WASHINGTON — Senate Finance Committee chairman Max Baucus on Tuesday urged Congress, as part of tax reform, to put Indian tribal governments on par with states and localities for tax-exempt financing.
“Congress should … level the playing field for tax-exempt bonds,” the Montana Democrat said during a hearing on what tax reform could mean for Indian tribes and U.S. territories. “We should do this as part of tax reform.”
“States are currently allowed to issue tax-exempt bonds for any public purpose,” including economic development projects such as municipal golf courses, convention centers and hotels, Baucus said. “In contrast, tribal governments can only issue bonds for government buildings. Their bonds have to pass what’s called an 'essential government test.’ ”
Baucus asked the four witnesses at the hearing — an Internal Revenue Service official, a tribal leader, a law professor and a public finance specialist from the Congressional Research Service — if the limitations for tax-exempt bonds for tribal governments should be repealed and virtually all of them said yes.
Sarah Ingram, the IRS’ commissioner for tax-exempt and government entities who spoke at the hearing, testified in writing that a federal law enacted in 1982 requires the proceeds of tribal tax-exempt bonds to be “used in the exercise of an essential governmental function” and that tribes cannot issue private-activity bonds except to finance certain manufacturing facilities.
The American Recovery and Reinvestment Act of 2009 created tribal economic development, or TED, bonds that were similar to tax-exempt bonds, except they had to be used to finance projects on reservations and could not be used for projects involving gambling. The act, which expired at the end of 2010, authorized $2 billion of TED bonds. The IRS allocated the full amount to tribes, but less than 3%, or $60 million, were ultimately issued.
IRS officials asked tribal governments about the low issuance rate. They were told that the allocation period was too short, the characteristics of TEDs were not readily understood, credit constraints impede the market for TEDs, and the current national economic environment is not conducive to new bond issuances.
The unissued bonds remain available for reallocation, Ingram said, adding: “After carefully considering the comments received, the IRS expects to issue public guidance in the near future to announce a revised process for reallocating the unused volume cap for tribal economic development bonds.” She pointed to a report the Treasury Department submitted to Congress in December that recommended the “essential governmental function” restriction be removed for tribal bonds and that tribes be permitted to issue private-activity bonds.
Meanwhile, Steven Maguire, a public finance specialist with CRS, testified that any attempt by Congress to reduce or remove, as a tax expenditure, a portion of a special excise tax on imports of rum to the United States, would hurt the finances of Puerto Rico and the U.S. Virgin Islands as well as bonds.
Through the end of last year, the United States levied a $13.50 per-proof gallon excise tax on all rum imports and transferred or “covered over” $13.25 per proof gallon to Puerto Rico and the U.S. Virgin Islands. In fiscal 2011, Puerto Rico received more than $449.1 million in revenue from its share of the transferred tax and the U.S. Virgin Islands received $155.1 million, Maguire said. The amount transferred to the two territories dropped to $10.50 per-proof gallon at the start of this year.
President Obama has proposed extending the $13.25 rate through 2013 on a retroactive basis. The revenue impact of the proposal would be a reduction in federal revenues of $222 million over a three-year budget window from fiscal 2012 through fiscal 2014, according to the Joint Tax Committee.
“Allowing the higher payment to expire permanently as part of tax reform would have a direct impact on the governments of Puerto Rico and the U.S. Virgin Islands,” Maguire wrote in his testimony. “For example, the U.S. Virgin Islands has issued debt secured by future cover-over revenue to finance the construction of rum producing facilities.”
“An even more substantial reform, such as repealing the cover-over for rum not produced in Puerto Rico or the U.S. Virgin Islands (or termination of the cover over completely), would be significantly more disruptive to the island economies,” Maguire wrote.