[Senate Hearing 112-772]
[From the U.S. Government Publishing Office]
S. Hrg. 112-772
TAX REFORM: WHAT IT COULD MEAN FOR
TRIBES AND TERRITORIES
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
MAY 15, 2012
__________
Printed for the use of the Committee on Finance
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COMMITTEE ON FINANCE
MAX BAUCUS, Montana, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico JON KYL, Arizona
JOHN F. KERRY, Massachusetts MIKE CRAPO, Idaho
RON WYDEN, Oregon PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan JOHN CORNYN, Texas
MARIA CANTWELL, Washington TOM COBURN, Oklahoma
BILL NELSON, Florida JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland
Russell Sullivan, Staff Director
Chris Campbell, Republican Staff Director
(ii)
C O N T E N T S
__________
OPENING STATEMENTS
Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman,
Committee on Finance........................................... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah................... 3
WITNESSES
Ingram, Sarah Hall, Commissioner, Tax Exempt and Government
Entities, Internal Revenue Service, Washington, DC............. 4
Porter, Hon. Robert Odawi, president, Seneca Nation of Indians,
Salamanca, NY.................................................. 6
Robertson, Dr. Lindsay G., professor of law, University of
Oklahoma College of Law, Norman, OK............................ 8
Maguire, Dr. Steven, Specialist in Public Finance, Congressional
Research Service, Washington, DC............................... 10
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Baucus, Hon. Max:
Opening statement............................................ 1
Prepared statement........................................... 23
Begich, Hon. Mark:
Prepared statement........................................... 25
Hatch, Hon. Orrin G.:
Opening statement............................................ 3
Prepared statement........................................... 27
Ingram, Sarah Hall:
Testimony.................................................... 4
Prepared statement........................................... 29
Maguire, Dr. Steven:
Testimony.................................................... 10
Prepared statement........................................... 35
Porter, Hon. Robert Odawi:
Testimony.................................................... 6
Prepared statement........................................... 42
Robertson, Dr. Lindsay G.:
Testimony.................................................... 8
Prepared statement........................................... 51
Response to a question from Senator Hatch.................... 53
Communications
Arctic Slope Regional Corporation (ASRC)......................... 55
Center for Fiscal Equity......................................... 59
Christensen, Hon. Donna M........................................ 61
Crow Tribe of Montana............................................ 66
Jamestown S'Klallam Tribe........................................ 74
Mandan, Hidatsa, and Arikara Nation.............................. 84
National Congress of American Indians............................ 91
Oglala Sioux Tribe............................................... 101
(iii)
TAX REFORM: WHAT IT COULD MEAN FOR TRIBES AND TERRITORIES
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TUESDAY, MAY 15, 2012
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:05
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max
Baucus (chairman of the committee) presiding.
Present: Senators Bingaman, Cantwell, Menendez, and Hatch.
Also present: Democratic Staff: Russ Sullivan, Staff
Director; Lily Batchelder, Chief Tax Counsel; Richard Litsey,
Counsel and Senior Advisor for Indian Affairs; Ryan Abraham,
Tax Counsel; Tiffany Smith, Tax Counsel; and Jeff VanderWolk,
International Trade Counsel. Republican Staff: Chris Campbell,
Staff Director; Tony Coughlan, Tax Counsel; and Nick Wyatt, Tax
and Nominations Professional Staff Member.
OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
MONTANA, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
There is a Crow proverb that says, ``Man's law changes with
his understanding of man. Only the laws of the spirit remain
always the same.''
Our desire to spur broad-based economic growth and give
help to those who need it stays the same, but our laws are
ever-changing. And, while some are well-intentioned, the 15,000
changes made to the tax code since 1986 have created too much
complexity and unfairness. Tax reform needs to simplify the
code in a way that creates jobs and encourages growth.
Today we will look at tax reform and how it affects Indian
tribes and the United States' five territories--Puerto Rico,
U.S. Virgin Islands, Guam, American Samoa, and the Northern
Mariana Islands.
Indian governments and the territories are in some ways
similar to State governments: each provides hospitals, public
schools, and law enforcement, for example. But U.S. policies do
not recognize tribal governments or territories as States or
fully sovereign nations. Instead, U.S. law has a patchwork of
complicated rules for each territory. Every tribal government's
U.S. policies are inconsistent.
Tax policy is a microcosm of this inconsistency. The
unemployment rate on some reservations, such as the northern
Cheyenne reservation in Montana and the Pine Ridge reservation
in South Dakota, is 80 percent. One in four Indians lives below
the poverty line. American Indians' median income is 31 percent
less than all other Americans. U.S. territories and
commonwealths also suffer from high unemployment.
In the past, Congress has recognized the special status of
tribal governments and the island territories and taken steps
through our tax policies to improve their economic conditions.
We provided accelerated depreciation for capital investments
and an employment credit for businesses located in Indian
country. Congress also allowed businesses to claim a credit for
the production of coal from Indian land.
The accelerated depreciation provision brought jobs and
economic activity to the Crow tribe in Montana when
Westmoreland Coal used it to boost profits. But there are
issues with these provisions. Two-thirds of the State of
Oklahoma qualifies as an eligible Indian reservation under the
accelerated depreciation provision and employment tax credit;
perhaps the tax laws need to be better targeted.
Congress should also level the playing field for tax-exempt
bonds. States are currently allowed to issue tax-exempt bonds
for any public purpose. These bonds help governments access
cheap capital to build schools or courthouses. States can also
use them to finance tourism and economic development projects
like municipal golf courses, convention centers, and hotels.
In contrast, tribal governments can only issue bonds for
government buildings. Their bonds have to pass what is called
an ``essential government'' test. To address this inequity, in
2009 Congress authorized $2 billion of tribal economic
development bonds for any purpose other than gambling
facilities. The Treasury Department studied the program, and it
recommended that Congress repeal the essential government test.
We should do this as part of tax reform.
Another area of concern for tribal governments is the
application of the general welfare doctrine. This doctrine
allows governments to provide benefits to citizens without
those benefits counting as taxable income.
Tribes provide many benefits to their members, including
educational assistance and cultural awareness, along with
housing and meals. But it is often unclear which benefits are
eligible for the exemption. That uncertainty is tough on
families and tribal governments, and it is something we should
fix.
For U.S. territories, Federal tax law previously contained
an economic activity tax credit and a possessions tax credit to
encourage investment. These credits expired at the end of 2005.
Another provision set to expire sends a portion of excise taxes
on rum to two territories to help fund their government
operations.
Today's hearing provides an opportunity to consider these
issues in the context of broader tax reform. I hope today's
witnesses will help us understand what roadblocks should be
eliminated and what incentives work for Indian country and for
the territories.
When I talk with tribes in Montana, they tell me the same
thing: they want a better future for their children and less
reliance on the Federal Government. These are goals we share.
So let us use tax reform as an opportunity to achieve these
goals. Let us think outside the box. Let us be creative here.
Let us hear what might be done to help tribes and territories
meet their goals. And, in the spirit of the Crow proverb, let
us take this opportunity to make man's law reflect our common
desires.
[The prepared statement of Chairman Baucus appears in the
appendix.]
The Chairman. Senator Hatch?
OPENING STATEMENT OF HON. ORRIN G. HATCH,
A U.S. SENATOR FROM UTAH
Senator Hatch. Well, thank you, Mr. Chairman. This hearing
deals with, as you said, two very important, yet distinct,
subject topics: tribal tax issues and territory tax issues. I
want to stress that I do not come into this hearing with any
pre-conceived agenda as to how we ought to treat tribes and
territories. Rather, we must consider how we can be most
productive on these matters when we undertake fundamental tax
reform.
With respect to tribal tax issues, certain of them, such as
the general welfare exclusion, seem to have been outstanding
for several years. This committee needs to determine the scope
of actions to be taken when final tax reform is finally
realized.
Aside from the long-term implications for tax reform, there
are short-term questions concerning the subject matter of
today's hearing. Several so-called tax extenders explicitly
designed to aid Native American tribes, such as accelerated
depreciation for business property on Indian reservations, have
actually expired. A credit for the production of Indian coal
will expire at the end of this year. If we are going to break
out of the repetitive loop of short-term extensions, we should
not put off a discussion of these temporary measures, even
prior to comprehensive tax reform.
I am also interested to hear about the tax treatment of
territories. In a nutshell, even though the people of the
various possessions are United States citizens or nationals,
most do not pay tax to the Federal Government but rather to
their possession's government.
Some U.S. possessions have a mirror tax code with tax laws
essentially identical to the U.S. Internal Revenue Code, simply
swapping the name of the possession wherever the Internal
Revenue Code says ``United States.'' Yet, others are given more
autonomy to write their own tax laws as they see fit.
In some ways, possessions are treated like foreign
countries. In other ways, however, they are treated like
States. For example, research and development in a territory is
eligible for the R&D credit, just as if the R&D were performed
in a U.S. State. However, income taxes paid to a possession's
government are generally eligible for a U.S. foreign tax
credit, just as if paid to a foreign government. Of course,
taxes paid to a State government are not creditable, and only
sometimes deductible.
I will be interested in understanding whether greater
consistency in the tax treatment of possessions is desirable or
feasible. Now, I do share the chairman's dedication to
thoroughness that this committee's tax reform hearings
represent and the emphasis they place on technical knowledge,
and I expect that this hearing will make a worthy contribution
to that particular effort.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
[The prepared statement of Senator Hatch appears in the
appendix.]
The Chairman. I would now like to introduce our four
witnesses. First is Ms. Sarah Ingram. Ms. Ingram is the
Commissioner for Tax Exempt and Government Entities at the
Internal Revenue Service. Thank you for coming. We will be
asking some questions. Next, the Honorable Robert Porter,
president of the Seneca Nation of Indians. Thank you, Mr.
President, for being here. Our third witness is Dr. Lindsay
Robertson, professor of law at the University of Oklahoma.
Finally, Dr. Steven Maguire, a Specialist in Public Finance at
the Congressional Research Service. Thank you all very much for
coming.
You probably know our usual practice here is, your
statement is automatically included. You may each speak about 5
minutes. I say this all the time and keep on saying it: do not
pull any punches, say what you think, be candid. You cannot
take it with you. Tomorrow is gone after today. [Laughter.]
So, Ms. Ingram?
STATEMENT OF SARAH HALL INGRAM, COMMISSIONER, TAX EXEMPT AND
GOVERNMENT ENTITIES, INTERNAL REVENUE SERVICE, WASHINGTON, DC
Ms. Ingram. Thank you. Good morning, Chairman Baucus,
Ranking Member Hatch, and members of the committee. I
appreciate the opportunity to be here to discuss the general
welfare exclusion as it applies to tribal programs and to
discuss tribally issued tax-exempt bonds.
As I begin, I want to acknowledge that the United States
has a unique government-to-government relationship with the
Indian tribes, as set forth in the Constitution of the United
States, treaties, statutes, executive orders, and court
decisions.
The Office of Indian Tribal Governments within the IRS was
created more than a decade ago in response to requests by
tribal leaders. The office exists to facilitate the government-
to-government relationship and to assist tribes in meeting
their Federal tax obligations.
First, I would like to address the general welfare
exclusion. Tribes, like all governments, sponsor programs
designed to support their members. To be very clear, whether
this tax exclusion is or is not applied does not limit what
benefits or social programs tribes can provide to their
members. The question is whether payments made through these
programs are excludable from the income of the recipient under
the general welfare doctrine.
There are two key tax concepts. First, code section 61
provides that gross income includes all income derived from
whatever source, and the second, the general welfare exclusion,
is a non-code exception, an administrative exclusion that has
been developed in official IRS guidance and recognized by the
courts and Congress over more than 50 years.
Despite the statutory breadth of section 61, the
administrative rulings show that payments made by governmental
units, tribal or non-tribal, can be excluded from a recipient's
gross income under the general welfare doctrine, if the
payments: (1) are made under a governmental program; (2) are
for the promotion of general welfare generally based on
individual, family, or other needs; and
(3) do not represent compensation for services.
The IRS does not have, and has never had, a special program
for examining tribal governments' social welfare programs. The
question may arise if the tribe seeks a letter ruling about a
specific program. It can also arise during an IRS review of
tribal governments' tax reporting compliance.
The code requires all persons, including Indian tribal
governments, to report to the IRS certain payments of $600 or
more. During an examination, records may show such payments to
tribal members, requiring further inquiry as to whether the
general welfare exclusion applies, because, if so, then the
amounts do not have to be reported.
The IRS always examines a program using the same 3-prong
analysis. Comments from the tribal community have focused on
whether the payments are being disbursed based on the needs of
the recipient and on the issue of whether the payments
constitute compensation received for services.
While there are many tribal and non-tribal examples in
administrative rulings, the difficulty has been that each
application is fact-specific, and the historical and cultural
context within the tribal government environment adds a layer
of complexity.
In response to concerns raised by various tribes and tribal
leaders, the IRS issued Notice 2011-94 last November, inviting
comments concerning the application of the general welfare
exclusion to Indian tribal government programs and beginning a
specific consultation process with tribes on how to find a
solution that addresses their concerns and improves clarity and
consistency of the tax law.
Since then, the IRS has received numerous written comments
from tribes and tribal leaders, which we are carefully
reviewing, and the IRS and Treasury have engaged in multiple
consultation sessions, such as in November during the White
House Tribal Nations Conference, in March during the National
Congress of American Indians' Annual Conference, and in a few
weeks we will host another consultation session through
teleconference to facilitate participation.
The IRS plans to publish written guidance that will address
issues and respond to concerns raised by tribes in their oral
and written comments. Our intent is that this published
guidance, along with improved internal coordination procedures,
will provide increased clarity and consistency of the
application of the general welfare doctrine. Tribal concerns
are very important to us, and we look forward to continuing to
work with tribes on this item in the future.
My second topic is tribally issued tax-exempt bonds. In the
interest of time, I would like to refer the committee to my
written testimony, with just two notes. I would note that we
are taking into account recent community input on the usage of
American Recovery and Reinvestment Act Tribal Economic
Development Bonds, and we expect to publish revised procedures
to reallocate the unused amounts.
Also, as requested by Congress, Treasury provided a report
last December containing legislative proposals to facilitate
the use of bond financing by tribal governments under rules
more closely parallel to those applied to State and local
governments.
I am aware of the administration's commitment to strengthen
and build the government-to-government relationship between the
United States and tribal nations, and I appreciate the
committee's interest in these matters.
Thank you. That concludes my testimony. I would be happy to
take any questions.
The Chairman. Thank you, Ms. Ingram, very much.
[The prepared statement of Ms. Ingram appears in the
appendix.]
The Chairman. President Porter?
STATEMENT OF HON. ROBERT ODAWI PORTER, PRESIDENT, SENECA NATION
OF INDIANS, SALAMANCA, NY
President Porter. Nya-weh Ske-no. Mr. Chairman, Vice
Chairman Hatch, Senator Bingaman, Senator Cantwell, I am
honored to be here, and I am thankful that you are all well.
I am here to testify on the promise of tax reform for
American Indian Nations and ask that my written testimony be
placed into the record.
[The prepared statement of President Porter appears in the
appendix.]
President Porter. I am here today on behalf of the Seneca
Nation of Indians, which I serve as its elected president. The
Seneca Nation is one of America's earliest allies, historically
aligned with the other members of the six nations of the
Haudenosaunee Confederacy and living in peace with the American
people since the signing of the Canandaigua Treaty 217 years
ago.
In that treaty, the United States promised that it would
recognize the Seneca Nation as a sovereign nation, that it
would ensure that our property and activities would not be
taxed, and that it would forever secure our title to our lands.
This treaty belt that I hold up, the ``Guswhenta,'' or the Two
Row Wampum belt, is a symbol of the continued recognition and
respect that we agreed to hundreds of years ago.
Because of our treaty-protected freedoms, the Seneca Nation
has been able to achieve some economic success in recent years,
mainly as a result of our commerce with non-Indians involving
tobacco, gaming, and other related ventures. I encourage this
committee to shape its tax reform effort for all Indian nations
so that it maximizes our freedoms, which are premised upon
treaties and territorial tribal sovereignty.
In the Seneca Nation we have long believed that our
treaties with the United States require that the Seneca Nation,
our people, our activities, and our lands be treated as immune
from all Federal and State taxation. However, many aspects of
our treaty-recognized freedoms have been eroded over time,
including tax burdens imposed by external governments which
have diverted wealth from our territories and made much of
Indian country unattractive for investment.
For specific analysis of several areas of concern to Indian
country, I draw your attention to the excellent comments that
have been submitted by the United South and Eastern Tribes and
the National Congress of American Indians. As a general matter,
however, if tax reform is to work in Indian country, it must
be, first, consistent with the principles that are at the
foundation of Indian policy at its best.
The tribal nations are governments whose exclusive
authority is to govern all economic activity in our
territories, and that is fully respected as a matter of Federal
law. Resurrecting this tribal territorial sovereignty approach
must be the focus of congressional tax reform efforts if they
are to succeed.
In recent decades, tax reform ideas, like the Indian
Reservation Wage and Investment Tax Credits, have not been
large enough, have not been of long enough duration, or have
not even been as simple to administer as necessary to induce
the private sector to invest and locate new jobs in Indian
country. Because these proposals have made all of Indian
country eligible, in theory the
budget-scoring rules that estimate the costs of these reforms
have led Congress to water down their benefits to useless
levels.
Many of the good people in this room have worked hard at
tax reform ideas in the past. They sincerely thought that they
would bring benefit to Indian country. But these complex
schemes mainly created work for lawyers, accountants,
consultants, and government administrators. With all due
respect, they have produced little tangible benefit for Indian
country. If you drive through most Indian territories in the
Great Plains or anywhere else, you can see the evidence of the
poverty that makes the undeniable point that these incentives
have not worked.
As you shape tax reform in Indian country, I urge you to
keep it simple so that it can be implemented without Indian
people having to hire an army of expensive lawyers,
accountants, and consultants. Keep it simple so that local
businesses and potential investors can make sense of it and
generate jobs for native people.
In my view, the accumulated decades of Federal tax policy
failures in Indian country make the case for trying something
bold and different based upon our aboriginal treaty
relationship. Instead of dialing back potential tax incentive
benefits to useless levels, I urge you to recognize unlimited
tax immunity on a limited number of footprints in Indian
country for a limited number of Indian nations. In other words,
I suggest that you shape tax reform law so as to restore
complete tax immunity in a demonstration or pilot project whose
size is limited to make it cost-feasible but with unlimited
benefits to facilitate chances of success.
I have submitted proposed bill language for this tax reform
idea. It would authorize a pilot project to establish up to 50
tax-free tribal empowerment zones of limited acreage. These
zones would be like tax-free economic oases in a desert,
importing and recycling private sector money into Indian
country where it has rarely, if ever, been invested for
generations.
Such a policy could induce a manufacturing company to
locate in Indian country in Montana rather than going to India.
It could also motivate a grocery store chain to build their
next store in Indian country.
Half of the tax-free tribal empowerment zones would be
reserved for applicant Indian tribes with an unemployment rate
exceeding 50 percent under the latest Bureau of Indian Affairs
workforce reports. The remaining half of the zones would be
awarded to applicant Indian tribes that competitively
demonstrate the strongest available tribal institutions,
fostering effective and stable self-
government, predictable legal infrastructure, and tribal
policies facilitating entrepreneurial economic development in a
business-friendly climate.
Each tribal empowerment zone would be a tax-free territory,
immune from all Federal, State, and local income, sales, and
excise taxes, and would have an immediate impact on investment
and job creation in Indian country.
Mr. Chairman and Senators, to put it simply, current
Federal tax incentive policies for Indian country have not
worked. Persistent poverty and harsh unemployment still enslave
Indian country and deprive too many Indian people of a fair
chance at living a full and complete life. The social problems
our people face are most often rooted in intergenerational
poverty. We are tired of our territories being drained of their
wealth for the benefit of others. Please help us restore the
flow of wealth back into our nations.
My hope is that you will keep your tax reform efforts
simple and consistent with tribal territorial sovereignty. I
would recommend for your consideration the creation of tax-free
tribal empowerment zones in Indian country so that the private
sector will be induced to re-enter Indian country in
partnership with sovereign tribal governments and Indian
entrepreneurs to let the marketplace create jobs and provide
goods and services in Indian country.
This model has worked with Indian gaming, where Federal law
acknowledged tribal territorial sovereignty to protect Indian
gaming markets and to allow billions of dollars to flow into
Indian country, like islands in the middle of non-Indian gaming
markets. Likewise, tax reform can create islands of tax-free
tribal empowerment zones that attract private sector investment
into Indian country markets.
I want to thank you for this opportunity to be here, and I
certainly would be glad to take any questions, if you have
them.
The Chairman. Thank you very much. That was very
interesting.
Next is Dr. Robertson.
STATEMENT OF DR. LINDSAY G. ROBERTSON, PROFESSOR OF LAW,
UNIVERSITY OF OKLAHOMA COLLEGE OF LAW, NORMAN, OK
Dr. Robertson. Good morning, Chairman Baucus, Ranking
Member Hatch, and other distinguished members of the committee.
My name is Lindsay Robertson. I am the Judge Haskell A.
Holloman professor of law and faculty director of the Center
for the Study of American Indian Law and Politics at the
University of Oklahoma College of Law.
I have been a professor of Federal Indian law for more than
20 years. From 2000 to 2010, I served as Special Counsel on
Indian Affairs for Oklahoma Governors Frank Keating and Brad
Henry. It is an honor to have been invited to address this
committee on this important topic.
First, I would like to place the issue of tax policy and
tribal economic life in historical perspective, then address
potential reforms. While there are a number of areas in the
Internal Revenue Code that could be improved to better serve
tribes--input on which others, including President Porter and
various organizations, are providing the committee--I would
like to highlight two: the essential governmental function
limitation on tribal tax-exempt bonding and current limitations
on the application of the general welfare exclusion.
Tribal governments in the United States are both pre-
constitutional and extra-constitutional. That is, they existed
before European settlement and they operate apart from, and not
directly subject to, the Constitution.
The U.S. Supreme Court has characterized tribes as
``domestic dependent nations''--nations, and not simply
aggregations of individuals sharing a particular heritage, but
domestic nations, not foreign nations, and therefore having a
special relationship to the United States.
In the same decision, Cherokee Nation v. Georgia, the court
described that relationship as being like that of a ward to his
guardian. In 1886 in Kagama v. United States, the court
recognized the substantive legal consequence to this
relationship. As guardian or trustee, the United States has
power to legislate over Indian affairs, but also the
responsibility to exercise that power to the ultimate benefit
of the tribes.
In furtherance of its trust responsibility, since Kagama
the United States, at numerous stages, has acted proactively to
address what it perceived to be problems in tribal economic
development. These efforts have been bipartisan.
For example, in the Indian Reorganization Act of 1934,
President Franklin Roosevelt's key tribal legislation, the
Congress established tribal economic development funds,
authorized the creation of tribal corporations, and provided
tribes the means to reestablish jurisdiction over lands lost
during the allotment era of the late 19th century, when
collectively owned tribal lands were divided up and sold.
The Self-Determination and Education Assistance Act of
1975, a Republican initiative, entrusted tribal governments
with control over Federal programs operating within their
communities, in part on the theory that only in that way would
these programs be truly accountable to the people they served.
Whether to comply with a trusteeship obligation grounded in
law or morality, or because it simply makes economic sense,
Congress has frequently employed its power to legislate tax
policy to facilitate tribal economic development.
Now I would like to say a few words in support of the two
specific reforms I mentioned when I began my remarks. The first
is the elimination of the essential governmental function
limitation on tribal tax-exempt bonds found in 26 U.S.C.
section 7871.
Tribes are now, and have always been, handicapped under
Federal law when it comes to the raising of capital for
economic development activities. Since the Trade and
Intercourse Act of 1790, tribal land sales without Federal
authorization have been invalid under Federal law. While this
restriction undoubtedly led to the retention of tribal lands
that might otherwise have been lost, it had the unintended
effect of making tribal lands unavailable as security for
conventional loans.
Free alienability of such lands is not the solution as long
as tribal jurisdiction is closely tied to land tenure. Instead,
the solution must involve the creation of compensatory capital
generation devices.
Authorizing tribes to issue tax-exempt bonds was a step in
the right direction. However, the essential governmental
function limitation imposed on the use of funds raised through
such bonding limited its utility as an engine for economic
development.
It is worth noting that the essential governmental function
limitation is not applied to limit the use of funds raised
through tax-exempt bonding by States and municipalities, as
Commissioner Ingram pointed out. The elimination of the
limitation on tax-
exempt bonding by tribes would free tribes to raise capital
otherwise unavailable to them and make it possible for them
responsibly to create their own solutions in today's difficult
economic times.
A second important tax reform involves the general welfare
exclusion, which is currently interpreted to apply only to
tribal means-tested programs. Tribal governments commonly
provide benefits to their members, including health, education,
and other services. Some of these, including for example
language education, are considered essential for the
preservation of tribal culture. When the United States taxes
these benefits, tribes are handicapped in the services they can
provide. Presently, it appears that, not only are these
services being taxed, they are being audited at a
disproportionate rate. It is difficult to imagine that the
revenue generated by taxation of these services outweighs the
harm done to tribal governmental operations and cultural
preservation.
Moreover, where services are provided to make up for
deficiencies resulting from adverse conditions not of the
tribes' making, historical conditions, or indeed to further
Federal policy objectives, taxing and auditing them appears to
me inconsistent with the requirements of the Federal trust
responsibility.
I thank you for holding this hearing and for allowing me
the opportunity to appear. I would be happy to answer any
questions.
Thank you.
The Chairman. Thank you, Dr. Robertson.
[The prepared statement of Dr. Robertson appears in the
appendix.]
The Chairman. You are last, Dr. Maguire, so you are the
clean-up guy here.
STATEMENT OF DR. STEVEN MAGUIRE, SPECIALIST IN PUBLIC FINANCE,
CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC
Dr. Maguire. Chairman Baucus, Ranking Member Hatch, and
members of the committee, on behalf of the Congressional
Research Service, I thank you for the opportunity to appear
before you today.
I have been invited here today to discuss how tax reform
could affect the territories. In this oral testimony I will
briefly summarize the U.S. tax treatment of the territories and
discuss a selected number of expiring provisions, commonly
referred to as tax extenders, pertinent to the territories.
Finally, I will outline how tax reform may affect the
territories.
Generally, Federal tax reform will have an impact on the
territories in two ways. First, several territories use the
United States' tax code as it is written, replacing the words
``United States'' with the territory name. As a result, when
the U.S. tax code changes, so does their tax code. Puerto Rico
is the exception.
Second, there are specific provisions in the U.S. tax code
that directly benefit one or more of the territories. This
group of provisions is often found in the so-called extenders
legislation. I will discuss two extenders here.
First, territories and taxation. The U.S. taxes residents
and corporations located in the territories differently than if
they resided in the United States. For individuals residing in
the territories, their tax treatment is most similar to the tax
treatment of foreign citizens. Generally, territorial residents
are exempt from Federal taxes on territory-sourced income, but
are, with some exceptions, taxed on income sourced in the U.S.
In contrast, U.S. residents are subject to Federal taxes on
their territory-sourced income as if it were foreign-source
income. However, territorial taxes can be generally claimed as
foreign tax credits to offset U.S. tax liability. Thus, as with
foreign-source income, the United States concedes primary tax
jurisdiction to the territory where the income is earned. With
some exceptions, it retains primary tax jurisdiction of the
U.S.-sourced income earned by territorial residents.
Corporations chartered in the territories are treated like
foreign chartered corporations under the Internal Revenue Code.
In principle, they are exempt from Federal taxes on territorial
income. U.S. firms that operate in the territories through
subsidiaries can, at least potentially, defer Federal taxes on
territory earnings. Generally, U.S. taxes are paid only when
earnings are repatriated to the domestic parent, with the U.S.
tax reduced by any foreign tax credits.
The impact of U.S. tax reform on the territories would
depend in large part on the specifics of U.S. tax reform and
how the territories responded to the changes. One option would
be for these territories to de-couple from the mirror system.
This option would allow the territories to be largely
unaffected by U.S. tax reform unless they choose to enact
similar reforms; administrative complexity and compliance costs
would likely rise with the de-coupling, however.
Alternatively, continuing with a mirror system, the
territories would incorporate the Federal changes. If the
Federal changes focus on increasing progressivity of the tax
code, such as higher rates for higher-income earners, the
impact on territories would likely be muted, as average income
is significantly lower in the territories. In any case, this
option would effectively cede control of the territory's tax
system to the U.S.
Now I will discuss provisions in the U.S. tax code
benefitting the territories. The U.S. tax code includes at
least three provisions that directly benefit taxpayers who have
income from activities in the territories or who are resident
in the territories. If tax reform were to include scaling back
tax expenditures generally, one or all of these may be
curtailed or eliminated. Modifications or limitations to
broader tax expenditures, such as tax-exempt interest on bonds
issued by the territories, are not addressed in this testimony.
Number one is the deduction allowable with respect to the
income attributable to domestic production activities in Puerto
Rico. U.S.-based entities, either individuals or corporations,
are allowed to deduct 9 percent of taxable income that was
earned in Puerto Rico.
The deduction lowers the marginal effective tax rates of
taxpayers, and the highest bracket amounts to just under 32
percent. This confers a tax advantage for these entities
because like-
situated entities without Puerto Rican or U.S.-sourced income
cannot claim the same deduction unless they are taxed at a
higher marginal rate.
This provision expired on December 31, 2011. The
President's 2013 budget proposes extending this provision
through 2013. The expected revenue impact would be a reduction
in Federal revenues of $312 million over the 3-year window of
fiscal year 2012 through 2014.
If Congress chooses to broaden the base of both the
individual and corporate income tax, they may choose to
eliminate the special provision for entities with Puerto Rico-
sourced income. The result may be some shifting of activity
away from Puerto Rico, though the magnitude of this shift would
seem minimal, especially in the short term, as much of the
activity generating the income may not be easily or quickly
shifted out of Puerto Rico. If Congress chooses additional
structural reforms, such as lower overall rates, the value of
the deduction to taxpayers would decline.
Number two is a temporary increase on the limit of cover-
over of rum excise tax revenue from $10.50 to $13.25 per proof
gallon to Puerto Rico and the U.S. Virgin Islands. The United
States levies a $13.50 per proof gallon excise tax on distilled
spirits produced in, or imported into, the United States.
Through 2011, $13.25 per proof gallon of all imported rum is
transferred, or covered over, to the treasuries of Puerto Rico
and the U.S. Virgin Islands.
The Caribbean Basin Economic Recovery Act of 1983 provides
that all revenue from Federal excise tax on rum imported to the
United States from any source, including any foreign country,
is remitted to the treasuries of Puerto Rico and the U.S.
Virgin Islands. In fiscal year 2011, Puerto Rico received over
$449 million in revenue, and the U.S. Virgin Islands received
$155 million.
The law does not impose any restrictions on how Puerto Rico
and the U.S. Virgin Islands can use the transferred revenue.
Both territories use some portion of the revenue to promote and
assist the rum industry. Reports of the size of the subsidy
vary considerably, though the amount ranges from roughly 6
percent of the covered-over revenue in Puerto Rico up to 18.5
percent in the U.S. Virgin Islands as of 2009. Since then,
however, the subsidy has increased significantly.
Beginning on January 1, 2012, the amount covered over to
Puerto Rico and the U.S. Virgin Islands reverted to $10.50 per
proof gallon. The fiscal year 2013 budget proposes extending
the $13.25 rate retroactively through 2013. The expected
revenue impact of extending the higher rate will be a reduction
in the Federal revenues of $222 million over a 3-year budget
window of 2012 to 2014.
I see that my time is up. In the interest of time, I will
end here and open it up for questions.
The Chairman. All right. Thank you, Dr. Maguire, very much.
[The prepared statement of Dr. Maguire appears in the
appendix.]
The Chairman. I would like to ask all of you, all four of
you, do you basically agree that the limitation on bonds issued
by tribes--that is, the essential government functions
limitation--should be repealed? Right down the line.
Ms. Ingram. Yes.
President Porter. Yes.
Dr. Robertson. Yes.
Dr. Maguire. Yes.
The Chairman. All right. So we have agreement there.
Next, with respect to the welfare limitation on taxable
income, I would appreciate it if you, Dr. Robertson, and anyone
else, would indicate, how should that be modified, if at all? I
mean, the argument is that there are some benefits conferred by
tribes on their members. Really, some of that should not be
taxable income. So where is the line? What is the test? Would
there be any limitation? Your views?
Dr. Robertson. Well, I guess I would defer to a variety of
organizations, including tribal governments, who have already
been in communication with the Internal Revenue Service on this
issue. But I can tell you, some of the proposals I am aware of
include expanding the definition in the tribal context to
eliminate the needs-based component of the analysis, maybe keep
the other two elements of the analysis, but make the exemption
from taxability no longer related to the income situation of
the individual beneficiary, and maybe then loosen up the range
of benefits provided that could qualify as welfare.
Tribes do a lot of things that State governments do not do.
I mentioned language education. Some tribes, to overcome
traditions of poverty and for cultural reasons, provide
clothing allowances to families to send their kids to school.
Some of those families may be in poverty, some of them may not
be in poverty, but this is something that is done across the
board. To have some of those recipients singled out for
taxation on the value of the benefit frustrates the tribes.
The Chairman. All right. Either President Porter or Ms.
Ingram, your thoughts?
President Porter. Mr. Chairman, I have a hard time seeing
why any of the benefits that we are providing to our people
should fall under any taxation because the services that we
provide for our people are to help them. We have the worst
health care, we have the worst degree of social problems in our
Nations.
The sources of income that we derive from our businesses,
from our grants that we use to provide services, are going
directly back to our people. We are not starting from some
exalted position of health care or socioeconomic status where
these are luxuries, where these are things that are perceived
to be things that most humans do not have. We are trying to get
back to a position of normal after recovering from many, many
generations of deprivation. So I would say that there should
not be----
The Chairman. Do tribes provide unemployment benefits?
President Porter. We do not. We actually work in concert
with the State system for purposes of unemployment insurance.
The Chairman. All right. Sure.
President Porter. But we do not.
The Chairman. Ms. Ingram? The general proposition of
welfare limitation.
Ms. Ingram. I think we are in a position of trying to
figure out how to administer something that is a creature of
administrative rulings. It started in the environment of State
and local governments, and over the years has been increasingly
raising issues with Indian tribal government programs.
I think our effort to step back for a moment, and through
that notice and through a specific and formal consultation
process, will allow us to hear a couple of things from the
tribal community. One is, as has been mentioned, the kinds of
programs that are either like those provided to the States or
are unique in the tribal context and should be taken into
account. We are listening very carefully to the input on that
category of questions.
Also, the question of the extent to which the taxation of
the recipient should be based on their needs, is something that
has been around for a long time in this string of
administrative rulings, and is something we are hearing is of
great concern. We have given favorable treatment or unfavorable
treatment to lots and lots of governments, tribal and non-
tribal, based on those standards, and I think it is perfectly
reasonable for us to listen to the tribal community.
The Chairman. But do you have a recommendation how to
simplify this so the tribes do not have to jump through all
these hoops?
Ms. Ingram. Well, I think we are on a journey with the
tribal community to see if we can figure that out. This being
an administrative doctrine and being very fact-specific in its
nature, I think we would welcome, as much as the tribes would,
trying to find a simpler way to approach this.
The Chairman. All right. Thank you. My time is up. Thank
you.
Senator Hatch?
Senator Hatch. Well, thank you, Mr. Chairman.
President Porter, in your written testimony you are
critical of many of the tax provisions that have been enacted
in the past in order to aid Indian country. In their place, as
I view it, you suggest the creation of a series of tax-free
tribal empowerment zones. Now, from my reading of your idea,
these areas would be exempt from all U.S. Federal and State
taxes that might otherwise apply for a period of 10 years, as I
understand it.
Now, please describe how this process is fundamentally
different from the renewal community and empowerment zone
provisions that you criticize, and why do you think it would be
more successful? How did you come to select 10 years as an
appropriate lifetime for the proposal?
President Porter. Well, the proposal is rooted in the idea,
Mr. Vice Chairman, that the existing provisions of law simply
are too incremental. They are never permanent. They never allow
for any real foundation for growth and development. As a
result, they do not work.
Trying to attract companies to your territory, which I have
tried to do, they look at these tax incentives, they look at
the tax opportunities, and they say, well, who knows what is
going to happen in a year or two, because it is not permanent.
Congress has a pattern of delaying the extension. So from a
business perspective, it is just not a very credible invite to
be able to attract capital into our territory.
Ten years might be a minimum. The idea that a company is
going to work in our territories, in a zone in which there are
no taxes, is patently attractive on its face. But then you get
into the second-level questions, which are still a challenge:
what is the legal infrastructure of the tribe? What is your
access to markets if we are making a product? What is the
demand for the services, if we are providing a service? There
are still going to be other hurdles to overcome as it relates
to this kind of development incentive.
But I think, when it relates to creating an attractive
magnet by which we can draw capital and investment--in my
nation we have succeeded significantly, in the gaming context,
to invite Wall Street money into our nation for investment for
gaming facilities. I am a strong believer that we can do the
same thing outside of gaming and help diversify our economies
and become less dependent on that particular business, if we
can have this kind of assistance from the Congress.
Senator Hatch. Thank you.
Dr. Maguire, let me ask you a question. As your testimony
has made clear, there are areas where the territories could be
treated in a more uniform fashion. For example, some have
mirror codes and some have non-mirror codes; in some ways they
are treated like foreign countries, in other ways, like States.
Now, do you think greater uniformity is necessary or
feasible or desirable? More specifically, does it make sense
that the R&D performed in a territory qualifies for the R&D
credit as if the territory were a U.S. State, while at the same
time income taxes paid to a territory may be claimed as a
foreign tax credit, as if the territory were really a foreign
country?
Dr. Maguire. Well, I think greater conformity across the
territories would decrease compliance costs and increase
administrative simplicity. On the other side of the coin,
Congress has decided to confer certain tax advantages to the
territories, recognizing their position economically.
So it is true that the research and development tax credit
would seem to be a ``double dipping'' for the territories if
there is also a foreign tax credit available. So, when
balancing greater uniformity with providing tax benefits to the
territories as a general welfare, I think that is a question
that Congress will have to answer, and unfortunately I do not
have a good answer for you.
Senator Hatch. Does it make sense that the section 199
domestic manufacturing deduction may be claimed for activities
in Puerto Rico but not in other territories?
Dr. Maguire. That does not make sense to me, though those
who crafted the legislation, I am sure, had legitimate reasons
for structuring the section 199 the way it is structured.
Senator Hatch. My time is about up.
The Chairman. Thank you very much, Senator.
Senator Menendez is not here, so we will move to Senator
Bingaman.
Senator Bingaman. Thank you very much.
Let me ask Ms. Ingram, you indicate that the IRS plans to
publish written guidance to address, particularly, this issue
of the general welfare exclusion.
Ms. Ingram. Yes.
Senator Bingaman. Is there any consideration, or does it
make any sense to consider the wealth of a tribe in those
guidelines that you issue? I mean, my sense is that many tribes
are as President Porter has described, and they have great
needs and substantial poverty and all.
But we have some exceptions. We have some tribes in this
country that are doing quite well, primarily because of gaming,
but in some cases other factors. Is there any consideration of
distinguishing in that regard, or would it make sense to even
think about that?
Ms. Ingram. Senator, we are not going along those lines at
all. That is not a criterion that we have ever used with State
and local government programs, and we have not to date, and do
not have any plans to take it into account in the Indian tribal
community.
Senator Bingaman. All right.
Let me perhaps ask Dr. Maguire about his testimony. He
talks about one option if we go ahead here with major tax
reform. He says one option would be for these territories to
decouple from the mirror system that has been in place. That
would seem to me to be a bad idea. I mean, it would seem to me
that, to the extent you decouple, you add great complexity to
the issue.
You have each of the territories essentially developing its
own tax provisions, which of course would then require not only
that you hire a raft of lawyers and accountants, as you have to
today, but you would have to hire a very specific group of
lawyers and accountants who would presumably have the expertise
to tell you what the tax system was in each of these
territories. What is your thinking on this?
Dr. Maguire. I tend to agree with you that, from an
administrative simplicity and compliance cost, that would be a
move in the wrong direction. That said, within the territories,
overlaying the U.S. tax code onto the territories also overlays
the policy decisions of the U.S. Congress on the territories.
So, the actions that Congress takes will have a direct impact
on the territories. So again, there is that rub between
administrative simplicity and complexity and what you do to
promote the economic efficiency within the island or within the
territory, if that makes sense.
Senator Bingaman. I think Senator Hatch was getting at this
in some of his questions. But I guess one obvious sort of
threshold issue is, should we have a guiding principle with
regard to these territories, which essentially determines that
they be treated as States, except where we decide that there is
an exception to that? Is that kind of a guiding principle in
place today? Would it make sense for us to consider that and
have that as a guiding principle, in your view?
Dr. Maguire. I think that is one of the options that was
explored by the Joint Committee on Taxation in their pamphlet,
that they prepared for the hearing today.* In that pamphlet,
they recognized the difficulty in treating them as States
because they are very different than the States, economically
and demographically. So from that perspective, I do not think
it would be a good default position.
---------------------------------------------------------------------------
* For more information, see also, ``Overview of Federal Tax
Provisions and Analysis of Selected Issues Relating to Native American
Tribes and Their Members,'' Joint Committee on Taxation staff report,
May 14, 2012 (JCX-40-12), https://www.jct.gov/publications.html?func=
startdown&id=4426, and ``Federal Tax Law and Issues Related to the
United States Territories,'' Joint Committee on Taxation staff report,
May 14, 2012 (JCX-41-12), https://www.jct.gov/
publications.html?func=startdown&id=4427.
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A good default position may be that they all use the mirror
system, they all use the Federal tax code, and then as Congress
sees fit--makes adjustments for territories as needed rather
than having a mix of dual-filing entities versus single-filing
entities within the territories--using a consistent treatment
to begin with and then making modifications.
Senator Bingaman. My time is up, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Cantwell? Oh. I will go to Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Dr. Maguire, thank you for your testimony. Above all, I
appreciate your expertise on so many issues: AMT, bond
financing, the rum cover-over program. It has been incredibly
beneficial to have your expertise. That is really where I want
to focus my questioning, is on the rum cover-over program.
I find it ironic that Diageo's rum brand is named after a
pirate, because they set a precedent of pillaging a program
that is meant to provide budgetary support to the territories.
In my view, the deal Diageo struck with the U.S. Virgin Islands
devastates the effectiveness of the cover-over program for the
people of the territories by gutting the revenue that is
supposed to go to vital public services and sets a precedent
that is pretty terrible, and a race--I think a death spiral--to
the bottom.
So this is a real concern to me, and I would like to have
you help us shed some light on some of these points. What is
the total value of subsidies provided to Diageo by the U.S.
Virgin Islands, which include, as I understand it, paying for a
new distillery then giving the ownership of the distillery to
the company, paying for much of the cost of the main
ingredient, molasses, and paying for a substantial portion of
marketing costs?
Dr. Maguire. In 2009, I went through and calculated it on
my own instead of relying on outside reports of what the
subsidy was, and I arrived at 18.5 percent. Of course, since
the Diageo plant was constructed and the agreement implemented,
that subsidy has increased significantly. I have seen internal
documents between the government of the Virgin Islands and
Diageo that the subsidy is closer to 46 percent today.
Senator Menendez. So it is 46 percent of cover-over
revenues just to one company.
How many people are employed by the distillery that
produces Captain Morgan's r um?
Dr. Maguire. In the agreement, Diageo indicated they would
hire anywhere from 40 to 70 people in the facility itself, but
that does not take into account any ancillary jobs that would
be created from the activity at the plant.
Senator Menendez. And of these jobs, how many would you say
were a net increase in the territories versus simply a transfer
of jobs between two territories?
Dr. Maguire. That is a good question. To the extent that
there is mobility between Puerto Rico and the U.S. Virgin
Islands, I am not certain of that. There is probably a mix of
replacing and new employment, but on net it is probably a
relatively small percentage of those new jobs.
Senator Menendez. Well, we believe that we are close to
zero, since the loss of production in Puerto Rico led to a
commensurate loss of jobs there.
So, looking at how these numbers intersect, how much would
you estimate is going to Diageo per job transferred from Puerto
Rico to the U.S. Virgin Islands?
Dr. Maguire. Well, in fiscal year 2011, the U.S. Virgin
Islands received $155 million in covered-over revenues, so half
that, or 46 percent, would probably be $70 million or so in
fiscal year 2011. But, as production ramps up moving forward,
the cover-over value would increase, production will increase,
and the subsidies will also increase, so that number will get
larger.
Senator Menendez. So I look at those numbers, and I look at
the number of jobs, the 40 to 70 direct jobs, and maybe an
indirect employment of approximately 230 jobs. Basically, the
U.S. Virgin Islands will pay Diageo between $1.2 and $2.2
million per direct job per year created, and approximately
$391,000 when indirect jobs are estimated. So that is pretty
outrageous. That is pretty outrageous, and it is unsustainable.
Can you briefly talk about what has happened to the
subsidies for the other producers in Puerto Rico and the U.S.
Virgin Islands since the Diageo contract became public?
Dr. Maguire. I have seen news reports that indicate the
government of Puerto Rico has loosened their self-imposed
restriction on the subsidies that they can provide to rum
producers in their territory. It seems that other rum producers
not named Diageo have also requested additional subsidies in
light of the Diageo agreement, and those are news reports that
I have not verified myself, but they seem reasonable.
Senator Menendez. Well, I can tell you that the government
of Puerto Rico, based upon what happened with the Virgin
Islands, then increased its assistance to rum producers from 6
to 10, and now 25 percent, so much so that CARICOM, the
Caribbean nations, have told the executive branch that the
subsidies are unfair trade practices and violate international
trade rules.
Let me close by saying, is it fair to say that, based upon
all this information, that money is flowing to profits, not
jobs, here at the end of the day?
Dr. Maguire. To the extent that we understand how the
subsidy is used by Diageo, it does appear as though it does not
go to the workers at the plants, and it does not go to lower
rum prices, necessarily. Most of it would go towards the
investors in the rum companies.
Senator Menendez. Mr. Chairman, so this is the challenge we
have if we allow this to continue to happen. Instead of
supporting--which was the intention of the rum carry-over
provision--the people of the territories to help improve the
standard and quality of their lives, what we are doing is
having millions of dollars go for profits for companies that
are not really producing the benefit for these territories.
So I hope we can work with the chairman and the committee
to try to find the right balance here so that, at the end of
the day, we can pursue the original intention. Because
otherwise I could see very easily that there will be a tax on
this program, to the extent that they will seek to take it
away, and it will be far worse for the territories at the end
of the day.
The Chairman. Thank you, Senator.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman. Thank you for
holding this hearing.
One of the issues--we have many tribes in the Northwest,
and my colleague from New Mexico asked about--well, many of my
colleagues asked about the general welfare doctrine. But I am
particularly interested in the area of education, because
Native Americans have a lower high school graduation rate. In
fact, I think it is something like 23.5 percent who do not
complete high school or the equivalency of high school. So
juxtapose that to, say, 4.7 percent of whites, or 14 percent of
Asians, and a whole host of other segmentations.
So, when it comes to this issue of taxation and what is a
general welfare or social benefit program, you can have
something like tuition--and I certainly applaud Native American
tribes across America for supporting continued education for
their members. I think this is a very, very positive sign. But
my understanding is, we have a lot of mixed signals here, so
that you can have tuition that is covered under this social
benefit or general welfare idea, but then books or room and
board are not. So, why is there a difference, and what do you
think we need to do to clarify this? So, either Professor
Robertson or President Porter.
President Porter. Senator, I think that you have hit the
nail on the head when it comes to the challenge of
administering in this area. That is why I do not think there
should ever be a tax question when it comes to providing
backpacks or pencils to children in our nation, or any Indian
nation in the United States. We are, in many cases, not
continuing education, we are starting it.
In our case, our language is almost gone, and we are trying
to re-install a language immersion school. We are trying to
raise our children in a way of life that Americans take for
granted. But it is the universal solution to our problems when
we can provide a strong education, and we have a multitude of
issues with the potential tax threat.
Even on the financing side, building schools, finding ways
in which we can provide for that, we need to make sure that
those opportunities are protected so that we can move forward
with our investments.
Senator Cantwell. Doctor?
Dr. Robertson. I agree with President Porter. I would just
sort of amplify that I think the benefit of the exclusion
applies to a multitude of levels of education. It is not simply
elementary education or secondary, but a lot of tribes are
providing monies to send their members away to study medicine,
to study law, to study business, to study engineering, so that
they can come back and help rebuild the tribe's health base,
infrastructure, political institutions, that sort of thing. All
of this is seen as being for the good of the community within
those communities more than for the good of the individual, who
then otherwise would be taxed on the receipt of a benefit.
Senator Cantwell. And so I would just assume that, aside
just from compliance, that the complexity of knowing what is
and what is not excluded is pretty hard to figure out. Is that
correct?
Dr. Robertson. Yes it is, under the status quo. And I do
not think the Service disagrees with that, as I understand from
Commissioner Ingram's testimony, which is why they are working
with tribes--and I think this is creditable--to try to figure
out a way to simplify these rules, if not eliminate them, which
is President Porter's suggestion, which would simplify things.
Senator Cantwell. Ms. Ingram, is there a simplification on
this?
Ms. Ingram. Well, as I mentioned before with Chairman
Baucus, we are very cognizant of this issue, which is why we
have reached out for input, and one of the categories we have
asked specifically for input on is in the area of education, as
well as the area of cultural practices, events, and issues. We
have tried over the years to figure out how to take the
principles that were largely crafted in the State and local
government environment and translate those to the more complex
situation involving the Indian tribal community.
We have asked for, and continue to receive, a rich amount
of input about what kinds of activities people are doing and
want to do, and how these are either the same as what we
currently allow for States--and we need to be consistent with
that--or to what extent it needs to be different. We are trying
to listen to that input to figure out what to do next.
Senator Cantwell. Do you think there is a difference
between tuition and room and board?
Ms. Ingram. I think there is both some information and
misinformation about where we are in agreement or disagreement.
One of the things we are doing, in addition to the consultation
sessions, is tightening some of our coordination within our own
organization to see if we cannot eliminate some of the fact
patterns where we know already, without further discussion,
that we should not be questioning. I think this discussion will
create areas--we hope--where we can provide some broader,
simpler ways for both of us to address this and all the other
issues that are being raised.
Senator Cantwell. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Thank you all very much. This has been a very helpful
hearing, with very good points to very difficult questions. My
thought is just to move towards simplicity, and clearly
repealing the essential government function provision will help
make things a little more simple.
But I also urge you to give us your ideas. I mentioned the
welfare provision. I did not get a chance to ask you, President
Porter, I know some of the tribes do very well with gaming.
Your economic opportunity zone looks very interesting, but I
presume that would not apply to gaming reservations. I say that
in part because we in Montana do not have the people for
gaming.
President Porter. Right.
The Chairman. It just does not work. Different tribes are
different in different parts of the country. Just idle
comments, unless you have something to say.
Thank you all very, very much. I appreciate it.
The hearing is adjourned.
[Whereupon, at 11:08 a.m., the hearing was concluded.]
A P P E N D I X
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