American Indians versus the Billion-Dollar Tax Weevil: The Pernicious Dual-Taxation of Tribal Economies after Cotton Petroleum

Abstract

Just as the Boll Weevil migrated into the United States as an invasive species to suck the life out of cotton crops, so too are state regulators and “tax weevils” crossing into Indian Country to suck the life out of tribal economies. The founding fathers were fully aware of the grave threat to tribal economies posed by the states; thus in the Constitution, they gave Congress the exclusive “power to... regulate Commerce... with the Indian Tribes.” Beginning in 1790, Congress passed a series of laws asserting federal primacy in Indian affairs to completely preempt state involvement in tribal economies. The Supreme Court was similarly aware of this threat, declaring that an Indian tribe was “a distinct community, occupying its own territory, with boundaries accurately described, in which the laws of [the state] can have no force.”

Despite the Supreme Court’s admonition that the power to tax is the power to destroy, the tradition of hostility towards tribes continued, particularly between state regulators and tribal governments regarding taxation and regulation of economic activity in Indian Country, particularly when non-Indians were involved. Just as the boll weevil cost America’s cotton producers more than $15 billion until determined eradication efforts eliminated infestations nationwide, state tax weevils have sucked billions of dollars out of tribal economies. Although most state governments provide little or no services within Indian Country, when state economies were lagging, voracious tax weevils aided by fundamentally flawed Supreme Court jurisprudence, particularly Cotton Petroleum, overran the boundaries of tribal sovereignty and created a pernicious problem of double-taxation for on-reservation economic activity.

When states wrongly insist on taxing on-reservation resources and economic activity, they dramatically increase the overall cost of any project. In some arenas, dual taxation makes otherwise economically viable projects impossible to pursue. Perhaps the single greatest impediment for tribes that want to monetize the wealth contained within their natural resource endowment is the dual taxation placed on tribal energy projects after Cotton Petroleum, although the tax weevil damages more than just those projects. The impact is particularly acute for tribes that are trying to grow their economies by attracting outside capital and non-Indian businesses to the reservation.

Fortunately, however, federal preemption provides a mechanism to eradicate these pernicious tax weevils yet again. A careful revision of the Indian Trader regulations would provide a mechanism to reverse this judicially-imposed disaster of dual taxation while simultaneously excluding overzealous state regulators. This article argues that the federal government should absolutely seize the opportunity to update the regulations for the benefit of all of Indian Country.

Keywords: Tribal Finance, Dual Taxation, Economic Development