Indian tribes would have to satisfy a much less stringent "essential government function" requirement to issue tax-exempt debt under legislation proposed by two Senate Finance Committee members.
Committee chairman Max Baucus, D-Mont., and Sen. Gordon Smith, R-Ore., this week introduced the Tribal Government Tax-Exempt Bond Parity Act of 2007, which would define "essential government function" as any function performed by state and local governments with general taxing powers.
But the tribal bonds bill, much like similar versions introduced in previous years, faces an uncertain future, since the earlier proposals failed to gain traction and the Treasury Department and the Internal Revenue Service are developing more restrictive regulations for the sector.
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 deals that facilities such as golf courses and convention centers do not satisfy the clause. That interpretation is too restrictive, given the legislative history, according to tribes and their advocates.
Introduced Tuesday, Baucus and Smith's bill stipulates that tribal bond proceeds cannot be used to finance gaming facilities, such as casinos. The legislation would give tribes "the same opportunities that state and local governments have to fund development programs, such as construction of community recreational facilities, public buildings, and conference centers," the senators said in a statement.
"This bill strengthens our commitment to the futures of Indian tribes in my home state of Montana and across the country, putting [tribal] governments on equal footing with cities and states when it comes to economic development," Baucus said. "It's common sense that tribal governments should have the same opportunities as other municipalities to build safer roads, better schools, and stronger communities in areas in great need of new development."
The bill was referred to Senate Finance Committee. The senators said Reps. Xavier Becerra, D-Calif., and Devin Nunes, R-Calif., are expected to introduce identical legislation in the House soon.
Meanwhile, the IRS and Treasury are believed to be finalizing proposed regulations that will strengthen the "essential government function" requirement. The regulations will likely define such functions as noncommercial and non-industrial activities that "numerous" state and local governments with general taxing powers have been conducting, and financing with tax-exempt bonds "for many years," according to a notice the IRS issued last summer.
