78 Pages Posted: 19 Sep 2006 Last revised: 24 Jan 2010
Date Written: September 1, 2006
Upwards of $50 billion in capital needs go unmet each year in Indian Country in such vital sectors as infrastructure, community facilities, housing, and enterprise development, in part due to the restrictions imposed on tribal access to the capital markets, specifically the ability of tribal governments to issue tax-exempt debt. Section 7871 of the Internal Revenue Code requires tribal tax-free bond proceeds to be used only for "essential governmental functions", a restriction not applicable to state and municipal bonds, and Section 7871(e) further limits the scope of available tax-exempt bonding to activities "customarily performed by State and local governments with general taxing powers" without providing any guidance as to when a particular activity becomes "customary" for a non-tribal government.
These restrictions have severely limited tribal abilities to access the capital markets, and although American Indians make up more than 1.5% of the population, tribes issued less than 0.1% of the tax-exempt bonds between 2002 and 2004. These restrictions harm the poorer tribes the most, as the differential between tax-exempt and taxable interest rates often determines the feasibility of a project. Without access to tax-exempt rates, poorer tribes simply cannot afford the debt service required to begin to make a dent in the $50 billion capital needs deficit.
Tribal governments are also victims of a disproportionate number of enforcement actions by the Internal Revenue Service ("IRS"). The IRS audits less than 1% of the tax-exempt municipal offerings each year, but direct tribal tax-exempt issuances are 30 times more likely to be audited within four years of issue than cities and states. In addition, 100% of tribal conduit issuances have been or are currently being challenged by the IRS. The ambiguity of the statute has led to a number of IRS enforcement actions that simply would not have happened had the issuer not been a tribe. In each of these cases, the tribes financed activities that had previously been routinely financed by state and local governments without any challenge from the IRS. This article argues that tribal governments should have the same tax-exempt bonding authority as their state and local counterparts, and that expansion of tribal bonding authority would increase federal revenues.
Keywords: tribal, regulatory
JEL Classification: G12, G28, H73, H77, I31, K34
Suggested Citation: Suggested Citation
Clarkson, Gavin, Tribal Bonds: Statutory Shackles and Regulatory Restraints on Tribal Economic Development (September 1, 2006). North Carolina Law Review, Vol. 85, No. 1009, 2007; U of Michigan Law & Economics, Olin Working Paper No. 06-006. Available at SSRN: https://ssrn.com/abstract=931486 or http://dx.doi.org/10.2139/ssrn.931486