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58–160—PDF 2008

S. HRG. 110–1075

INDIAN GOVERNMENTS AND THE TAX CODE:

MAXIMIZING TAX INCENTIVES

FOR ECONOMIC DEVELOPMENT

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JULY 22, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(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

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

WITNESSES

Desiderio, Dante, certified financial planner and economic development policy

specialist, National Congress of American Indians, Washington, DC ............. 3

Laverdure, Donald (Del), chief legal counsel, Crow Nation Executive Branch,

Crow Agency, MT ................................................................................................. 5

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

of Indians, Roseburg, OR ..................................................................................... 7

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Cantwell, Hon. Maria:

Prepared statement .......................................................................................... 19

Desiderio, Dante:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 21

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

Laverdure, Donald (Del):

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 31

Shammel, Wayne A.:

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

Prepared statement .......................................................................................... 48

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 56

COMMUNICATIONS

Association on American Indian Affairs ................................................................ 59

Council of Energy Resource Tribes ........................................................................ 62

Flandreau Santee Sioux Tribe ................................................................................ 64

Jensen, Erik M. ........................................................................................................ 66

Lummi Indian Business Council ............................................................................ 73

National American Indian Housing Council ......................................................... 81

Native American Resource Partners, LLC ............................................................ 91

Southern Ute Indian Tribe ..................................................................................... 94

Ute Tribe of the Uintah and Ouray Reservation .................................................. 98

(III)

(1)

INDIAN GOVERNMENTS AND THE TAX CODE:

MAXIMIZING TAX INCENTIVES

FOR ECONOMIC DEVELOPMENT

TUESDAY, JULY 22, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:06 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Grassley and Smith.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Cathy Koch, Senior Advisor, Tax and Economics; Tiffany Smith, Tax Counsel; Pat Bousliman, Natural Resource Advisor; Richard Litsey, Counsel and Senior Advisor for Indian Affairs; and Susan Hinck, Fellow. Republican Staff: Nick

Wyatt, Tax Staff Assistant; and Ellen McCarthy, Tax Counsel.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The Teton Sioux Lone Man once said, ‘‘I have seen that in any

great undertaking, it is not enough for a man to depend simply

upon himself.’’ He was right. In economic policy, as in any great

undertaking, we need to work together. And for American Indians,

that can mean working with family, working with tribes, and working with the United States.

Times are tough in Indian country. Even before the current economic downturn, the Census Bureau reported that a third of American Indians or Alaska Natives who were available for work were

unemployed. The median American Indian household earns

$15,000 less than the median U.S. household, and more than 1 in

4 American Indians and Alaska Natives lives in poverty—more

than 26 percent. That is the highest poverty rate of any American

ethnic category.

Economic development in Indian country requires a great undertaking. We need to work together. Families, tribes, and the Federal

Government each need to play a part. Indian nations often suffer

from high unemployment rates because there are no businesses on

or near the reservation. There is often simply nowhere to go to find

a job.

Indian reservations in our country often suffer from economies

and conditions that one might expect to find in the developing

2

world. Many reservations are in rural areas where transportation,

infrastructure, and communications are minimal at best.

Today, we will hear about three strategies for economic development in Indian country. We will discuss tax-exempt bonds, we will

discuss accelerated depreciation, and we will discuss the Indian

employment tax credit.

These are not going to solve all of our problems, but they will

help. All three of these tax policies affect tribal entities and reservations. Today we will discuss the effect that these tools are having on the economic development of the tribes and reservations,

and we will discuss how we might make them work better.

We will hear from two witnesses who work as legal counsels on

two different reservations. We will hear from a member of the oldest Indian organization in the United States, the National Congress of American Indians.

These days, many tribes are focusing on energy issues. Some

tribes hope that revenues from energy production may give them

the ability to provide needed services for the tribal members.

Tribes are working to find new revenues, even though laws and

treaties often make these services the responsibility of the Federal

Government. All too often, the Federal Government is failing to

provide the services that it is obliged to provide.

My own tribes in Montana tell me that, if they can raise the

needed capital, they can expand energy resource development and

reduce their reliance on the Federal Government. They tell me that

with tax incentives of the sort that we discuss today, they could

provide medical care and housing for their populations.

In this regard, the tribes of Montana are not alone. Energy resources mean that many tribes live on the edge of great potential

wealth. If they can get the needed capital to explore and develop

their opportunities, many tribes hope to tap that wealth, and they

hope to benefit their people.

Many tribes may benefit from the economic development that

tax-exempt bonds, accelerated depreciation, and the Indian Employment Tax Credit can help to provide. Issuing tax-exempt bonds

is a viable way for tribes to raise the needed capital to build muchneeded infrastructure like roads and bridges, and accelerated depreciation and the Indian Employment Tax Credit are mechanisms

that can encourage non-Indian businesses to locate on, or near, reservations.

These tools can help provide much-needed jobs for areas with the

highest unemployment rates, and these tools can also help companies to find lucrative business opportunities in the process.

Today we will examine how tribes are able to utilize these tools

to promote jobs, build infrastructure, and enhance the quality of

life for the first citizens of this country. I suspect that these tools

have not yet provided all the benefit that they might, and, if that

is true, I want to hear why. I want to hear other ideas that you

might all have of how we can help make all this work better.

So let us get to work on the great undertaking of economic development in Indian country. Let us find new ways to work together,

3

* For more information, see also, ‘‘Overview of Federal Tax Provisions Relating to Native

American Tribes and Their Members,’’ Joint Committee on Taxation staff report, July 18, 2008

(JCX–61–08), http://www.jct.gov/publications.html?func=startdown&id=1278.

and let us find ways to improve life for Native American families,

for the tribes, and for the country of which we are all part.*

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Mr. Chairman, thank you for holding this

hearing. Just as with every other part of our society where we hold

hearings on tax incentives, it is important for us to understand the

impact of tax incentives used by Native Americans, particularly

with regards to economic development.

Appropriately, the Internal Revenue Code includes specific incentives to promote investment in Indian country, such as the Indian

Employment Tax Credit, and accelerated depreciation for business

properties placed on reservations.

Of course, as we all know, uncertainty of tax policy has economic

consequences, and there is a certain amount of uncertainty now

that the accelerated depreciation and the Indian Employment Tax

Credit has ended and expired at the end of 2007. Just as with any

tax incentive, certainty of tax treatment for future planning and investment is critical. Allowing these tax incentives to expire dilutes

their effectiveness and further complicates business planning.

This uncertainty in taxation is further exacerbated by an additional layer of taxation by tribal governments. In addition to these

tax incentives, tribal governments may issue tax-exempt bonds for

governmental purposes. This provides tribal governments a valuable option for lower-cost tax-exempt financing. It is important to

look at how these rules operate to meet the needs of tribal governments and, of course, to maximize the use of taxpayer dollars as

a matter of fairness to every taxpayer in America.

So I look forward to this testimony and helping advance any

needed legislation.

The CHAIRMAN. Thank you, Senator.

I would like to introduce the panel. The first witness is Dante

Desiderio. Mr. Desiderio is the economic development policy specialist with the National Congress of American Indians. The second

witness is Del Laverdure. Mr. Laverdure is chief counsel to the

Crow Nation Executive Branch. Then Wayne Shammel. Mr.

Shammel is with the Cow Creek Band of Umpqua Tribe of Indians.

Thank you all for coming. As is our regular practice, your statements will be included in the record, and we ask each of you to

speak about 5 minutes.

Mr. Desiderio?

STATEMENT OF DANTE DESIDERIO, CERTIFIED FINANCIAL

PLANNER AND ECONOMIC DEVELOPMENT POLICY SPECIALIST, NATIONAL CONGRESS OF AMERICAN INDIANS,

WASHINGTON, DC

Mr. DESIDERIO. Thank you, Senators.

The National Congress of American Indians is the intergovernmental body for American Indian and Alaska Native tribal governVerDate 11-MAY-2000 14:16 Sep 17, 2010 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 58160.000 TIMD PsN: TIMD
4

ments. For over 60 years, tribal governments have come together

as a representative Congress through NCAI to deliberate issues of

critical importance to tribal governments. We have been invited

here today to talk about the ability of tribes to access capital and

attract businesses to reservations using existing incentives. We can

assure this committee that both of these issues are critically important to tribal governments.

There are a few high-profile examples of tribes around the country that have prospered economically, leading to a perception that

all but a few tribes are wealthy and successful. This perception

could not be further from reality. There are hundreds of tribes that

remain nearly invisible and are struggling to preserve their reservations, their culture, and their sovereignty. Real per capita income of Indians living on reservations is still less than half the national average; unemployment is still double what it is for the rest

of the country; and a full 8 of the 10 poorest counties in the United

States are home to Indian tribes.

Many tribal governments lack the ability to provide basic infrastructure most U.S. citizens take for granted, such as passable

roadways, affordable housing, plumbing, electricity, and telephone

service. It is difficult to believe that in America, where 97 percent

of the households have a phone, there are reservations unable to

provide basic telephone service to half of their citizens.

These sub-standard economic and quality of life indicators have

a social toll as well. Health disparities are prevalent, and suicide

rates, a symptom of lack of opportunity, are high, with over 60 percent more incidents than the average in America. Alcoholism on

reservations and diseases like tuberculosis are both over 500 percent higher for Indians.

The need for economic development for tribal governments is

heightened not just because of the need to address these entrenched conditions, but because tribal governments lack an adequate tax base to provide basic citizen services.

Tribes cannot impose property taxes on trust land, sales taxes

are regressive and require a viable underlying economy, and a secondary income tax on a low-wage population will simply not create

a sustainable government revenue base.

State and local governments have the ability to fully utilize

lower-cost tax-exempt financing for a broad range of general government activities, including providing roads, water, parking, as

well as golf courses, marinas, and convention centers. However, the

current law limits tribal access to the same financing because of an

essential government function test that has been interpreted and

defined differently over the years.

Currently, the IRS, through its strict interpretation, and its approval and audit practices, has had a stifling effect on the tribal

tax-exempt market, with fewer than five tribal issues, on average,

being placed a year. Tribes need to use this government tool in the

same manner as other governments to build an economic base,

fund community nonprofits, and build infrastructure.

Without an economic base, it is difficult to understand how tribes

will have the means to repay any debt. As the 2004 Advisory Committee on Tax-Exempt and Government Entities Report concluded,

the unclear definition of essential government function leaves tribVerDate 11-MAY-2000 14:16 Sep 17, 2010 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 58160.000 TIMD PsN: TIMD
5

al governments with the impossible task of providing government

services to their citizens and visitors, without any real ability to

utilize tax-exempt financing, one of the biggest financial tools of

nearly every other State and local government.

The second critical issue for tribes is the ability to make full use

of the business incentives authorized by Congress in 1993. The

business incentives include accelerated depreciation for businesses

locating on reservations and a wage and health credit when they

hire from the local Indian workforce.

Accelerated depreciation and tax credits have proven to be successful in influencing capital spending, but because these incentives have been renewed on a year-to-year basis and at times been

left to expire, they have been under-utilized by both businesses and

tribes. The uncertainty associated with their availability sends a

mixed message to businesses, especially for partnerships that can

make the biggest difference in elevating a tribal economy, like natural resource development projects that take years to develop and

build.

Uncertainty and risk are two formidable road blocks to raising

capital and attracting capital. Congress can level the playing field

for tribes by clarifying the use of a tax-exempt financing tool commonly used by other governments, and Congress can give tribes the

opportunity to partner and succeed in developing an economic base

by extending the business incentives for a meaningful period.

As governments with tremendous responsibilities and challenges,

tribes should be able to fully utilize existing financing tools, build

their infrastructure, develop their economy, and ultimately improve

the quality of life for their citizens just as other governments.

Thank you.

The CHAIRMAN. Thank you very much, Mr. Desiderio.

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

The CHAIRMAN. Mr. Laverdure?

STATEMENT OF DONALD (DEL) LAVERDURE, CHIEF LEGAL

COUNSEL, CROW NATION EXECUTIVE BRANCH, CROW AGENCY, MT

Mr. LAVERDURE. Good morning. I want to thank Chairman Baucus and the members of the Senate Finance Committee for holding

this important hearing on Indian tax issues.

My name is Donald Laverdure, and I currently serve as chief

legal counsel for the Crow Nation Executive Branch. Prior to this

time, I was assistant professor of law and founding director at

Michigan State University College of Law. I spent 2 years previous

to that working on an LLM on Indian tax issues. So with that

background in mind, my entire legal career has been focused on

this subject, and I appreciate the opportunity to address this.

The American people generally believe Indians do not pay taxes

or their fair share, that Indian nations sometimes are not legitimate governments, and that all Indians are wealthy by virtue of

tribal gaming. The fact is, that is perception and not fact. Indian

nations, such as the Crow Nation, have 50-percent unemployment,

we have an average age of 22, and per capita income is $6,000 per

year for a family of four.

6

Moreover, we do not have a developed local economy, where we

spend roughly $122 million immediately off the reservation and

contribute to the other pieces of Montana’s economy. What we

would like is to have our own economy and to have small business

opportunities and all the aforementioned, based on energy development by the Crow Nation.

The history of taxation in Indian country is long and tortured,

and I will not go into all the details that I have provided in my

written testimony. But despite the poverty, Indian wealth is potentially subject to four or five concurrent government taxes: Federal,

tribal, State, county, and city, an unjust structure that I call Indian

tax law.

Today we are considering three pieces of what I would characterize as modest Federal legislation to create the certainty and predictability for economic development in Indian country, and with

the Crow economy in particular.

Our master energy plan includes, in the testimony that I have

provided, a world-class coal-to-liquids project. We would like to be

America’s partner. We would like to reduce America’s dependence

on foreign oil. The bottom line is, we need help. I believe that this

Senate Finance Committee, and Congress in particular, by leveling

the playing field for Indian country with respect to tax policy, can

do this in order for the Crow Nation and other Indian nations to

be truly independent and have meaningful self-determination,

where Indians make decisions for themselves.

In contrast to other governments, Indian tax law has created a

schism, the unjust structure I talked about. I think Alexander

Hamilton wrote it, appropriately, back in Federalist Paper No. 12:

‘‘A nation cannot long exist without revenue and, destitute of this

essential support, it must resign its independence.’’

With Federal tax authority firmly established in the expansion

of State and local taxes, to tax almost all wealth activities in Indian country along with a U.S. Supreme Court that is very hostile

to Indian country and continuously diminishes tribal tax authority,

many Indian nations, including the Crow Nation, have been rendered powerless and dependent within their own homeland.

That being said, I strongly recommend that this committee carefully consider, and I hope permanently extend, the existing and

proposed Federal Indian tax legislation. I believe that the subject

matter before this committee represents legislation that creates

some incentives for doing business in Indian country. As a lead negotiator in various energy projects, oftentimes tribal governments,

because of the existing tax structure, have to negotiate their tax

authority or rates down in order to attract energy development.

What we would like from this Finance Committee is partnership

and leadership to clear the field of all these concurrent taxes and

create the level playing field that is necessary for development in

Indian country.

With the coal-to-liquids project that we have, we think that we

can be America’s partner and that, working together with the Congress when they clear the field, and also with the local governments and States, that we can have source-based taxation in Indian country.

7

But the problem is, development takes time, and companies are

just beginning to realize the benefits. We have partners now ready

and willing, and these existing pieces of legislation would, in the

internal, overall project economics, be meaningful and tip towards

the world-class development we would like to see.

We think that the internal rate of return for these for their investments will tip this towards the coal-to-liquids project that we

would like to see accomplished and come to fruition, and we hope

to close very soon. We hope that your leadership will make that

possible by passing the legislation before us.

Thank you.

The CHAIRMAN. Thank you, Mr. Laverdure.

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

The CHAIRMAN. Mr. Shammel?

STATEMENT OF WAYNE A. SHAMMEL, GENERAL COUNSEL,

COW CREEK BAND OF UMPQUA TRIBE OF INDIANS, ROSEBURG, OR

Mr. SHAMMEL. Good morning. Thank you, Chairman Baucus,

Senator Grassley, Senator Smith.

I am Wayne Shammel. I am here on behalf of the Cow Creek

Band of Umpqua Tribe of Indians out of southwest Oregon. Chairman Shaffer sends her greetings. Also, although I am not here to

speak on behalf of the Flathead Tribe, I had a chance to talk with

Chairman Steele, and he said, ‘‘Make sure to tell Max hello.’’ So,

good morning.

I was born and raised on the Flathead reservation with a family

that was involved in BIA, Indian politics, and non-Indian business

there, and took that background and decided that I wanted to be

involved with a progressive movement in Indian country to try to

change the framework from the traditional idea of conflict—Indian

law being about the boundaries between nations—and try to turn

it into a more balanced approach where we are working together

as partners, because I think that is a great tradition in America

that gets lost a lot in the discussion about Indian country—the fact

that the communities that have succeeded as well as any are those

that have integrated well and worked with the reservations and

tribal communities as opposed to necessarily being in conflict.

To do that, going through college and law school, I decided to

focus on business and finance, realizing that the business of America is business. I came to find out that so much of the Indian law

has been defensive and litigious, that there was very little route to

achieve some of these lofty economic goals. One of the best ones is

capital finance, so that is where we are focused, working through

large law firms into Indian country and into a general counsel position, putting that into practice, beginning with turning gaming revenues into economic diversification.

What we have done at the Cow Creek Tribe is take those gaming

revenues, use tribal tax-exempt bond financing and other debt instruments, and roll about $40 million worth of revenue into about

$300 million worth of local benefit.

The point I would like to make is, because of the restrictions on

tribes and the difference between tribal ability to issue that type

8

of debt versus non-tribal entities, that number should be closer to

$400 million in our county. Our tribe wants to work in partnership

with the local community, using the abilities that we have under

the law as a government. What we found was, even with one hand

tied behind our back in terms of our ability to issue debt, we have

now become the second-largest employer in the county. We contribute over $107 million a year annually in net economic benefit.

The biggest portion of that comes not because of the Indian gaming revenue, it comes because we have been able to diversify, with

nine separate, different entities. We have formed our own utility,

we have recently tried to expand our utility from wheeling the

northwest power down into our region to expanding again to solar

projects and so forth, and have found that because of the disparity

in the treatment between tribes under the tax code and other governmental entities, most of the investors will shy away.

I will give you a tangible example of this. In 1996, the tribe

issued its first set of tax-exempt bonds, along with a set of taxable

debt, to finance housing, land acquisition, some resort construction,

and a convention center. At that point it was fairly clear, because

communities, municipalities, and States throughout the country

had issued the package of debt for the convention center and hotels, that tribes should be able to do this also.

By 2006, that had changed. We went back to the market to refinance all of our debt and found that we could not even get bond

opinions, had to shop for almost a year. Our costs were increased

at least 3-fold above other issuers. Yet, going through all those

hoops, taking that risk, we were one of the lucky groups to get

through. As Dante had pointed out earlier, there are four or five

a year that happen.

Because of these disparities between the way that tribal and

non-tribal debt issuers are treated, it has created a structural instability in the market so that basically Wall Street is trying to

take more money out of the reservations because the government

is telling it it is all right. They can charge us more money because

the laws say that the tribes, yes, they are treated as governments

and we want that tax-exempt debt—we all find that an attractive

investment—but we can also price you like you are in the highyield market. So the market is getting its cake and eating it too,

and the tribes are barely getting through the door in getting most

of their debt projects done.

In my belief, the local communities are suffering. I think, particularly given the state of the economy now, that tribes should be

viewed as anchors for what are generally rural and poor communities, that we have the ability, because of our commitment to our

locality, to use our governmental status to help not just our own

agenda, but everyone around us. We are not going anywhere.

One of the myths of the great fights between Indians and nonIndians is that it continues to go on, but I am here to tell you, although I cannot pretend to speak for all Indian people, tribes are

not separatists. We are loyal Americans. We are here to be part of

the country. The vast majority of us, although we might not be

pleased with the term, are still satisfied to be part of this Nation

and be domestic dependent nations, as Chief Justice John Marshall

put it in the 1830s. Nonetheless, our independence underneath the

9

law is a sham unless we can be treated at least as equal with the

States.

In 2006, when we went to issue tax-exempt debt again, we actually took the convention center out of the deal and refinanced that

with taxable debt. That cost us more. That had simply to do with

the fact that the IRS had been working since the passage of the

Indian Tax Status Act of 1982 to tighten and restrict the rules in

a strange way.

Any time that it was available for States or municipalities to expand their ability to issue debt under the existing rules, there had

been fairly favorable treatment under the idea and guise of economic development and wanting to support a governmental push

for economic development. However, in Indian country it was interpreted in exactly the opposite way. I believe Mr. Desiderio and Mr.

Laverdure touched on that sufficiently for our oral commentary.

Suffice it to say that, since that time, all of the tribes then were

treated by the market as, first, commercial entities. Then they recognized our status as governmental entities for issuance of debt.

Now it has gone back again, and we are treated as commercial entities. This happened specifically in the rating area, where tribes

were able, 10 years ago, to go in and only be rated for Wall Street

transactions by buying debt insurance from one of the national

guarantee agencies.

Two years ago, that changed. Through the efforts of all these

people sitting around here, pushing for years to try to get us equal

access, the tribes were finally treated by the rating agencies as governments. A year ago, it rolled back, so now, again, we are here

in this limbo. I believe that limbo is created because of the legal

disparity that we are talking about here. And why should the market not go after what it sees as the ability to grab more profit out

of something that is being structurally created by Congress?

The CHAIRMAN. I am going to have to ask you to kind of wrap

up, Mr. Shammel, if you could, with your testimony.

Mr. SHAMMEL. That will do it for me then, sir.

The CHAIRMAN. Thank you very much. Thank you.

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

The CHAIRMAN. Mr. Laverdure, what does this all come down to?

You are saying that the tax treatment of tribes is just different

from the tax treatment of other entities, non-tribal entities. What

is it? I mean, is it excessive tax? Is it inconsistent interpretation?

Is it failure or loss of the permanence? Is it changed too often?

What is it? What does this really come down to?

Mr. LAVERDURE. Thank you, Senator Baucus. I think you have

actually summed it up very well. One is the length of time. Yearto-year extensions do not work. You cannot put those in economic

models and rely on them for financing. It just kills the deal.

Number two is excessive taxation. Basically every other government has their hand in some wealth-generating activity. For ours,

for example, it would be property taxes by Bighorn County. There

would be the various State taxes that applied depending on the

title to the land. Tribal taxes could also apply, and certainly Federal taxes on all the activities above with their energy partner.

10

So, when you face that many, your rate of return starts to go

down correspondingly, and the fact that these incentives are only

year-to-year and you cannot rely on them, it really does detract

from people wanting to do business in Indian country, especially in

large-scale projects that we are trying to accomplish which would

change the nature of not only the Crow Nation, but the whole region, in bringing 3,000 to 4,000 jobs, 400 to 500 permanent technical jobs. That is why we are here to ask for your help, to say we

should permanently extend these.

And also, the Alternative Fuel Tax Credit is absolutely essential

to a coal-to-liquids project. So it is Indian-specific, as well as some

other incentives. I think that can get us over the hump.

The CHAIRMAN. Right. Now, how much would that help, that is,

if the alternative tax credit were extended? Second, if the other

provisions were extended a much longer period of time, how much

does that solve the problem for you from a taxation perspective?

Mr. LAVERDURE. Well, when you focus, Senator, on a particular

project, like our coal-to-liquids project, in the economics that we

have run, the Indian Employment Tax Credit, if it was reworked

more like a work opportunity credit, that certainly would help with

employment. But in terms of the project itself, accelerated depreciation, if you say it is at $80 a barrel, would be 1 to 1.5 percent.

The Alternative Fuel Tax Credit is 3 to 3.5 percent.

When you are talking $80 a barrel without tax benefits, it can

run anywhere from 11 to 13 percent IRR. We know that industry

standard is 15 percent, so you add in the other 4 percent and you

have a project that will go. It is really at the margin there, and

these incentives, including that Alternative Fuel Tax Credit, would

push the project toward an investment goal.

The CHAIRMAN. What about the different layers of taxation? That

gets cumulative after a while. You are kind of in a unique, unfortunate situation. You have lots of different jurisdictions. Is it worthwhile to try to address that or not?

Mr. LAVERDURE. Thank you, Senator. The first is, we are focusing on the project to make it as practical as possible so we can get

our hands around it, but in terms of the larger tax policy, which

I think is partly addressed in this hearing, I would say that, if Congress treated tribes as States for all Federal tax purposes, not just

certain ones, and even with those certain ones, when you have this

Federal statute which has ambiguities, the IRS has interpreted

that statute very narrowly. Moreover, tribes are audited at a phenomenal rate. So that differential treatment with a partial statute

that helps, you can see how it creates a problem.

So, if we could say tribes are the primary governing entity, they

have the primary tax authority in Indian country, carve out their

land bases, separate and distinct as they started, then I think you

could have the certainty and predictability in the larger sense for

creating the level playing field for economic development.

The CHAIRMAN. So, if tribes were treated as States for the purposes of taxation in all cases, that would mean that there would

be no State tax. There would be no State property tax.

Mr. LAVERDURE. That would be the penultimate solution.

The CHAIRMAN. And no State income tax whatsoever. I am just

asking, that would be the result? I am not passing judgment as to

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whether that is good policy or not, but I am just asking, practically,

operationally, would that be the result?

Mr. LAVERDURE. Well, Senator Baucus, those are very good

points, and that could be one conclusion. I would submit that the

money is there locally to be used for various purposes, whether it

is schools, roads, infrastructure. Because other governments are

getting all the taxes, their towns, their roads, their bridges are

fine, and the ones within the reservation, as we know, are Third

World country conditions. So it would actually help all the local

economies, and tribes would finally have a say over where that revenue went.

So it is not a question of, is it going to be a tax haven like Bermuda or something. It would be more like, if there is a government, and they could work with the local governments, the tribes

would be at the table to say, this revenue should go to this school

which is severely under-funded, these roads are terrible, there are

pot-holes everywhere, and we know that in Indian country the infrastructure is much, much worse because of the lack of a tax base.

The CHAIRMAN. Right. Right. Thank you very much. My time has

expired.

Senator Grassley?

Senator GRASSLEY. Yes. Mr. Desiderio, how would you clarify the

term ‘‘essential government function’’ to fully utilize the use of taxexempt financing?

Mr. DESIDERIO. Well, Senator, I was remiss in my oral testimony.

I want to thank this committee for holding this Finance hearing.

Tribes really appreciate the respect this committee is giving them

to voice these issues that are really of concern.

The essential government function test that was initially intended to give tribes the similar bonding authority to State and

local governments, I think tribes are frustrated with how that is

being interpreted, or is currently interpreted by the Internal Revenue Service. The repercussions from the Internal Revenue Service

audits and the field service advisories, as was stated before, have

a chilling effect.

The National Congress of American Indians has a resolution of

support, and supports the language that is proposed in S. 1850,

which is defining the essential government functions to mean any

function which is performed by a State or local government with

general taxing powers.

Senator GRASSLEY. And I assume that you are following what

would be applicable then to Indian governments, the same as any

other political subdivision. Is that the equity that you are seeking,

or does that simplify it too much?

Mr. DESIDERIO. Well, I think it is pretty clearly stated in the bill,

which is the Tribal Tax-Exempt Bond Parity Act, so we are seeking

parity with the State or local governments. It is important to note,

we are seeking no more and no less than the State or local governments.

Right now, the IRS is in a position, an awkward position, of playing gatekeeper, where they are approving what are considered essential government functions for projects for the local and State

governments, and at the same time those same projects that are

undertaken by tribes are not approved, they are disallowed. So

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they are setting up this gatekeeper function where the IRS is actually determining quality of life issues for tribal citizens versus nontribal citizens.

Senator GRASSLEY. All right.

Then a very general question, because we have spent most of the

time—in your testimony and in the questions thus far—talking

about tax incentives that presently exist and the renewal of those.

Do you have any other tax incentives that you think would be helpful for economic development of the tribes that we have not talked

about yet?

Mr. DESIDERIO. We do. I want to bring up a couple of issues. We

have had an economic stimulus plan that was passed by Congress

recently that was designed to give incentives for individuals for

consumer spending and for some limited business spending.

The National Congress of American Indians has put together

what we are calling our American Indian Economic Stimulus Act.

The two things that we are talking about today, which are the TaxExempt Bond Parity Act and the accelerated depreciation and employment tax credits, are two of those things.

The third thing is to be able to authorize tribes to transfer the

energy tax credits and allow them to be participants, encourage

them to be participants in the domestic energy production. Those

three things, we think, are targeted at having the most effect for

enhancing the economic development for Indian tribes—more

spending on infrastructure, creating jobs, getting incentives for

businesses, and larger energy projects. A lot of the tribes that are

in more acute economic states are large land-based tribes. The Energy Production Tax Credit and full use of the accelerated depreciation can help those tribes the most by bringing in these long-term

partnerships.

As Mr. Laverdure had stated, the way the current accelerated

deprecation and the tax credits are set up now, it does not value

the tribes’ participation at the table, so there is no way to plan

long-term or to court companies to come in for those large projects

that take years to develop.

The other issue that I think this committee could help with is

the administration of the current Pension Protection Act. I think

there has been a bill that was passed by the House, and also the

Senate, to apply technical corrections to the Pension Protection Act.

The way the bill reads now, there is a government functions test

for the tribal pension plans that makes it difficult for tribes to administer two different plans for the same tribal entity. We are asking this committee to apply the technical corrections in the Pension

Protection Act to allow tribes to have one government plan, just

like State or local governments do. So, we urge you to take that

up in conference.

Senator GRASSLEY. Senator Smith?

Senator SMITH. Thank you, Senator Grassley.

All three of you, I appreciate so much your testimony here. I

want to single you out, Wayne, for special appreciation. This is the

second time you have come back to testify on behalf of this bill in

terms of bonding authority. Many of the questions I have, you have

already answered very well in your testimony.

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But I cannot help but recognize the tremendous opportunity that

exists on tribal land in terms of renewable energy, and certainly

for the Nation, which has a need for renewable energy—wind, biomass, certainly solar as well, geothermal. These are tremendous resources that the tribes have, but they remain undeveloped, in part,

if not in whole, because the tribes do not have Federal income tax

liability as governments. But then neither do the States, and yet

they are excluded from taking advantage of production tax credits,

without virtually conveying ownership of their reservations.

That just seems, on its face, wrong and something in need of correction. I wonder if you agree with that assessment, and if any of

you want to elaborate a little further on the central issue here, why

tribes should be treated as governments, as sovereign governments

for purposes of economic development—just as the States are—so

that we thereby show the respect and provide the opportunities to

tribal governments that the State governments enjoy.

Mr. SHAMMEL. Thank you, Senator. Tribes should be treated as

States because it is a central prong of the American constitutional

structure. It comes as a surprise to many people because popular

culture teaches that Indians are somehow the enemies. We are not.

We are part of you. The contributions of American Indian culture

to American history make us what we are.

So I think it is a general idea of convincing people that we are

friends and we are just like you, and when we tell you we are going

to use these debt instruments and these other legal abilities to be

helpful, hold us to our word, but let us move forward and do it.

There is this idea of, somehow we are going to try to take back the

country if we have fair rules to play underneath. I do not think

that is going to happen any time soon. So it is a culture of fear and

misperception in dealing with the tribes as governments.

Frankly, the vast majority of our fellow country people do not

even understand that. Most of them would still continue to view us

as voluntary groups and societies of some kind. It is a surprise to

them when you explain, hey, this has been that way from the beginning.

I would note that today is the 218th anniversary of the 1790 Indian Trade and Intercourse Act, one of the very first statutes

passed by the Congress. That was the foundation of a lot of the economics of this entire country, and the tribes have been left kind of

high and dry after that. I think what we would like to do now is

untie that hand that is behind our back, treat us as the full partners in the American union that we are, and we will prove ourselves up to it.

Mr. LAVERDURE. If I could, Senator Smith, thank you for the

question and the opportunity to respond. I think, in the overall

structure, it would be helpful if some of these incentives, like renewables and other non-renewables, if we just included that tribes

and Indian reservations are eligible for those credits as well. Certainly national tax incentives would apply on the reservation, but

sometimes when the Congress does not specify, then the IRS and

other agencies will narrowly interpret and leave tribes out of the

energy and economic development game, if you will.

In particular, some other things that I was going to mention.

Senator Grassley, who stepped away, said, are there other incenVerDate 11-MAY-2000 14:16 Sep 17, 2010 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 58160.000 TIMD PsN: TIMD
14

tives? I have a table, a 4-page table of various incentives that

would apply to the project, and certainly extending the Department

of Defense length of contracts—we are going to do a coal-to-liquids

project—would be helpful, and investment tax credits, and all the

like, similar to the questions you are asking.

With the Crow Nation, it is not just coal-to-liquids, but we would

like to develop wind power, geothermal, and all the like. Those incentives also have some of the limitations that we mentioned earlier, but certainly treating tribes as States at the outset would go

a long way towards helping tribal governments in the economic development playing field.

Senator SMITH. I am tempted to ask, are there other interest

groups that are pushing back against the tribes having access to

this bonding authority because you would use it for coal-to-liquids

and things that others may regard as harmful to the environment?

Mr. LAVERDURE. Well, Senator Smith, I assume there will be interest groups that will probably take an active role once the project

is announced very shortly.

Senator SMITH. But right now your position is, simply, the Treasury Department is disallowing this bonding authority in relationship to tribes, so it makes it much more difficult to access capital

markets to develop these resources.

Mr. LAVERDURE. That is correct, Senator Smith. I think that if,

anywhere else, a FutureGen or another project wants to develop

coal-to-liquids in another State, there are going to be local governments involved that are going to issue this tax-exempt bonding authority. We are saying tribes should also be able to access that,

particularly because the overall purpose is to help the Nation and

not just a particular tribe. So as energy partners, I think that it

is good tax policy to create that incentive in Indian country, as well

as anywhere else.

Senator SMITH. I am saying the same thing. I appreciate you,

Mr. Chairman, for helping to lead the effort on this bill that we

have introduced. I wish you all well, and I thank you all for being

here. And Wayne, for coming all the way over the Oregon Trail

again, we appreciate it.

Mr. SHAMMEL. My arms are still tired.

The CHAIRMAN. Thank you, Senator. I am sorry I had to step out

briefly.

Is it the problem with the interpretation of essential government

purpose, is that the hang-up that you have with respect to issuance

of bonds by the tribes? It makes it more difficult for you because

that is the language that is hanging you up? Is that the problem

here with respect to the issuance of bonds?

Mr. LAVERDURE. Yes, I would say that that is one of the issues.

Section 115 of the Internal Revenue Code is pretty clear. It states,

‘‘For all purposes.’’ The IRS, essentially carte blanche, allows State

or local governments to utilize it for any purpose. I can give you

a very recent example. There are tons of municipal golf courses out

there. Why can a tribe not use the same authority to create a golf

course as well? Instead, the IRS has said it cannot. It is that simple when you come to an example.

So, if this committee could create the legislation to enable tribes

to access capital markets like everybody else, clarify that that esVerDate 11-MAY-2000 14:16 Sep 17, 2010 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 58160.000 TIMD PsN: TIMD
15

sential government function should be the same regardless of entity, then I think that would go a big step towards solving that problem.

The CHAIRMAN. Now, the three provisions I first mentioned in

my opening statement—bonds, accelerated depreciation, and also

the Indian Employment Tax Credit—which of those are the most

effective, and are there others that would be more effective?

Mr. LAVERDURE. Well, at least for the Crow Nation, the Indian

Employment Tax Credit has been absolutely useless, to be honest,

because it is so complicated. It has a wage cap of $35,000, and it

needs to be restructured where we have, say, an eligible wage of

$20,000 in the first year, $35,000 in the second year, and then have

a floor instead of a ceiling. Then you could have it apply to goodpaying jobs as opposed to excluding them and having the lowerincome jobs be the ones subject to that credit.

Accelerated depreciation has been used. It has been useful. The

long-term extension, especially in capital-intensive projects, would

be very helpful. I think, at least with the Crow Nation, bonds have

been particularly difficult, just like my colleague here said, to access. So I think the combination of those tools, as I heard you mention earlier, Senator, if we had more tools in our chest to work with

and open those up, I think we can get into the energy picture and

help the Nation and ourselves.

The CHAIRMAN. But are there other provisions that would be

even more helpful, or as helpful?

Mr. LAVERDURE. At least for us, the Alternative Fuel Tax Credit

would be essential, the long-term renewal of that. An investment

tax credit. For example, 100-percent expensing of investments in

the year of capital outlay. Those types of incentives would really

bring the investment firms to the table.

The CHAIRMAN. All right. I will ask the other two of you, Mr.

Shammel and Mr. Desiderio, whether there are other provisions,

whether there would be greater bang for the buck.

Mr. DESIDERIO. I think, when the National Congress of American

Indians held an economic summit last year, the issue for the Capital and Finance Committee that came up as one of the highest priorities was the tax-exempt bonding issue. As far as your comments

about which is more important, I think the tax-exempt bond authority for tribes, clarifying that, will do more universally to help

all tribes serve their citizen populations and develop an economic

base.

I guess the common frustration among tribal leaders is that Congress has authorized these fiscal tools, but there is this inability of

tribes to really realize their full value. So the tribes that do not

have an economic base or a revenue base to be able to issue taxexempt debt are frustrated, and are trying to come up with ways,

creative ways, to finance school construction or school repairs and

coming up with ways to try to finance water projects.

So those two tools, the accelerated depreciation and tax credits,

along with the tax-exempt bonding authority, together, I think, can

make a huge difference for all tribes, and especially for right now,

you have to look at where the economy is and some of the indicators. Energy and tourism are, because of the high energy prices

and the falling dollar—those two things. The tribes can use their

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cultural assets for tourism, and tribes can take an advantage and

be partners in domestic energy production.

Having those tools fully available for tribes—we are in a position

now, or Congress is in a position, to give tribes an opportunity to

participate in developing their economy and use these two factors,

the high energy prices and the low dollar, to really help the tribal

economies.

Mr. SHAMMEL. Senator, in terms of other incentives that you are

talking about, I would suggest that Congress should open up the

private activity bond prohibition. That is not currently covered in

S. 1850. That would help us legitimize governmental purpose financing facilities, such as rental housing, electrical generation

plants, things that are commonly done by non-tribal governments.

Another one that I would suggest that Congress review is

amending the Securities Act of 1933, to place tribal bonds on par

with those issued by State or local government in terms of registration requirements, the same basic playing field, which is opening

up the capital markets. But those are two other large areas—

The CHAIRMAN. What is the difference there?

Mr. SHAMMEL. We do not have the exemption from registration

requirements in the same way that State or local governments do

for issuance of any type of securities. Tribes are just treated differently. It is, again, just that simple.

The CHAIRMAN. Treated differently in what way?

Mr. SHAMMEL. We are forced to register. Governments generally

can fit underneath a registration exemption. Tribes cannot, so it

forces up the costs of your debt, reduces the rate of return on all

of your projects.

To touch briefly on Senator Grassley’s comment earlier about the

cost impacts of this, I can give you a direct cost impact where these

market impediments have harmed a local community. Our job creation projection was over 11.5 a month based on costs of projects

that we are working on, particularly utility projects. But because

of the costs that we had to incur that State governments would not

have had to, it went down to just over 9. So on a monthly basis,

that is 20 people, 25 people in our community that were not employed over a 1-year period that otherwise would have been.

The CHAIRMAN. How much do these tax issues get to the heart

of the matter, or are there other measures that also help jobs and

economic development on reservations? We are not talking about

tax issues.

Mr. SHAMMEL. The treatment as a State question would fix it almost overall. That does bring up the complicated issue of checkerboarded jurisdiction that you pointed out earlier, and that is basically a major issue throughout Indian country. But in our lifetimes,

the incidence and success of intergovernmental contracting and

agreements leads me to believe that that is something that could

be worked out on a State or local level when, as Dante pointed out

earlier, all of the governments are trying to do the same thing:

house our children, educate them, build roads, bridges.

17

But there is a lot of fear outside of Indian country that, all of

a sudden, that is going to erode our power. We will not have control. What we are trying to convince people of is, if you just treat

us as a State and we learn to work together, that works all over,

in tax compacting, and so forth.

The CHAIRMAN. Mr. Laverdure, your thoughts on that?

Mr. LAVERDURE. Yes, Senator Baucus. I appreciate the probing

questions and giving us an opportunity to think outside the box.

Federal title to Indian land is an enormous barrier. How do you get

a mortgage when the Federal Government holds title? You have to

come up with creative ways of new property interests that you

have to create to leverage against it. Of course, that creates uncertainty, there is no predictability, and it is something new. People

with money do not want to take chances. So we have to do something about that in order to really have property that is useful that

you can leverage.

For example, with large, land-based tribes, there is a huge land

base, but if it is all in Federal title, how can you turn that into economic development? It makes it 3 times as hard. The fact that

there is just terrible record-keeping with the Bureau of Indian Affairs complicates matters even worse. Tribes need to be taking over

that function. Tribes need to manage their own land. We have to

release that Federal title so that tribes can actually utilize their assets to help themselves.

The CHAIRMAN. Is there any need for a BIA any more?

Mr. LAVERDURE. Well, without offending anyone from the BIA

who might be here who might need to help us on our projects and

approve it, I would say, long term, tribes really need to take over

and run their own show. It is time.

The CHAIRMAN. All right. I appreciate it.

With respect to the title issue, any thoughts you have there

about how to deal with the Federal title problem? How do we deal

with that?

Mr. LAVERDURE. Well, as a matter of fact, I do have a thought

on that, Senator Baucus. I would say that it should be tribal title,

not Federal title. It was originally tribal land anyway, so why not

just say it is tribal title and the Feds have some trust responsibility that is there, but turn over what was tribal homelands and

then tribes can utilize them how they want. I mean, you have State

territories with permanent political boundaries.

We need permanency. Just because somebody buys something

and they are non-Indian, it goes out of Indian country and then

other governments take over jurisdiction, that is the dilemma we

are in. So, if we tried to privatize it and make it into fee-simple,

then other governments come in and have control. If we keep it in

Federal title, then we cannot get banks to come in and finance a

transaction. We are in the worst dilemma you can be in, so oftentimes the decision is, let us get it back in Federal title and protect

it so at least we have some say over it.

The CHAIRMAN. All right. This has been helpful. This is a big

problem. I am not quite sure where we go from here or what

changes we can make, or what priority we can make them. But we

will be working on that right now, and this committee will, too. I

really appreciate the time that you have taken to come and talk

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to us. You have suggested a lot of good ideas, and it is up to us

now to follow up.

Thank you very much.

The hearing is adjourned.

[Whereupon, at 11:01 a.m., the hearing was concluded.]

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