When the New York Times recently revealed that President Trump had paid little or no tax in the last 20 years, the response was unsurprising: Democrats were outraged and Republicans declared he was a genius. Partisan politics aside, this story also re-kindled some old myths that both Red and Blue voters mistakenly believe, namely the misguided notion that Indians who run casinos don’t have to pay any taxes.
Let’s just start at the top – that’s not true. But the situation certainly can be confusing to outsiders. Perhaps a primer is needed.
The US Department of the Interior has this FAQ summary on their website:
Do American Indians and Alaska Natives pay taxes?
Yes. They pay the same taxes as other citizens with the following exceptions:
- Federal income taxes are not levied on income from trust lands held for them by the U.S.
- State income taxes are not paid on income earned on a federal Indian reservation.
- State sales taxes are not paid by Indians on transactions made on a federal Indian reservation.
- Local property taxes are not paid on reservation or trust land.
If they pay federal taxes like any other citizen, what’s the source of the myth about no taxes? Likely, it’s that line about not taxing income from trust lands. In plain speak, that’s casino profit. On the surface, that sounds like a huge loophole that give tribes a substantial advantage over commercial casinos. Combine that with the exemptions for state income, sales and real estate taxes mentioned above, and it’s easy to assume they’re getting a free ride. But the devil is in the details.
When a commercial casino makes profit, they can deduct certain allowable expenditures from their gross revenues to determine their net profit, which is then taxed. This is common in all businesses, and deductions can include capital improvements like furniture, computers, office equipment and carpeting, as well as certain operating expense like payroll, marketing, utilities, etc. What is left over is subject to federal taxes. If expenditures exceed revenues, there is no tax.
It’s not that different with most tribes that own successful casinos. Even though they don’t face federal casino taxes, they have the same sort of deductions for capital items, and can also deduct most monies spent on tribal government to determine their annual profits. Individual agreements with the National Indian Gaming Commission (NIGC) then determine the percentage of remaining profits to be distributed to tribal members (or the Revenue Allocation Plan.) These distributions are generally known as per capita, or per cap. Depending on the tribe, these payments can range from nothing to thousands of dollars a month.
Tribal distributions of casino profits ARE subject to all federal taxes. If the payments are large, the individual recipients generally land in the highest tax bracket with few applicable deductions. The same would apply to a privately owned commercial casino – but, crucially, not corporations.
Corporate profits are either distributed to stockholders, or the value of the stock increases. As Bloomberg Businessweek reported in their October 5 issue: “Whenever you do sell, capital gains are taxed at a little more than half the top rate on wage income (this is how Native American “per cap” distributions are treated.) And if you never you sell? Congratulations, you beat the IRS. Your children can inherit the assets with all taxable gains wiped out. Invoking a rule known as ‘stepped-up basis,’ the earnings of a lifetime can escape tax forever.”
These loopholes are even greater in the real estate segment, which may help explain the recent rise of REITs, or real estate investment trusts, in our industry. Again, from Bloomberg Businessweek: “Because of a rule called depreciation, which assumes properties have a limited useful life, owners can write off a portion of their purchase price each year. Those paper losses can offset real income, zeroing out tax bills even as the true market value of a property keeps climbing.”
Let’s forget federal taxes and consider the state exemptions. Why don’t Native Americans have to pay state sales taxes and property taxes just like the rest of us? Again, it takes some explaining to understand the full picture. If a tribal member lives in your neighborhood, they pay the same state sales taxes and property taxes that you do. The exception comes only if they live on a reservation and/or get their goods and services delivered on the reservation.
Don’t think that’s fair? Perhaps you can relate to those patriots who dumped the tea in Boston Harbor a few years back in the name of taxation without representation. If tribes had to pay state fees, it would be taxation without benefit, since in most cases, neither the city nor the state provides any services on the reservation like they do in your neighborhood. There are countless stories in the early days before casinos of homes on the reservations burning to the ground because local municipal fire departments wouldn’t respond. One of the first uses of Native American bingo/casino revenues was to purchase fire trucks and build fire stations. Same goes for roads, schools, parks and other infrastructure projects on reservation land. Have you ever priced how much it would cost you to pave the street in your neighborhood and pour the sidewalks? How about getting running water and a sewer system? Would you really trade no state taxes for no services?
Still, one might wonder, why they don’t have to pay state income taxes on their casino profit like other businesses serving the non-Native residents of the state? Maybe they actually do?
In February of 1987, the U.S. Supreme court sent shock waves throughout the country when they ruled in favor of Indian gaming in California v. Cabazon. Writing for the 6-3 majority, Justice Byron “Whizzer” White said that “the State’s interest in preventing the infiltration of the tribal bingo enterprises by organized crime does not justify state regulation of the tribal bingo enterprises.”
Essentially, this decision said that most states could not regulate gaming on reservations in their jurisdictions. The states, as a result, largely panicked and almost immediately, from California to Connecticut, began to put pressure on Congress. The government quickly moved to protect the states’ interest by passing the Indian Gaming Regulatory Act in 1988. This act essentially legalized Native American gaming nationally and added a provision that Tribes and states must negotiate compacts (for this, read contracts) in order to operate. Many scholars argued that the court action in the Cabazon decision didn’t require an IGRA, but most tribes signed on quickly to eliminate the legal battles that had been going on for years. Most of these compacts included provisions that the state could tax gaming revenues, with most taxes based on slot machines. These taxes vary widely from state to state, and even compact to compact. Oklahoma has one of the lowest rates at 4% to 6% of slot revenue. Foxwoods and Mohegan Sun in Connecticut agreed to 25%. California has a mix of different agreements, but most are in the 10% to 20% range.
Compare these to Nevada’s relatively low annual $250/machine fee plus a monthly tax of 6.75% of gross gaming revenue, including table games. On the other extreme, Illinois is up to 50%, Maryland comes in at 67%, and Rhode Island should be ashamed to charge their 87%.
Also note that most of these slot taxes are on the gross revenues, not the net revenues. Because of this, a Native American casino – or, for that matter, a commercial one – often will pay a true tax rate many times higher than their advertised tax rate. Gaming taxes nationwide are among the highest rates charged to any industry. The bottom line is that, no, tribes don’t pay state income taxes, but their gaming revenue taxes are stiff, and probably higher than other businesses’ income tax.
Apart from the formal tax regulations, there are some practical reasons why you might prefer to have a “non-tax paying” Native American casino in your neighborhood rather than a big corporate casino operation that does “pay taxes.”
Consider the tribal member getting a large monthly per cap check: as mentioned above, they most likely pay the highest federal tax rate without loopholes. But even more importantly, the vast majority of tribal members live in the communities where their casino is located. They buy their groceries at your local market. Their cars come from the local dealership, and their generous charitable contributions benefit locals. The higher their payments, the stronger their contribution to your local economy.
What happens with corporations? Of course, all casinos, be they Native American, commercial, or corporate, provide great economic benefits to the communities where they are located through payrolls and local purchases of goods and services. But once corporations pay their federal taxes – assuming they haven’t used one of the loopholes mentioned above – the profits are distributed to corporate owners scattered around the world. Unless your neighbor is Warren Buffett or George Soros, your local community will probably never see any benefit from those profits or stock gains.
So, next time you see a local tribal member, be sure and thank them for “not paying taxes.” And then be sure and thank your local corporation for paying theirs.
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