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35–146—PDF 2006

S. HRG. 109–899

ENCOURAGING ECONOMIC SELF-DETERMINATION

IN INDIAN COUNTRY

HEARING

BEFORE THE

SUBCOMMITTEE ON LONG-TERM GROWTH

AND DEBT REDUCTION

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 23, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION

GORDON SMITH, Oregon, Chairman

CHARLES E. GRASSLEY, Iowa JOHN F. KERRY, Massachusetts

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Smith, Hon. Gordon, a U.S. Senator from Oregon, chairman, Subcommittee

on Long-Term Growth and Debt Reduction, Committee on Finance ............... 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 2

WITNESSES

Etcitty, Raymond C., Esq., chief legislative counsel, Navajo Nation Office

of Legislative Counsel, Window Rock, AZ .......................................................... 4

Scheffler, Lenor A., Esq., Best & Flanagan, LLP, Minneapolis, MN .................. 7

Clarkson, Dr. Gavin, assistant professor, School of Information, School of

Law, and Native American Studies, University of Michigan, Ann Arbor,

MI .......................................................................................................................... 10

Schickli, Scott, Esq., Orrick, Herrington, & Sutcliffe, LLP, Portland, OR ......... 16

Shammel, Wayne A., Esq., general counsel, Cow Creek Band of Umpqua

Tribe of Indians, Roseburg, OR ........................................................................... 19

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 2

Clarkson, Dr. Gavin:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 27

Etcitty, Raymond C., Esq.:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 55

Scheffler, Lenor A., Esq.:

Testimony .......................................................................................................... 7

Prepared statement with attachment ............................................................. 70

Schickli, Scott, Esq.:

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 90

Shammel, Wayne A., Esq.:

Testimony .......................................................................................................... 19

Prepared statement with attachment ............................................................. 95

Smith, Hon. Gordon:

Opening statement ........................................................................................... 1

COMMUNICATIONS

Alaska Federation of Natives ................................................................................. 143

Confederated Salish and Kootenai Tribes of the Flathead Nation ...................... 149

(III)

(1)

ENCOURAGING ECONOMIC SELFDETERMINATION IN INDIAN COUNTRY

TUESDAY, MAY 23, 2006

U.S. SENATE,

SUBCOMMITTEE ON LONG-TERM

GROWTH AND DEBT REDUCTION,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 2:37 p.m., in

room SD–215, Dirksen Senate Office Building, Hon. Gordon Smith,

(chairman of the subcommittee) presiding.

Also present: Senator Baucus.

OPENING STATEMENT OF HON. GORDON SMITH, A U.S. SENATOR FROM OREGON, CHAIRMAN, SUBCOMMITTEE ON

LONG-TERM GROWTH AND DEBT REDUCTION, COMMITTEE

ON FINANCE

Senator SMITH. Welcome, ladies and gentlemen. We are pleased

to have you here on this important issue of tribal self-determination.

We are going to talk today about the Federal Government’s policy of encouraging Indian tribes in their efforts towards self-determination, which has been the Federal goal since the 1960s.

The problem is that, as we have translated this into reality, we

have treated, in theory, tribal governments like quasi-sovereign entities, just as we have State and local governments, but we have

not given them the same ability to access capital markets.

Tax-exempt bonding authority is literally the bread and butter of

most State and local governments, and the current law limits

tribes’ ability to issue such bonds.

The Indian Tribal Governmental Tax Status Act of 1982 provided

Indian tribal governments with a tax status similar to States and

municipalities. However, bonds issued by tribal governments are

subject to limitations not imposed on State and local government

issues.

Tribal governments may not issue tax-exempt private activity

bonds. Furthermore, they may issue tax-exempt governmental

bonds, but only if substantially all the proceeds are used for central

governmental functions and not economic development.

In doing so, this act runs counter to our Federal policy of selfdetermination. If tribes are hamstrung in their ability to develop

their infrastructure and foster a robust economy, then a Federal

policy of self-determination is rather hollow.

2

Contrary to popular conceptions, most of the 562 Indian tribes in

America do not have casinos. According to the National Indian

Gaming Association, less than half of them engage in Class II or

Class III gaming. As they have for generations, many tribal members, therefore, live in poverty.

As reported by the Advisory Tax Committee on Tax-Exempts in

its 2004 report, ‘‘Most Indian tribes have an economy that is on par

with most third world countries.’’ In 2000, the American Indian

population had a poverty rate of about 26 percent in comparison

with a poverty rate of about 12 percent for the general U.S. population.

Indian tribal governments have struggled for years to develop

the infrastructure necessary to attract businesses and employers to

create employment opportunities. Instead, unemployment is endemic on reservations, and under-employment, rampant.

Without new job growth and self-sustaining revenue bases, the

goal of Indian reservations as viable homelands for American Indians will simply be unattained.

So I look forward to today’s testimony, because it gives us an opportunity to reflect on our current tax system and perhaps re-think

our tax policy so that it better fosters the development of tribal

economies.

I like the quote of Ronald Reagan, who said, ‘‘The Federal Government’s responsibility should not be used to hinder tribes from

taking advantage of economic development opportunities. A full

economic recovery for tribes will unleash the potential strength of

this private sector and ensure a vigorous economic climate for development which will benefit not only Indian peoples, but all other

Americans as well.’’

I would like to turn the mic over to my colleague and friend from

Montana, a fellow northwesterner and the Ranking Democrat on

the Senate Finance Committee.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you very much, Mr. Chairman. First, I

commend you for holding this hearing. This is very important. I

know, especially in the State of Montana, I see tribes doing a good

job.

There has been major improvement over the years in managing

their affairs and moving toward economic development, including

self-determination. It has always been on again, off again.

Should tribes develop themselves, have their own contracts, or

work through BIA, IHS, or whatnot, it is kind of on again, off

again. It depends largely on the tribe. It depends on lots of other

situations.

I also believe that it is time to lift the shackles that we, as the

Federal Government, often have on reservations that prevent tribes

from developing more aggressively.

For example, I think that there should be more tax-exempt bond

authority available for tribes so they can determine their own destiny more. I very much thank you, Mr. Chairman, for holding this

hearing.

3

One of the witnesses today is Wayne Shammel, who is the general counsel for the Cow Creek Band of Umpqua Tribe of Indians,

in your own State of Oregon. He is also a member of the Confederated Salish and Kootenai in Montana.

Senator SMITH. We can both claim him. [Laughter.]

Senator BAUCUS. I think we both will.

The title of this subcommittee hearing is ‘‘Encouraging Economic

Self-Determination in Indian Country.’’ One of the policy arguments for self-determination, clearly, in addition to government-togovernment relationship between tribes, is to support the development of tribal economies.

There is a lot we can do. We can add infrastructure, housing,

telecommunications, et cetera. That must be addressed very aggressively. In order to pay for it, tribes cannot rely on Uncle Sam

when tribal programs are being reduced or eliminated by the Federal budget, which often is the case.

That is why I turn more to permitting tribes to issue tax-exempt

bonds. I might say—you may know about this, Mr. Chairman—we

have a program recently passed called the Clean Renewable Energy Bond (CREB). It is a renewable energy program for nonprofits. Tribes would clearly qualify. So not only can private entities build alternative energy programs, like wind towers, but so can

nonprofits, including tribes.

In our State, 35 applications met the April 26th deadline for

Montana nonprofits. I do not know if any of them were tribes. But

I am hopeful that tribes, too, can participate in a program like this

so they can also develop wind power on the reservations. By focusing on tax-exempts, I think that is another tool that tribes can

have.

But, all in all, I just want to thank Wayne for being here, and

thank you, Mr. Chairman, for what you are doing. This is very,

very important, and I just urge our witnesses to be aggressive

themselves and tell it like it is, and give us some concrete, specific

ideas so we can advance the ball.

Thank you very much.

Senator SMITH. Thank you, Senator.

We thank all of our witnesses here. As I call you up, I am going

to talk about you; take your place as I do so.

Our first witness will be Mr. Raymond Etcitty. He is the chief

legislative counsel for the Navajo Nation. He served on the IRS Advisory Committee on Tax-Exempt and Government Entities from

2003 to 2004.

Our second witness will be Ms. Lenor Scheffler. She is a member

and chair of Best & Flanagan’s Native American law practice

group. In 2004, she was appointed to the IRS Advisory Committee

on Tax-Exempt and Government Entities.

Then we will hear from Mr. Scott Schickli. He is of counsel in

Orrick’s Pacific Northwest office of Portland, OR, and is a member

of the Tax and Public Finance Practice Groups. His practice focuses

on tax aspects of tribal and other public finance transactions.

Then we will hear from Dr. Gavin Clarkson. He is Assistant Professor in the School of Information at the University of Michigan.

He has simultaneous appointments at the Law School and in Native American Studies.

4

Then a Montanan-turned-Oregonian, Mr. Wayne Shammel is the

general counsel of the Cow Creek Band of Umpqua Tribe of Indians

in Oregon. He was born and raised on the Flathead reservation

and is a member of the Confederated Salish and Kootenai Tribes.

We thank you all for being here.

Senator BAUCUS. Mr. Chairman? If you will pardon me.

Senator SMITH. Yes.

Senator BAUCUS. It is Confederated Salish and Kootenai Tribes.

Senator SMITH. Salish.

Senator BAUCUS. Salish Kootenai. We like to think he is both Oregonian and Montanan. [Laughter.]

Senator SMITH. Yes. That is sort of like Easterners calling us

‘‘Or-e-gon.’’ [Laughter.]

Senator BAUCUS. You would be very proud of me. I go out of my

way to correct that mispronunciation regularly.

Senator SMITH. All right. I appreciate that. Thank you.

Why do we not start with Mr. Etcitty?

STATEMENT OF RAYMOND C. ETCITTY, ESQ., CHIEF LEGISLATIVE COUNSEL, NAVAJO NATION OFFICE OF LEGISLATIVE

COUNSEL, WINDOW ROCK, AZ

Mr. ETCITTY. Thank you, Senators. Thank you very much for this

opportunity.

My name is Raymond Etcitty. I am the chief legislative counsel

for the Navajo Nation. The Navajo Nation is a large tribe. We say

we are the largest in the Southwest. We have 300,000 members.

We currently encompass a land mass that is 27,000 square miles,

so we are larger than the size of the State of West Virginia. I provide legal advice to our council.

However, in 2004 I was on the IRS Advisory Committee. The IRS

Advisory Committee is a committee that provides guidance and advice to the IRS regarding how the IRS operates.

In 2004, I chaired a group that provided a report to the IRS on

the Indian Tribal Tax Status Act of 1982. In that report, I essentially stated that, when the act was drafted, we were in a period

of, and we are still in a period of, self-determination in which the

Federal Government is assisting in helping tribes becoming selfsufficient as Indian nations.

In 1982, Congress approved this act, and the act clarified how

tribes would be treated for certain taxing purposes by the Federal

Government.

With respect to the tribal bonds issue, the act itself provided

some limitations. So, although the act had the intent of treating

tribes equally with States, it was somewhat limited.

When it came to private activity bonds, Congress had stated that

tribes were unable to do that. However, with respect to governmental bonds, those were bonds where Congress placed some limitations.

So if you look at the other governments, local and State governments, they are able to issue bonds tax-exempt, and are, therefore,

able to obtain low interest rates on these and work with the IRS.

When it comes to the tribes on issuing these specific bonds, the

tribes are somewhat limited by the act as to how to deal with these

issues.

5

In 1987, Congress amended the act again. However, in doing so

the particular phrase that tribes had been hindered with is a

phrase called ‘‘essential governmental functions.’’ Essentially, the

act stated that when it comes to issuing bonds and others, ‘‘tribes

shall do so only for essential governmental functions.’’ This definition was not clarified in the act itself.

Senator SMITH. For the record, give us an example of how a city

might be able to issue bonds different than that.

Mr. ETCITTY. Thank you. As an example, near the Navajo Nation

there is a metropolis city called Albuquerque. In Albuquerque,

there is Intel. From what I understand, the city, Rio Rancho,

issued a private activity bond in order to help finance the Intel

building, helped finance manufacturing.

So that is a private activity in which a government will use its

tax status to help finance potentially private activity using the

bond capacity, bond status of a government. When it comes to

tribes, they are not able to do so.

Senator SMITH. I just wanted to get that distinction on the

record. I mean, if the government was supposed to treat tribal governments like State and locals, they are not doing it.

Mr. ETCITTY. Senator Smith—Chairman Smith.

Senator SMITH. Senator is good. I get called a lot worse. [Laughter.]

Mr. ETCITTY. With the Navajo Nation, we have encountered this.

The Navajo Nation is lacking in infrastructure. As I stated, we

have about 300,000 members, and we are looking at ways to provide infrastructure.

Basic infrastructure not only helps our citizens, but, if you have

a good infrastructure, you can then start requesting outside businesses, outside groups, within the tribe, to help build it. I believe

people have stated that we have about a 50-percent unemployment

rate upon the Navajo Nation, and we lack infrastructure.

So by expanding and allowing tribes this opportunity to issue private activity bonds or to clarify how government bonds are operated, that will again provide, as was stated, tools to the Navajo Nation for further economic development.

When it comes to government bonds, the issue, as I stated, is ‘‘essential governmental functions.’’ I believe in my report I did state

that the Treasury Department, back in 1984, developed some temporary regulations trying to define that. However, Congress’s

amendments in 1987 turned that around.

In 1987, there was an amendment to the act that, as I usually

tell people, provided a negative definition, so it did not state, an

essential governmental function is this.

Instead, the act essentially states that the definition of an essential governmental function is a negative definition. It sort of states

that an essential governmental function is an activity, a function,

that is not customarily performed by a State or local government.

So, therefore, some people do say, this is what governments do.

Instead of defining what it is, you have created a problem by defining what it is not. So what eventually happens is your bond

counsels, instead of trying to fit it within a definition, they are

more fearful that the negative definition swallows the entire rule

itself.

6

So, therefore, your negative definition again hinders the ability

of tribes to issue bonds, because in doing so they believe that their

activities may not be qualified as essential governmental functions.

For the Navajo Nation, again, we sort of encounter this whenever

we look to developing jails, hospital spaces, and other services. As

I always point out, when it comes to Indian tribes like the Navajo

Nation, we are not only looking out for Navajos.

We have many Navajos within our reservation, but we have

other Indians, and we also have non-Indians. Pretty much within

the Navajo Nation, the government itself provides all the governmental services.

I usually indicate and tell people that the Navajo Nation looks

after its own members, it looks after other Indians, it looks after

non-Indians, it looks after visitors.

So we have this entire group of people who come upon the Navajo Nation, so therefore you do have police services, you do have

other services—ambulance services, health services—all of these

governmental activities, opportunities for economic development.

We may have a person who comes to the Navajo Nation wanting

a job that may be a non-Indian. So since it is a reservation, as ours

in the Navajo Nation is, it is up to the Navajo Nation to stand on

its own and to provide these opportunities.

So if a visitor required, again, police service, ambulance services,

some of these things are not provided by the Nation. When it

comes to the police, the question with the Navajo always is, how

do we finance these? Do we use private companies in order to finance jail spaces?

How do we provide the health care systems? Will the hospital be

owned by the Navajo Nation, the tribe, or a private entity? So in

order to help facilitate these things, we need the capacity to provide this economic development.

In many cases, you will have someone who decides to move to the

reservation, live upon the reservation. However, we also need economic development opportunities for them.

A person who marries a Navajo and wants to live there, will

want a job. Well, it is pretty much incumbent upon the Navajo Nation, much like other governments, to develop this infrastructure,

to develop the means by which outside companies can come upon

the Navajo Nation and grow.

Again, when you are talking the size of West Virginia, it is pretty

hard for just one government, one entity to control that vast area.

We have to start working with outside entities, outside people and,

again, use these bond capacities in a manner to facilitate economic

development within the Navajo Nation.

I usually state that there is a person on the Navajo Nation whose

name is Trib Trerard, an economist. He usually tells me that in the

United States, in the Great Depression, he states the unemployment rate was around 20 percent, or something like that. I think

it was closer to 18 percent, around there. He stated, the Navajo

Nation is 50 percent.

So if they call that the Great Depression at that unemployment

rate, what do you call the situation upon the Navajo Nation when

it is about three times what the unemployment was in the Great

7

Depression? I do not know what terminology you would use, but

again, this is significant.

Senator SMITH. What percentage of non-Navajo would be in the

Navajo Nation for which you are providing services? I am just curious. What part of that percentage would be considered Caucasians?

Mr. ETCITTY. Thank you very much, Senator. With regard to the

Navajo Nation, figures are roughly around 10 percent. So the Navajo Nation, as large as it is——

Senator SMITH. Members of other tribes?

Mr. ETCITTY. Members of other tribes, probably about 3 percent

up to 5 percent.

Senator SMITH. All right.

Mr. ETCITTY. So the Navajo Nation, again, as large as it is, you

do have public schools, you do have Indian health care, you do have

Bureau of Indian Affairs schools, you have private schools, you

have private businesses, private industry there. So, many of these

places are staffed by non-Indians.

A lot of non-Indians come back to the reservation. They will

marry a Navajo, so while the Navajo is working they will have the

spouse who is non-Indian. Meanwhile, in the Navajo Nation we

also have tourists who visit the Grand Canyon, Monument Valley.

There are over 100 different types of monuments, and there are

tourist attractions within the Navajo Nation’s four corners. So, people estimate we have several million visitors who come to the Navajo Nation yearly.

So the focus, I always say, on the Navajo is, again, we try to

build economic development the old-fashioned way. We look at tax

incentives, tax bonds. We look at these means to achieve economic

development. When we do it, we are looking at not a small level,

but a macro level, how States, how large local governments try to

achieve these things.

They achieve these goals by, again, issuing tax-exempt bonds,

trying to lure businesses onto the reservation. They do so by doing

governmental bonds and trying to provide basic infrastructure,

basic government services.

Currently, the problem with the tax law as written and as currently written by the IRS, is that these provide limitations. If we

want to issue bonds for a certain purpose, I believe there are great

concerns that that may not fall exactly within what the IRS requires.

Senator SMITH. So if you are going to develop the services, you

need the economic base, you need economic development, and you

are not allowed to have that through bonding authority now?

Well, thank you very much, Raymond.

[The prepared statement of Mr. Etcitty appears in the appendix.]

Senator SMITH. Ms. Scheffler?

STATEMENT OF LENOR A. SCHEFFLER, ESQ.,

BEST & FLANAGAN, LLP, MINNEAPOLIS, MN

Ms. SCHEFFLER. Thank you, Mr. Chairman. I appreciate the opportunity to be here this afternoon and to speak. I am from the

Mdewakanton Dakota Community of the Lower Sioux in Southern

Minnesota, a much smaller tribe. We have about 900 members, and

less than 1,000 acres.

8

I am, as you had mentioned in the introduction, a current member of the Advisory Committee on Tax-Exempt and Government

Entities for the IRS. In 2005, we followed up Mr. Etcitty’s report

with our own survey and review of existing information and guidance for Indian and tribal governments, and we looked at a number

of issues that were of concern, particularly what guidance was out

there and what is available for tribes in a number of areas.

We did focus on the tax-exempt bond issue because, particularly

in the last year and a half, the IRS compliance folks have focused

on tribal deals. The perception in Indian country was that that was

an inordinate amount of attention for the number of deals.

It also caused—in our observation, working on the committee

and also among my clients—a chilling effect, with some tribes shying away from even those types of what would be common-sense essential governmental services, because of the concern of what, in

fact, the definition is. Is it what Congress may have meant, or is

it what the IRS compliance officers are implying it is through their

audits? So we focused on that and talked to folks across Indian

country.

A number of items. I just want to remind the committee, and Mr.

Chairman, as we look at this issue, the context is, as you well

pointed out, the vast majority of tribal people are not wealthy. Not

everyone has a gaming enterprise, though that has been one economic tool in recent years that has been successful for the tribes.

The States and local economies, local municipalities, they learned

about State lotteries. So in some ways, tribal folks have learned

from dominant society what works and what does not, so we have

used gaming enterprises as one option.

Other tribes with resources have found some success in tourism,

oil and gas, but not all tribes have the resources, because most of

the tribes were placed on reservations in isolated, and not necessarily productive, areas.

Another point to contrast is that the tribes do not have the tax

base that State and local governments have, or even the Federal

Government. State, local and Federal governments can raise taxes.

In Indian country, we sit on trust land which we cannot leverage,

mortgage, nor really tax.

Some tribes do have tax ordinances, tax codes, and they do raise

tax revenue, but it is not sufficient or adequate to supply and to

support the tribal government operations or the tribal programs for

their tribal members. I think that is important to remember, that

there is just not the tax base the State and local governments

enjoy.

Congress, as you pointed out, has a longstanding policy of encouraging self-determination, self-government, some economic development. Seventy years ago there was the passage of the Indian

Reorganization Act, and in there one of the goals was to have

tribes be able to go into business.

They granted charters from the Secretary of Interior with the

idea that, with governments and with the opportunity to do business, that in fact we could enter the economic mainstream. It was

well-intentioned, but with marginal success.

9

But at least those charters are there, and some tribes in Indian

country are taking advantage of that opportunity and pursuing economic development.

As mentioned, the two tools that came along after that, the ability to issue tax-exempt bonds and a limited ability to issue private

activity bonds, were two tools that, theoretically, tribes should have

been able to use.

But, it has been pointed out, and you’ll hear more about it, what

does ‘‘essential governmental function’’ mean? Common sense tells

tribes and the practitioners who represent them that it should be

the same things as State and local governments do, and that has

just not been the case.

I am sure you will hear about golf courses, sports facilities, and

other things that State and local governments fund with their tax

status, and the tribes are not able to engage in that.

In the private activity bond area, it is so narrow and limited that

it virtually has not been of any value. I do not know that there has

ever been an issuance, and maybe some of the other folks of the

panel would have some information. But theoretically, that would

be a good tool and opportunity for tribes to use.

What it is, is these tools would be helpful to build economies for

tribes that are not gaming, but they also will help tribes that

maybe have gaming right now, which is continually under challenge.

So having the opportunity to diversify and look at other ways to

strengthen our economies, be able to provide programs to our tribal

members, and to participate in the overall economy of our States,

these two tools need to have attention and they need the attention

of Congress.

The amendments. I do not have the magic words. Maybe some

of my colleagues on this panel today will have the magic words.

But, clearly, we need definitions. At a minimum, it seems to me

that treating tribes as State and local governments is a place to

start.

As far as broadening the ability of tribes to issue private activity

bonds, since it is so narrow and so limited, there should be plenty

of room to expand there.

Really, I think the place to start, or the place to focus on, is the

IRS Code at section 7871, which was originally passed in 1982 and

1987, and there are regulations that are also a part of that. I think

that really is the beginning point.

Most importantly, as you are focusing on this, Mr. Chairman and

the committee, it is very important to contact and be informed

with, and by, the tribes, talking to them, having conversations, understanding really what would be effective in carrying out

Congress’s longstanding policy of encouraging economic development in Indian country.

Thank you.

Senator SMITH. Thank you very much.

[The prepared statement of Ms. Scheffler appears in the appendix.]

Senator SMITH. If I could ask you, what tools could the Federal

Government provide to the Indian tribes to make it easier for their

advisors to find tax statutes and guidance related to Indian and

10

tribal governments? Are there some tools that we need to get to

you in a way that would be helpful?

Ms. SCHEFFLER. Well, in our report in 2005, we had talked with

the IRS and the Treasury’s Chief Counsel’s Office about what regulations could they do and what actions could they help with and

educate.

With Treasury and the Chief Counsel’s Office, the regulations

that might provide some definition and assistance in the essential

governmental functions, for example, is just not a priority.

Senator SMITH. So do you think that is why the IRS is slow to

move on this?

Ms. SCHEFFLER. Absolutely. That was not a priority. In reading

some of the literature surrounding the whole ‘‘essential governmental functions,’’ it is almost a question of, what did Congress

really mean, in some of the articles that were written about how

that law was passed, and I think there was a Florida House of Representatives Congressman who had his own special axe to grind,

shall we say, based on some of the literature.

So we can give them advice as committee members, but, clearly,

this particular issue is a Congressional fix, I think, so that means

proposing legislation. Or if you can put pressure on the Treasury

Department and the Chief Counsel’s Office to talk to tribes and

clarify the regulations.

Senator SMITH. Well, that is part of what this hearing is about.

Ms. SCHEFFLER. But as I was told by one IRS official, suggest a

legislative fix, because they did not know that the Treasury would

do much if you all called them again.

Senator SMITH. Well, thank you very much.

Dr. Clarkson, why do we not go to you next? We will just go

down the line.

STATEMENT OF DR. GAVIN CLARKSON, ASSISTANT PROFESSOR, SCHOOL OF INFORMATION, SCHOOL OF LAW, AND

NATIVE AMERICAN STUDIES, UNIVERSITY OF MICHIGAN,

ANN ARBOR, MI

Dr. CLARKSON. Mr. Chairman, thank you very much for the invitation to come to speak today.

Again, my name is Dr. Gavin Clarkson. I am a professor at the

University of Michigan in the School of Information, the Law

School, and Native American Studies.

In terms of background, I have a law degree from the Harvard

Law School and a doctorate from the Harvard Business School. I

also hold the Series 7, 24, and 66 securities licenses, and I have

helped tribes raise approximately $200 million in various different

bonds, including tax-exempt bonds.

What I would like to talk about today, Mr. Chairman, is the need

for capital improvement in Indian country. According to the Harvard Project on American Indian Economic Development, there is

$50 billion of unmet capital need that goes unfunded each year in

Indian country, and it is due, unfortunately, in large part to the

restrictions that are present in section 7871 of the tax code.

Basically, you have tribes such as the Navajo Nation, as I understand it, the size of West Virginia, that have only 2,000 miles of

11

paved roads. Twenty percent of Indian country does not have running water or plumbing facilities.

These deficits in capital improvement and infrastructure are a

direct consequence of the tribes’ inability to tap into the capital

markets in the same way that State and local governments can.

The essential governmental function test which Mr. Scheffler and

Mr. Etcitty just described is a test that only applies to tribes. State

and local governments do not have to pass the essential governmental function test in order to issue tax-exempt bonds. They have

no restrictions. Only Indian tribes face these restrictions.

Senator SMITH. As you read the statute, does that violate the intent of Congress?

Dr. CLARKSON. The question is, was it the intent of Congress or

was there one particular individual who managed to exert influence

in a conference committee report? It is hard to tell what the intent

of Congress was in the aggregate.

It is very clear to see what Congressman Givens’s intent was,

and that was to restrict the ability of tribes to issue the tax-exempt

bonds. But it goes contrary to Congress’s intent and longstanding

practice of local empowerment and allowing tribes to exercise their

ability to do self-determination.

So, it certainly is inconsistent with the broader Congressional

policy of allowing Indian tribes to exercise self-determination, to

exercise local control, and to basically treat them on par with State

and local governments.

In fact, the conference report described that the intent of the bill

was to treat tribes the same as State and local governments. Unfortunately, the resulting legislation failed miserably in that regard.

Senator SMITH. From your understanding of the history, have

there been instances where these have been issued and they or the

payments on the bonds have been defaulted on, or when the State

and local communities have issued these and they have gone bad?

Why the discrimination against the Indian tribes on this?

Dr. CLARKSON. Well, Senator, I am trying to be a little bit restrained in my rhetoric here.

Senator SMITH. I am trying to draw you out. [Laughter.]

Dr. CLARKSON. I have been circulating a Law Review article that

I am anticipating publishing that goes through the history of the

Tribal Tax Status Act and the 1987 amendments. It is a gentle policy piece that has the title of ‘‘Racism in the Tax Code.’’

As an academic, I am being provocative, so I am attempting to

not use that rhetoric here. Unfortunately, the reality, the facts on

the ground are, Indian tribes are being discriminated against in

the tax code for no other reason than for being Indians.

Senator SMITH. I mean, if it is racism, that is what I want to

focus the light on. But we do not have an IRS witness here. Are

there instances where bonds have been abused or defaults have occurred? Is there a track record that justifies this on some other

basis than racism?

Dr. CLARKSON. Senator, the IRS got a copy of my article and they

called me to come meet with them. They promised it was not to

audit me. [Laughter.] I sat down with the acting head of TaxVerDate 11-MAY-2000 16:01 May 29, 2007 Jkt 095484 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 35146.000 SFIN1 PsN: SFIN1
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Exempt Bonds, and they are actually helping me gather the data

to understand the problem.

My understanding from the IRS is, they do not like the statute

either, but they are stuck enforcing it. But what they were unaware of, until they read my article and looked at the data that I

had gathered, was the fact that Indian tribes—well, let us put it

this way.

There are approximately 15,000 tax-exempt bonds that are

issued every year, and approximately 1.25 percent of those are

challenged by the IRS. Almost 40 percent of the direct-issue taxexempt bonds issued by tribes in the last 3 years have been challenged by the IRS, and 100 percent of the conduit bonds issued by

tribes have been challenged by the IRS.

Senator SMITH. Well, why is it? Are they to finance economically

unsustainable projects?

Dr. CLARKSON. No. These are for things like municipal golf

courses, water treatment plants. For the conduit projects, the one

I was involved with was for a hotel.

Senator SMITH. So there is nothing in the track record in terms

of the performance of these bonds that would justify this treatment?

Dr. CLARKSON. Nothing at all, Senator. In fact, I am not aware

of any tribe that has defaulted on a tax-exempt bond. Obviously

there are a litany of instances where other municipalities and other

governments have defaulted. I think Indian country actually has a

stellar record in comparison to State and local governments just in

general.

But you have the instance where the IRS is stuck enforcing a defective statute. To that end, they have indicated that they were unaware of the hazard rate of challenge. At least at the senior levels,

they were unaware of that. So, they have expressed to me their interest in identifying bias and eliminating it. But in discussions that

I have had with them, they, I think, would agree that the best fix

would be a legislative fix.

Senator SMITH. So they want that, then? They feel like they are

hamstrung in treating tribes like State and local bond issuances?

Dr. CLARKSON. That is the sense I get. I do not want to say that

I am speaking for the IRS, but in all my conversations with IRS

officials and senior IRS management, they recognize the problems

in the statute, they recognize its defectiveness, they recognize its

ambiguity, they recognize the uncertainty that it has created.

I think it would be administratively easier on them and require

less specialized resources if they could just treat tribes as States.

I think that would make it simpler for everybody. I think the IRS

would find that simpler.

I would love to say that I could speak for them, but I obviously

cannot. In my conversations with them, I have not heard a single

IRS senior manager say that they think the statute, as is, is good.

I will give you an example. There is a tribe in Las Vegas. They

are in Las Vegas, but they are not going to be competing with the

Steve Wynns of the world, or the MGMs in the gaming space. But

they have land and they have access to water, so they have put together a golf course. And like 2,500 other municipalities in this

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country, they financed that municipal golf course with tax-exempt

debt.

Senator SMITH. Is this the Paiute?

Dr. CLARKSON. Yes, sir. The Las Vegas Paiute.

Senator SMITH. I have played it. It is great. [Laughter.]

Dr. CLARKSON. You played it. Let me ask you, Senator. Did you

enjoy playing it?

Senator SMITH. Oh, it was wonderful.

Dr. CLARKSON. Was it a pretty course?

Senator SMITH. Beautiful.

Dr. CLARKSON. Well, here is the problem. The IRS says that if

it was a pretty course, it cannot be intended to meet the recreational needs of the tribe, and the therefore challenged the taxexempt status of it because it was pretty enough to attract nonIndian golfers.

Senator SMITH. I did not know I was hurting them to play there.

[Laughter.]

Dr. CLARKSON. Senator, it was a pleasant golfing experience. It

was one where, by playing it at the tribe’s golf facility, you contributed to the economic base of the tribe. You helped employ

groundskeepers. Hopefully you bought something at the pro shop.

Senator SMITH. But that is the point of this whole thing. I mean,

so the idea that they should build golf courses just for Indians to

play on is just ridiculous.

Dr. CLARKSON. Well, Senator, I could not agree more wholeheartedly. When you read through the Field Service Advisory that

the IRS issued, it is highly problematic. Let me go back to my reserved self and say it is highly problematic.

But it also creates a high degree of uncertainty. The statute, as

amended in 1987, adds, in addition to the essential governmental

function test, it says you only get to be an essential governmental

function if you are something that is ‘‘customarily’’ performed by

other governments, without providing any guidance or any indication of what that means.

So even though there are 2,500 other municipal golf courses financed with tax-exempt debt—and in my written testimony I go

through and give you a listing of several State-operated and governmentally operated resorts with hotels that were financed with

tax-exempt debt—but for whatever reason, the current interpretation by the IRS of this defective statute says that that is not permissible for a tribe to do, and that is just wrong.

Senator SMITH. It sounds like Congress did not write it clearly

enough. It sounds like Treasury is kind of sitting on it.

Dr. CLARKSON. Well, Mr. Chairman, let me suggest, the problem

is that Congress decided to pass a statute that discriminated

against the tribes. If they would remove that discrimination, eliminate the disparate treatment—I do not think the tribes are asking

for anything special.

I think they are just asking to be treated the same, to be given

the same access to the capital markets as their State and local

counterparts. The problem is, because the statute is ambiguously

drafted, it creates uncertainty. When the capital markets are faced

with uncertainty, the appropriate reaction is to charge more interest.

14

So you have situations where tribes have to pay more to do the

exact same thing, even if they could qualify for tax-exempt bonds,

because it is uncertain as to whether their water treatment plan

will survive scrutiny by the IRS.

I know there are at least two different tribes currently under

challenge by the IRS for sewer plants, for water treatment plants.

In fact, if you look at the legislative history, that was spelled out

specifically. They were talking about roads, schools, and sewers. So,

the ambiguity in the statute has begun to run amok.

I also want to emphasize that it is actually the poorer tribes that

face the most harm from this defective statute. Some of the

wealthier tribes, if they need the infrastructure, they can pay the

taxable rates. It is unfortunate that they have to, because their

State and local counterparts just down the road do not have to.

But I will tell you an example. I did a bond where I helped a

tribe repurchase approximately 23,000 acres of ancestral homeland.

There was no way they were going to be able to afford the purchase

price and the debt service if they had to pay taxable rates, so we

put together a very creatively structured tax-exempt bond that

used a variety of mechanisms to draw down the rate to the point

where they could afford the debt service and we amortized it over

40 years.

But had they not been able to get the tax-exempt rates, the

project simply would not have gone through. They would not have

been able to purchase the land. This is part of why the tax statute

is so deleterious to Indian country, and this is part of why you have

$50 billion in unmet capital needs.

In fact, you have several million dollars in tax receipts that the

Federal Government could be collecting, but does not, because if

you remember the statute, the models that I put together actually

showed that this would have a positive impact on Federal revenues, or at a minimum, be revenue neutral, because in Indian

country, as Mr. Etcitty has pointed out, unemployment in some

areas runs 50 percent in some tribes. I think there is even a tribe

in Oregon that has an unemployment rate of 82 percent.

So in those cases, if the tribe were able to do a bond that would

generate jobs, all of a sudden you would be getting Indian tribal

members off of unemployment into wage-paying jobs, and they

would then be paying taxes.

So the recent tax revenues from the workers, in these projects

that would not get done if they could not get tax-exempt rates,

would be revenue-enhancing and would more than offset any subsidy of taxes on bonds that are paid to the bond holders.

So even though the Federal Government may be getting less in

revenue from taxes on the interest payments to the bond holders,

that would be more than made up for just in taxes on wages alone.

Unfortunately, my model is a little incomplete because I started

building it on Friday. But basically you have the situation where

the taxes on the wages alone are more than enough to compensate

for any loss in tax revenue in terms of tax on the bonds. But you

also eliminate the need for some of the welfare transfer payments,

because you are elevating the economic prospects of Indian country

by allowing tribes to become self-sustaining economic engines.

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So, if I could leave you with three main points. You have $50 billion in unmet capital need that is a direct result of the defective

tax statute. The essential governmental function test only applies

to the tribes, it does not apply to State and local governments, and

is, therefore, highly discriminatory. Finally, if you were to amend

the statute, amend section 7871 so as to treat tribes just like

States, you would actually increase Federal revenues. I have one

model that says it is by $77 million a year.

Senator SMITH. That is not through income taxes or FICA taxes?

Dr. CLARKSON. Just from taxes alone on the wages paid to workers in these projects. If you look on page 6 of my written testimony,

and I have a chart here I can pull up in a second, but if you look

at the number of tax-exempt bonds that were issued by non-tribal

governments, in 2002 there were 14,000 bonds, accounting for $355

billion.

In 2003, it was 14,752 bonds, accounting for $378 billion. In 2004, it was 13,306 bonds, accounting for $356 billion. In contrast,

and as a direct result of the defective tax statute, in 2002, Indian

country issued 4 bonds.

In 2003, Indian country issued 6 bonds, which was the one I

worked on. In 2004, Indian country issued 5 bonds. So even though

Indian country makes up at least 1.5 percent of the general population, it accounts for less than one-tenth of 1 percent of the taxexempt bonding activity in the country, and it is a direct result of

the hamstringing of tribal tax-exempt bond authority. You in Congress have the power to fix it very simply by amending section

1871 to treat tribes just like States.

Senator SMITH. Well, we will fix it. I wonder if you had a thought

on this, and I just ask this for my own education. Is there any evidence that the ambiguity in this statute was done because there

was a sense that tribes have other tax advantages that private

businesses do not have, as to consumption taxes and things like

that?

Dr. CLARKSON. No, sir. Actually, I believe the opposite. The intention of the legislation in 1982 was, basically, as you well know,

you do not have an exemption from taxation unless one is specified.

So the intention of the 1982 act was to give tribes the tax-exempt

bonding authority that they did not have. When the Internal Revenue Code was first passed in 1913, automatically it basically carried the provision for State and local governments to have taxexempt bonding authority.

It was a direct Federal subsidy, an intentional Federal subsidy

of local governments to be able to fund infrastructure, to fund economic development. Over time, the notion of a central government

function has expanded.

I know it is an unpopular case, but if I might read to you a paragraph from the recent Supreme Court case, Kelo. Basically, the Supreme Court has opined, ‘‘Promoting economic development is a

traditional and long-accepted governmental function, and there is

no principled way of distinguishing it from the other public purposes the court has recognized.’’

So the Supreme Court has said essential governmental functions,

from a local government standpoint, are extremely expansive.

There should have been no reason why Congress limited tribal auVerDate 11-MAY-2000 16:01 May 29, 2007 Jkt 095484 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 35146.000 SFIN1 PsN: SFIN1
16

thority; when their expressed intention was to give tribes an expanded bonding authority, they fumbled at the goal line. It got hijacked in conference and, unfortunately, tribes have been paying

the price ever since.

Senator SMITH. You have been very helpful, Doctor. Thank you

so much.

[The prepared statement of Dr. Clarkson appears in the appendix.]

Senator SMITH. Mr. Schickli?

STATEMENT OF SCOTT SCHICKLI, ESQ., ORRICK,

HERRINGTON, & SUTCLIFFE, LLP, PORTLAND, OR

Mr. SCHICKLI. Thank you very much, Mr. Chairman, for inviting

me here today.

My name is Scott Schickli. I am a tax attorney who, for 25 years,

has focused on issuance of tax-exempt debt, and, for the last 13

years of those in Portland, OR, I have done a large amount of work

on tribal financing.

As a lawyer, I am going to speak very narrowly and incrementally here. Others have testified to the benefit that changes in the

existing law can bring to development of infrastructure and economic prosperity in Indian country.

I am going to focus on a fairly narrow point and ask your assistance, not in changing the law, but in clarifying the intent on one

particular point relating to essential governmental function. That

alone, without changing the text of the statute, can provide immense benefit to tribes.

Congress has long recognized the importance of public infrastructure, and this recognition has been very evident, as Dr. Clarkson

pointed out, in the Federal tax code since its beginning.

It permits State and local governments to issue tax-exempt debt

for a huge variety of purposes, and in fact, local governments routinely issue tax-exempt bonds to build streets, parking lots, water

and sewer utilities, other utilities, and they do it to benefit their

residents, to attract tourists, and to serve new commercial and industrial enterprises.

Local governments also issue tax-exempt debt to finance convention centers, hotels, auditoriums, parks, golf courses, and other recreational facilities, both to serve their residents, to attract tourists,

and again to generate public revenue.

So, tribes have many of the same needs as State and local governments in promoting economic development, but they are increasingly handicapped by an ambiguous regulatory environment.

As a result, they are increasingly stymied in their ability to undertake the same types of infrastructure, recreational, and economic development projects that local governments provide for

their citizens.

Tribes need your assistance in clarifying that they can use, under

the 1987 act, tax-exempt debt to promote economic development to

the same extent as State and local governments.

Let me take a little detour into history, some of which has already been touched on here, to get to my one and only point. Congress first authorized tribes to issue tax-exempt bonds in 1982 for

17

essential governmental functions, but did not define what an essential governmental function was.

Two years later, in 1984, Treasury issued regulations that defined an essential governmental function for tribal purposes very

broadly. It included, among other things, not only customary activities of State and local governments, but also the many commercial

and industrial activities that were eligible for assistance under two

acts, the Snyder Act and the Indian Self-Determination Act.

In 1987, Congress amended the law to provide, as has been said

before, a negative comment on what an essential governmental

function did not include, which is that it did not include any function which is not customarily performed by State and local governments.

The 1987 amendment, again, did not affirmatively define what

an essential governmental function was, it simply excluded certain

undefined activities from the list.

Many believe, including myself, that Congressional intent, then,

was simply to limit the financeable activities of tribes to the customary essential governmental functions of State and local governments. Others, though, have pointed to the fact that the legislative

history of the 1987 act—and this is the only point that I really

want to address here—is the only available guidance as to what

Congress’s intent was.

That legislative history does not speak with one voice. The most

authoritative part of the legislative history, the conference report,

simply repeats the language of the 1987 act itself. It states the intent of Congress was—and it states it exclusively in the negative—

to identify certain things that Congress did not intend to be an essential governmental function.

But the conference report, the most authoritative part of the legislative history, conflicts with and does not adopt significant portions of the original House report. The original House report declared that the Treasury regulations were invalid, to the extent

that they permitted taxes and financing by tribes of commercial

and industrial facilities.

It may be the only time in history in which Congress has told

the IRS and Treasury that they were being too liberal in their approach to taxation, but it did happen in the 1987 House report.

Because the conference report did not repeat the more restrictive

language of the House report, it appears that the House report

does not reflect the true intent of Congress.

This conflict in views as to what Congress intended has reached

the point where it is paralyzing the ability of tribes to access taxexempt financing for economic development and infrastructure development, which was the very benefit that was intended to be extended to tribes in 1982.

Senator SMITH. Do you know of some projects that would go forward if we could fix this, I mean, as a tax attorney in Portland?

Mr. SCHICKLI. Yes, I do.

Senator SMITH. Good. We will fix it.

Mr. SCHICKLI. The ambiguity is, as everyone today here has mentioned, sewer facilities, water facilities, roads, parking lots are routinely developed by cities to bring shoppers to a shopping district,

to provide sewer and water services to large industrial facilities.

18

The situation in Indian country is that tribes develop their infrastructure for the same reasons as local governments do. But unlike

States and local governments, tribes themselves undertake much of

the economic development in their territory rather than relying on

private enterprise.

We do not believe that Congress intended to treat tribal infrastructure in any different fashion than State and local infrastructure, simply because it served the interests of tribal, rather than

private, enterprise.

I am not talking here about changing the law to authorize taxes

and financing for explicit tribal business enterprises, although

there are certainly strong arguments in support of that.

I am talking about simply not disqualifying tribes, clarifying that

Congress did not intend to prohibit a tribe from using tax-exempt

financing to finance a sewer system because its largest customer,

in addition to individual residences and the like, is a large tribal

commercial facility.

We see no evidence in the conference report that Congress intended to prevent tribes from using tax-exempt debt to finance any

facilities that State and local governments customarily finance, regardless of whether those facilities are operated on a profitable

basis.

So as a result, without changing the law, simply by reenacting

the provision as stated but stating clearly what you intend that

provision to cover, you can assist tribes in dealing with the situation in which Indian country lags significantly in every measure of

infrastructure and economic development.

Mere clarification of the 1987 Congressional intent, with respect

to this one important provision, can have a truly significant effect

on the ability of tribes, large and small, to be able to borrow for

roads and other activities and functions that promote economic development in Indian country.

Senator SMITH. Let me ask you the question I was getting at

with Dr. Clarkson. Are there any tax advantages that tribes have

that local and city governments do not have? For instance, they do

not pay property taxes.

Mr. SCHICKLI. They do not pay property taxes. They are exempt

from general income taxes. Like city and State governments, they

do pay FICA taxes on wages earned by employees. I cannot think

of a tax advantage that they have that State and local governments

do not have.

Senator SMITH. But they have their own property tax. Perhaps

some do, I do not know. But I am just trying to weigh the equities

here. I am just trying to think, is there another side?

My mother always taught me that the best way to ruin a good

story is to hear the other side. I do not know the other side of this,

but from what I understand, there is no good reason why this ambiguity exists.

Mr. SCHICKLI. Thank you, Senator. Again, my focus was very

narrow, just on clarifying what the original intent was.

Senator SMITH. We can do that.

[The prepared statement of Mr. Schickli appears in the appendix.]

Senator SMITH. Mr. Shammel, a Montanan-Oregonian.

19

Mr. SHAMMEL. Cow Creek country now, sir.

Senator SMITH. Yes. I am claiming you.

STATEMENT OF WAYNE A. SHAMMEL, ESQ., GENERAL COUNSEL, COW CREEK BAND OF UMPQUA TRIBE OF INDIANS,

ROSEBURG, OR

Mr. SHAMMEL. Thank you very much, Chairman Smith, for calling us here today.

I am most interested in following up in creating the record that

you would like to do. I would, first, like to recognize Michael Rondeau, who is our chief operating officer from the Tribe. Thank you

for coming here with me, Mike.

Dr. Clarkson made a comment about his ‘‘reserved self,’’ and I

promise not to do that. I am not sure that I have much of one.

I would like to step away from my prepared comments for a second and respond to a comment about the IRS feeling like it is hamstrung from the Tax Status Act. I do not buy it, quite honestly. I

think there is a large institutional bias built in on some historical

assumptions about how this country has developed in relation to

Indian country that have followed through in the implementation

of their administrative procedures.

Senator SMITH. That is why I keep asking the question: is there

something else that they are given that I am not aware of?

Mr. SHAMMEL. Yes. It is our whole history.

Senator SMITH. All right.

Mr. SHAMMEL. I mean, the wealth of our country was originally

founded on stealing lands from the Indians and selling it in a great

retail market. There is now a resurgence in this country, given the

recent commercial successes of certain tribes. There is this underlying fear that the tribes are going to take back over. I have to tell

you, I find that absolutely, stunningly ridiculous.

Senator SMITH. No, you want customers.

Mr. SHAMMEL. That, and the fact that we are great Americans.

There is an oft-quoted fact about, more American Indians are fighting and dying for the flag since the Revolutionary War till now. We

take great pride in that. It is very offensive to find out that you

are afraid that we are going to take back our country. So, I will

point that out.

One thing, sir, I am not sure you might even be aware of: we

have always found that we are comfortable with, or accepting of,

the fact that the Congress has plenary power over the tribes. We

did not realize that the Treasury Department was going to take

that upon themselves also.

Every year, the Congress publishes a list of the Federally recognized tribes, and we know that that confirms our inter-governmental status with the Federal Government on an annual basis.

However, if you are an Indian tribe, as distinct from a State or

municipality, you have to get a special ruling from the IRS in order

to just qualify for the tax-exempt bonding that our other distinguished panelists are pointing out.

So, despite the word of Congress that we exist as tribes and as

bodies underneath the Federal Government, underneath the Tax

Act to access this mechanism, we still need the blessing from the

20

Treasury Department. I have always found that astounding. I

would think, when Congress spoke, that was enough.

Senator SMITH. Well, we are always fighting with the executive

branch. [Laughter.]

Mr. SHAMMEL. One of the themes that I wanted to touch on was

not just the benefits to Indian country on the issuance of taxexempt debt, but also to our local communities. One of the things,

from Navajo country to Cow Creek, that you are going to find with

tribal economic development, is these are community development

initiatives.

We do not tend to distinguish who receives our services on the

basis of their tribal membership or not. You want to drive on the

road, you do not need a membership card.

Do you want to drink water from the water treatment system?

You do not need a membership card. You want to be a patron? You

do not need a membership card. However, if you happen to be the

tribal government, you have to jump through these different hoops

to issue the debt.

Senator Smith, I wanted to thank you, and Senator Baucus, in

his absence, for your particular leadership on Federal tax issues affecting Indian tribes over the past several years.

I very much appreciate your particular effort on the comprehensive effort of our tribal pension benefit plans, and both you and

Senator Baucus have advocated the passage of tax incentives in Indian country over the years to spur investment in Indian country,

such as the accelerated depreciation provisions and the Indian employment tax credit, both of which expired on December 31, 2005,

and, in addition to the initiatives that we are talking about today,

very much need to be extended.

The Cow Creek Tribe is one of nine Federally recognized tribes

in Oregon. We have approximately 1,300 members and about 1,600

employees. We are the second-largest employer in Douglas County,

third if you count the Federal Government.

We have single-handedly contributed to our unemployment rate

dropping from just under 12 percent to just over 8 percent. We are

pretty high in that county, but we figure that 2 or 3 percent is fairly valuable.

What does that have to do with tax-exempt bonding? Everything.

When the tribe was restored in the early 1980s, it was the passage

of the Indian Gaming Regulatory Act and the expansion of capital

into Indian country for gaming that allowed the tribe to move forward on its mission of community development. We have followed

through on that, through diversifying our economy past gaming

and into local infrastructure projects.

We are currently in the middle of a water and sewer development project in the Canyonville area. It is the largest public works

project in Southwestern Oregon in over 30 years. With that, we are

bringing the entire local community along.

But what we are finding, on the margins, because of the costs associated with bringing the capital in to the project, we are having

to turn away the very best edges of what the State and Federal

Governments want to do in cooperation with us.

21

Let me give you an example. Part of our project is to re-do the

freeway interchange at Exit 99, which is where the tribe’s casino

and the Canyonville developments are.

The State said, well, while you are redoing this, we have a problem. We want to close down a couple of rest areas, one to the north,

one to the south, and combine them in one spot. So, we entered

into a joint project with them.

We said, we would like to do that also, because we can then have

people stopping near our area, and we can get your assistance in

an in-kind basis in improving this interchange for the developments that we are doing.

As we moved forward with that project, we gained a lot of momentum with entities like the Oregon Travel Information Council,

and, oh, my goodness, this is a wonderful public/private partnership that we have to move forward our idea of turning our rest

areas into regional tourism kiosk destinations.

We have had to tell them, we love that idea also, it can also help

us, but we have $3 million into this, this is a $50 million project.

The extra $1.5 million that you are looking to find to put full-time

staffers in there, to have people, when they come through our

State, be able to stop and find out about all of the wonderful activities in our area, we simply cannot afford it.

I can directly equate that $1.5 million to what we have had to

do in financing this project in moving segments of our project from

the tax-exempt to the taxable side of the ledger.

For example, in 1998, we were able to issue close to $55 million

in bonds, about $35 million of which were tax-exempt. Now in the

course of refinancing that project, there are several elements that

we have had to take off of the tax-exempt side of the ledger and

move to the taxable side of the ledger, so basically about a 20 percent cost increase.

One example was the convention center that happens to be attached to the Seven Feathers Hotel and Casino resort. In 1998,

when we originally went through the bonding process and constructed this, we went through a lot of hoops to make sure that it

was physically separate, that there were separate accounting structures, a lot of additional costs so that we could qualify for the same

types of tax-exempt debt funding that 90 percent of the convention

centers in this country are based on.

In 2006, just in order to retain a nationally qualified bond counsel, we had to give up that portion of that tax-exemption. This

year, in reissuing those bonds, all of that debt that we were able

to get through in 1998 as tax-exempt was recategorized as taxable

simply to get the bond opinion.

In order to issue these, you need to get a nationally recognized

bond counsel. We actually had to go through quite a journey to find

a bond counsel that was willing to sign off. Why? Because of the

chilling effect imposed by the IRS simply by making statements

about how, well, if it is attached to a commercial enterprise, we

might audit it. What does that do? It makes bond attorneys nervous. It chases investors away.

Just yesterday evening as we were sitting here after dinner, I got

a call from one of my underwriters saying, hey, we are having a

22

problem with this particular investor. They do not understand the

difference between a qualified and unqualified opinion.

Your tax counsel is going to give us a bond opinion that says the

IRS has looked at these issues, basically the very reason for our

hearing, and they were inserting a paragraph. Why? Because they

do not want to be held accountable for this uncertainty.

So now we have an investor who is willing to put about $20 million into these projects that has all these non-tribal benefits and

attributes too that is saying, is that a qualified opinion? I have a

nationally recognized counsel saying, we are not sure what it is, we

are just trying to describe what the IRS is doing.

So in tangible effects, the costs on what is about a $100 million

transaction in 2006 have gone up half a million dollars or more in

excess of what they would have been, and we are paying 20 percent

more for the money.

The result is, the project has contracted, and of course our priorities have to focus back on the tribal community, first and foremost. What it has done is pulled back on our ability to serve those

outward interests that we are trying to serve as well.

Another example would be Senator Wyden, some months ago

when he was visiting us, mentioned the work that you were all

doing in Oregon in trying to push forward on biomass initiatives.

So the Cow Creek Tribe has spent upwards of $75,000 already

doing fuel supply studies, engineering studies, figuring out how we

can link the work that we are doing to the initiatives that you all

are trying to push to get our forest products industry on a more

diversified industrial basis.

We were sitting through, working through the legal and financial

analysis, and realized, if we were the State of Oregon, we would

be able to work with private industry, go out there, and for the taxexempt costs, be able to start putting together these plans and put

it into work.

But unfortunately, because of the restrictions that have been described by our panel, we can only do that on a conduit basis and

we simply cannot get bond counsel to sign off on it because, as has

been noted, 100 percent of those deals have been challenged.

So here we are, being incented and asked to assist on initiatives

that are coming from your offices, and we are stuck because of

what the Treasury Department has done. Really, I think it is not

much more than an ambiguity, driven by the desires of some to categorize our activities on a more commercial than governmental

basis.

I looked back over the last 75 years of development of Federal

Indian policy and the wonderfully enlightened things that have

happened, from the Indian Reorganization Act, to the Self-Determination Act in the 1970s, and then the things we thought were

great boons, like the Tribal Governmental Tax Act that we have

been discussing, and realized that there is a distinction being created about tribes.

There is a bias being created about tribes, that because we are

so small, we have been dispossessed from much of the ground, the

assumption has been about our disappearance and that we would

eventually sort of melt in and go away.

23

There are many people, some of your colleagues, some of your

colleagues in the House, who still believe that as an underlying

principle. That is my personal opinion, sir. I believe that is what

is driving some of this.

There is a conscious, a willful disregard of the ability of the

tribes to segment their activities on the governmental and commercial side, whereas, we have a full set of Federal laws that recognized just that.

Under the Reorganization Act, we can form constitutional governments and we can issue Federal charters, but somehow that is

looked at differently than a State operating as the State government, versus the State operating as an industrial development authority.

[The prepared statement of Mr. Shammel appears in the appendix.]

Senator SMITH. Wayne, recently I was driving from Portland to

Pendleton. I turned on the radio and there was a call-in talk show.

It may be the projects you are describing, but the Cow Creeks were

the issue, and you were buying some land in the county, and people

were complaining that the purchase takes the land off the tax rolls.

Is that what you are talking about?

Mr. SHAMMEL. We face a lot of that. We faced it for the first time

in Cow Creek’s history and since their restoration here recently

with one of our county commissioners. Frankly, I think it had more

to do with the election than the actual policy underriding it.

We commissioned a study—and I am getting to your point, sir—

to analyze the net economic impacts in Douglas County of the

tribe’s business and land acquisition activities, and it is attached

to my testimony, too, sir.

The answer was, in 2004, the net economic impact of the Cow Creek Tribe was $107.1 million.

Senator SMITH. So, it was positive?

Mr. SHAMMEL. The additional. That was taking out of the equation jobs that would otherwise exist, money that would otherwise

be spent. When you look at the land in the county, we were less

than 2 percent of the exempt property in the county, so behind veterans’ exemptions, behind armed forces exemptions.

So my personal opinion is, this is just simply a matter of control.

There are some people out there, that particular commissioner, perhaps some in the Treasury—I do not know; I cannot speak for

them; they have all been fine people that I have dealt with, so

please do not audit me—who would rather force us to pay them

$1,000 to distribute to someone else rather than watch us voluntarily give $2,000 to it.

That is the net effect that we are facing with these restrictions

in the tax code. The things that we could do for our own folks, the

things we can do for the outside communities, are being disincented for purposes that we frankly do not understand either.

I believe that it is a weakening argument for us to point back

at racism as the issue, but it is bias of some sort, because I cannot

sort it out otherwise.

Senator SMITH. It is obviously not very productive to use that

word, but I do want to get this fixed, and we will pursue it vigorously.

24

Will you do me a favor, Wayne?

Mr. SHAMMEL. Yes, sir.

Senator SMITH. Will you give Sue a big hug for me?

Mr. SHAMMEL. I will.

Senator SMITH. Tell her it is from me.

Mr. SHAMMEL. I will, sir.

Senator SMITH. Thank you, gentlemen, and Ms. Scheffler. Thank

you so much for your testimony. You have added immeasurably to

the Senate record. You have certainly shined the light on what we

need to do, and we will set about doing it. Thank you for coming

such a long way.

Doctor, do you have a final comment?

Dr. CLARKSON. Yes. There is a story I meant to mention earlier

about how backwards this is. There was a tribe in Oklahoma that

was repurchasing some ancestral homeland as well. They are in

farming country there in central Oklahoma, and there was a full

crop of corn on the land.

They wanted to buy the land, and they could have actually harvested the corn to pay for the debt service, but their tax counsel

told them, if you harvest the corn, you will jeopardize the taxexempt status of the bonds you are about to issue to buy the land.

So at the end of the day, the tribe repurchased the land with a

tax-exempt bond, but to avoid having the IRS challenge it based on

the essential governmental function, they had to let the corn rot.

Basically, that sort of rotting impact, that sort of depressing impact, that deleterious impact is pervasive throughout Indian country. Indian country is a victim of this tax code.

I am not giving the IRS a pass. I do think that they recognize

that there are problems in the statute. It goes beyond just expanding what essential governmental functions are. It also includes expanding and giving tribes the ability to issue meaningful private

activity bonds.

For example, a very important issue. A lot of governments issue

private activity bonds to finance mortgage loans for low-income

housing. That is something that is clearly an essential government

function. Tribes cannot do it. There are all sorts of private activity

bonds that are financed for economic opportunity, whether it is

building hotels, whether it is building resorts.

Post-Katrina New Orleans is wholly dependent on a resurgence

in tourism to bring back its economic vitality. Guess what? They

are going to be issuing tax-exempt bonds, they are going to be

issuing private activity bonds, and everybody thinks it is a great

idea.

Indian country has tourism opportunities, but they are denied

the ability to issue bonds to fully take advantage of the natural

beauty that is throughout Indian country because the tax code restricts them.

You were asking me, and I did not give you a good answer right

at the beginning, about the differentials in terms of any sort of tax

advantages. Indian tribes really do not have any tax advantages

over State and local governments. In fact, they are worse off.

There are instances where tribes that generate economic activity

on a reservation can charge sales taxes, but it turns out that if the

purchasers are not Indian, the State can impose additional taxes

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on the non-Indian purchases on the reservation, but the converse

is not true. The tribe cannot tax transactions that happen off the

reservation.

For example, New Hampshire routinely advertises its lack of

sales tax as an enticement. When I was living in Cambridge, it was

sometimes worth the drive up to New Hampshire to purchase a

large-ticket item because you were not paying sales tax. They do

that as a mechanism for economic opportunity, but that opportunity is denied tribes.

Senator SMITH. We do that in Oregon, too.

Dr. CLARKSON. And in terms of taking land off tax rolls, any time

a State or local government purchases land, it goes off the property

tax rolls. A lot of people were complaining that Indians do not pay

taxes on their gaming revenues, but I am unaware of any State

that pays taxes on its lottery proceeds.

So, just as State and local governments do not pay tax on their

commercial or quasi-commercial activities, tribes do not either, so

they are on par with that. But on the flip side, the State actually

has an advantage.

When I was on the faculty at Rice University in Houston, the

Sam Houston Race Park went up. A horse racing track went up,

financed with tax-exempt bonds. So the State can be in the gaming

business and use tax-exempt bonds to finance it.

So if you take the most egregious examples of what people might

find problematic, the States are doing it. But we can pull back and

look at much more benign things, like hotels, convention centers,

golf resorts, or even hospitals.

The other problem, in addition, is the notion of conduit financing.

There are some opinions coming out of the IRS—and again, I am

not giving them a pass—where they have basically said that the

statute is completely silent in terms of the ability of tribes to use

conduit mechanisms to finance things, and basically the reason the

tribes went to the conduit mechanisms was because of the inequities in the tax code.

Even Merrill Lynch is on record as saying that that is the rationale for conduit financing. We have a private non-profit, a charity,

going to build a hospital. They will go and either do a private activity bond, or it may go through some sort of development authority

and issue a conduit bond.

The IRS said, well, gee, if the tribes cannot do it directly, they

cannot do it indirectly. But as I recall, the entire purpose of conduit

financing is to allow entities to do it indirectly, i.e., issue taxexempt bonds even though they are not governmental entities. The

entire purpose of conduit financing is to allow entities to do indirectly that which they cannot do directly.

But again, because of the ambiguities in the statute, because the

IRS is taking the most extreme interpretation of the statute, tribes,

again, are being punished and hamstrung. So, it is heartwarming

to hear you say you are going to fix it, and if there is anything I

can do to help, whether providing data or writing testimony, please

let me know how I can help.

Senator SMITH. I would love to get your article, but I hope we

fix it before I get the article. [Laughter.] Yes?

26

Mr. SHAMMEL. Senator Smith, one last comment that we have

not addressed here yet at the table. You asked what tools might

be helpful.

The one other impediment that the tribes have that we have not

discussed yet is lack of an exemption from registration under the

securities laws that is shared by the State and local governments

now. As a result of the lack of this exemption, we are forced into

a higher yield, what they usually call a 144(a) Qualified Investor

Market.

The net effect is, our debt is always a quarter of a percentage

point higher, even when we can break through these other hurdles

and issue tax-exempt debt. So you first have the hurdles to get

through that we have talked about today, and then when you get

that, then we have an even more expensive marketplace because

we do not share that exemption with the State and local governments.

Dr. CLARKSON. To echo Mr. Shammel’s point, my preliminary research on that issue—which is a separate article that takes on the

capital markets—indicates that the price premium that tribes pay

is anywhere between 75 basis points to 250 basis points. So there

again, you have a situation——

Senator SMITH. Surely for regulatory reasons and statutory reasons.

Dr. CLARKSON. Again, this is one of those instances where you

do not get an exemption unless one is specified. Unfortunately, in

1933 and 1934 when Congress was redoing the Securities Act, even

though they were at the same time passing the Indian Reorganization Act, I guess it never occurred to any of the Senators then that

tribes might be issuers of capital market debt.

Even though they put in exemptions for registration from municipal debt, adding two words ‘‘and tribes’’ would have solved the

problem. But again, this is an instance where tribes, when they go

to the capital markets, are at an extreme disadvantage to their

State and local counterparts.

Now, this does not have anything to do with the tax code, but

it has everything to do with the lack of a securities registration exemption for tribes and it is, again, an instance where, if you have

a municipality or a tribe doing the exact same thing, the tribe is

going to pay more for no other reason than that they are a bunch

of Indians, and that is just wrong.

Senator SMITH. Yes. On that note, we will thank you again, and

we are adjourned.

[Whereupon, at 4 p.m., the hearing was concluded.]

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A P P E N D I X

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