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Kansas tax case threatens balance

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WASHINGTON - Here's the next danger that an unpredictable U.S. Supreme
Court holds for Indian country, a "bright line" that could become an
economic noose.

A major case involving a tribal gas station in Kansas could change the
rules for states' attempts to tax Indian economies. At present, federal
courts apply a "balancing test," weighing the sovereign interests of state,
federal and tribal governments in each particular case. But the test worked
too well for one tribe fending off an aggressive Kansas Department of
Revenue.

The Prairie Band Potawatomi Nation persuaded the 10th Circuit Court of
Appeals to strike down the state tax on motor fuel headed to its one gas
station, the "Nation Station," even though the state collected it from a
non-Indian distributor off the reservation. Circuit Judge Monroe G. McKay
ruled that the nation and the federal government had a strong interest in
fostering tribal economic development and self-reliance, but Kansas had
only "a general interest in raising revenue."

Kansas officials found this judgment hard to take. Since the state changed
its motor fuel tax in 1995 to go after reservation sales, the Revenue
Department has sued not only the four federally recognized tribes in Kansas
but also the Winnebago Tribe of Nebraska and its motor fuel wholesaler, HCI
Distribution. The state even seized HCI tank trucks and brought criminal
charges against Winnebago Tribal Chairman John Blackhawk and Lance Morgan,
head of its economic development arm Ho-Chunk, Inc., until a federal judge
made it back off.

Now the current head of the Kansas Revenue Department, Stephen S. Richards,
is asking the Supreme Court to drop the "balancing test." His allies, an
association of state tax collectors and a coalition of state attorneys
general, are asking for a "bright line" rule that will keep tribal tax
immunity back on the reservation.

A "friend of the court" brief filed last November by the Multistate Tax
Commission puts it with admirable clarity. (The commission is administrator
of a compact among 44 states designed to preserve, and extend, their taxing
authority.) In two of three tax situations, wrote commission General
Counsel Frank Katz, the Supreme Court has laid down "bright line" rules
based on geography.

When Indians deal with Indians on their sovereign lands, states have no
taxing authority (unless Congress expressly grants it). When Indians go off
the reservation, states can tax them (unless Congress preempts it). But the
third case, wrote Katz, "raises more difficult issues" when non-Indians
deal with Indians on the reservation. This is the grey area that gave rise
to the "balancing test." Even worse, in Katz's view, the 10th Circuit Court
has now taken it off the reservation, to a case in which the state tax is
at least one step away from having an impact on the tribal economy.

Extending the balancing test, he warned, "will cause great uncertainty and
turmoil," impairing state tax administration and rousing bad blood between
states and tribes. He reinforced his point with what a judge once called "a
parade of imaginary horribles." What if tribal casinos demanded state sales
tax exemptions for all their purchases? (At present, we don't know of any
that do. In fact, many brag about how much they do pay in taxes.) What if
tribes challenge state regulation as well as taxation?

The Prairie Band Potawatomi Nation v. Stephen S. Richards, Secretary of the
Kansas Department of Revenue case, he concluded, gave the court a chance to
reinforce its "two pillars of certainty" by invoking the territorial limit
on sovereignty.

There is some potential in their approach, but certainly not in the way
Katz or Richards envisage. Tribes could probably live with a "bright line"
limit to tax sovereignty based on their reservation boundaries as long as
it covered their entire economies, including non-Indians. The grey area of
which Katz complained arose when the Supreme Court backed away from the
guiding principle of sovereignty, deriding it as a "platonic notion" and
demoting it to a backdrop for its "particularized inquiry" into competing
interests.

But there are many practical advantages to restoring tribal tax
sovereignty. For starters, it would simplify tax administration and restore
amity between state and tribal governments. This is the reason New York
state Gov. George Pataki suspended his attempt to tax reservation sales in
1997, a decision later ratified by the state courts.

The economic benefits are enormous. In the aftermath of Pataki's decision,
reservation economies boomed. Thousands of jobs have sprung up, directly
and indirectly - and not primarily from casinos, either. (Until the opening
of the Seneca casinos in the last two years, only the Oneida Indian
Nation's Turning Stone Resort and Casino and non-gaming enterprises,
including this newspaper, provided significant cash flow.) The Oneidas and
Senecas are now the engines of growth in their regions, both noted for long
stagnation.

Far from increasing the burden on state finances, this growth has reduced
its social costs. Unemployed and welfare-dependent families have been given
a chance at productive work, personal esteem and autonomy: and they all pay
taxes in one form or another.

This growth is just the result predicted by supply-side economics, the
dominant federal economic policy of the last 25 years. In fact, Pataki
attempted to duplicate it, with less success, by providing tax breaks in
Empire Zones directed at corporations. Sadly, he has abandoned his
principles under pressure from a political backlash generated by the Indian
success.

This same backlash is now seeking its day in the Supreme Court. Indian
country will have a chance to rebut it. Tribal briefs in the Richards case
are due July 14. One hopes the court will seek a "bright line" version of
sovereignty that will foster tribal economic growth and self-determination,
not strangle it.