Leaving Money on the Table(s): An Examination of Federal Income Tax Policy Towards Indian Tribes

Abstract

The advent and rapid expansion of Indian gaming has finally provided tribes with a viable economic development opportunity. In 2001, tribal gaming operations generated revenue of $12.7 billion. This income goes untaxed at the tribal level since, for nearly forty years, the IRS has taken the position that the income of Indian tribes is not subject to federal income taxation. In recent years, however, Congress has been eyeing Indian gaming as a potential source of revenue. This Article reviews the current federal income tax treatment of Indian tribes, compares this treatment to the federal income tax treatment of states, and addresses whether Indian tribes should be subject to federal income taxation from both a tax policy and Indian policy perspective. The IRS generally views states and tribes as falling outside the scope of the income tax provisions of the IRC. This Article argues that, despite the changes in Indian country brought about by Indian gaming, federal tax policy towards Indian tribes is best kept at the status quo. While tribes could be viewed either as governments or business entities, they are really more like states than private businesses. States are just as aggressive as (and compete with) Indian tribes in their commercial endeavors - particularly when it comes to gambling. Therefore, the important tax policy goal of horizontal equity would be violated if tribes were taxed differently from states. Furthermore, federal Indian policy views tribes as self-determinative governments that should have the opportunity to pursue economic development activities. Tax policy has and should continue to follow this federal Indian policy of self-determination. Unless and until there are major changes in tax policy towards states or federal policy towards Indian tribes, imposing the federal income tax on tribes would frustrate both tax policy and federal Indian policy.

Keywords: Federal taxation, American Indian Law