently, only housing bonds can carry a federal guarantee and still be tax-exempt.

The group said Treasury should grant tribal governments the same flexibility as other governments in delegating the issuance of bonds and the use of bond-financed facilities to authorities, agencies and other instrumentalities.

The types of entities used by Indian nations can vary considerably from tribe to tribe, which makes it more difficult to get tax law classifications that they qualify as governmental entities, according to the NCAI.

For example, to determine if a tribal entity qualifies as a governmental subdivision, it often has to undergo a lengthy two-step process.

First it must obtain a ruling from the Interior Department that the tribe has delegated sovereign power to it. Then it must obtain a private-letter ruling from the IRS affirming its status as a qualified subdivision. NCAI called for a more streamlined process.

The government also should open the door to private-activity bond financing for tribal governments, especially small-issue manufacturing bonds, the group said. In addition, the federal government should create two new types of PABs specifically for tribes — housing and economic development PABs — the NCAI said, noting that tribal members typically cannot access traditional mortgage financing.

Also, tribes have virtually no access to tax-advantaged financing like tax increment financing, which state and local governments use to encourage economic development, the NCAI complained. “There may be no private activity of greater interest to most tribes than economic development,” it wrote.

Economic development PABs could be used to finance tourism and recreational facilities, travel centers, or retail mall ­facilities.

However, if tribes gain the ability to issue PABs, the current population-based allocation method used for states would not work for them.

Many tribes look to an individual’s percentage of Native American blood to determine membership, but others allow anyone with tribal descendents to be a member — including one of the nation’s most populous tribes, the group said, without identifying it.

As a result, a significant portion of some tribes reside off their reservations, it wrote.

The group suggested instead that PAB allocations be made in equal amounts to all tribes and that they be given flexibility to assign their capacities to or pool their allocations with other tribes.

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