US Senate Mulls Tax Reform For Tribes And Territories

by Mike Godfrey, Tax-News.com, Washington

18 May 2012

At a recent Senate hearing on the effect of possible tax reforms on Native Americans and the United States territories - Puerto Rico, the US Virgin Islands, Guam, American Samoa and the Northern Mariana Islands - Finance Committee Chairman Max Baucus (D – Montana) pointed to the anomalies and complexities existing in their current tax treatment.

“Indian governments and the territories are in some ways similar to state governments,” Baucus said. “Each provides hospitals, public schools and law enforcement. But US policies do not recognize tribal governments or territories as states or fully-sovereign nations. Instead, US law is a patchwork of complicated rules for each territory. And for tribal governments, US policies are inconsistent. Tax policy is a microcosm of this inconsistency.”

Looking at the high unemployment suffered in both the tribal areas and the territories, he suggested that tax incentives, such as accelerated depreciation for capital investments and an employment credit for businesses located in Indian country, and an allowance for businesses to claim a credit for the production of coal from Indian land, needed to be better targeted.

Baucus also noted that Congress should also level the playing field for tax-exempt bonds. States are currently allowed to issue tax-exempt bonds for any public purpose. However, tribal governments can only issue bonds for government buildings, and their bonds have to pass an ‘essential government test’.

Another area of concern for tribal governments, he confirmed, is the application of the ‘general welfare doctrine’. This doctrine allows governments to provide benefits to citizens without those benefits counting as taxable income. However, Baucus points out that tribes provide many benefits to their members including educational assistance and cultural awareness, along with housing and meals. "But it’s often unclear which benefits are eligible for the exemption,” he observed.

With regard to the US territories, he noted that federal tax law previously contained an economic activity tax credit and a possessions tax credit to encourage investment, but they expired at the end of 2005. Another expired provision is the rum ‘cover over’ which returns a portion of excise taxes on rum to Puerto Rico and the USVI to help fund their government operations.

Orrin Hatch (R - Utah), the Committee’s Ranking Member, pointed out that several 'tax extenders', explicitly designed to aid Native American tribes, such as accelerated depreciation, have actually expired, and the credit for the production of Indian coal will expire at the end of this year. "If we are going to break out of the repetitive loop of short-term extensions, we should not put off a discussion of these temporary measures, even prior to comprehensive tax reform,” he argued.

He also asked whether greater consistency in the tax treatment of the territories is desirable or feasible. “Some US possessions,” he noted, “have a mirror tax code, with tax laws essentially identical to the US Internal Revenue Code, simply swapping the name of the possession wherever the tax code says US. Yet others are given more autonomy to write their own tax laws as they see fit.”

In some ways, the territories are “treated like foreign countries,” he concluded. “In other ways, however, they are treated like states. For example, research and development in a territory is eligible for the R&D credit, just as if the R&D were performed in a US state. However, income taxes paid to a possession’s government are generally eligible for a US foreign tax credit, just as if paid to a foreign government. Of course, taxes paid to a state government are not creditable, and only sometimes deductible.”