WASHINGTON -- Kansas is a good bet to win its U.S. Supreme Court tax case
against the Prairie Band Potawatomi, legal observers are saying, after
tribal lawyers faced a "difficult" oral argument before the nine justices
in the first Indian case before the John Roberts court.
But the most likely result might not be the "bright line" doctrine the
state was urging as an attack on tribal sovereignty. Instead, the justices
will probably deepen the mess they've already made in their rulings on
state taxation of reservation economies.
The case is the latest in a decade of Kansas attempts to tax motor fuel
sales on tribal reservations within its boundaries. The 10th Circuit Court
of Appeals has generally knocked down the state taxes: and the Supreme
Court refused to intervene until now.
It was already a bad sign that the Supreme Court took up the case. "They
wouldn't grant cert [the writ of certiorari that brings a case before the Supreme Court] unless they wanted to reverse the Court of Appeals," said
Richard Guest of the Native American Rights Fund. But things got worse as
soon as the court opened oral argument Oct. 3.
Justice David Souter threw the tribal attorney for a loop when he asked
whether tribal sovereignty was really involved. Setting the tone for the
rest of the session, he asked whether the state tax affected the
reservation at all. According to Guest, a courtroom observer, the tribal
team hadn't expected the argument to go this way and remained off-balance
under the sharp barrage of questions from the bench.
The debate veered sharply from the issues in the briefs that the NARF --
National Congress of American Indians Supreme Court Project had carefully
coordinated. The series of tribal "friends of the court" briefs were
defending a lower-court trend of balancing interests in deciding whether
states could tax tribal business. In this case, the 10th Circuit had
overturned a state tax on the non-Indian distributors of motor fuel, levied
even before the gasoline reached the pumps of the Prairie Band Potawatomi's
Kansas, and a consortium of state attorneys general and tax collectors,
wanted to overturn the balancing test, especially since it was protecting
Indian interests even off the reservation. They asked for a "bright line"
test that would give them the categorical right to tax all Indian sales to
non-Indians. (Contrary to widespread political rhetoric and confusing
Supreme Court precedents, that is not what the Constitution now allows.)
But instead of reaching these issues, the justices hammered on what is
known as "tax incidence." The term might sound like a legal and economic
technicality, but it could become just as dangerous for tribes as the
all-out attack on sovereignty. It could be even more insidious, in fact, if
the Supreme Court continues to turn the same blind eye to the states that
it showed in its courtroom Oct. 3.
"Tax incidence" is best understood as the power to destroy. It describes
the person who bears the brunt of paying the tax. But there are two kinds
of incidence. There is legal incidence, meaning the person that the law
designates to write out the check to the tax collector. And there is
economic, or effective, incidence, meaning the people who ultimately bear
the cost. Economists and consumers understand the phenomenon of "tax
shifting." If you tax a distributor, he will pass on the cost as much as he
can, usually by raising the price at the cash register.
When John Marshall wrote his famous line in McCulloch v. Maryland that "the
power to tax involves the power to destroy," he wasn't talking about legal
incidence. He had in mind the real economic crunch that comes at the end of
the line. The basic principle was that one sovereign could not tax another
sovereign because that power could be used to put that other sovereign out
of business. This is a bedrock principle of constitutional law -- except
when it comes to Indian tribes.
In a truly ditzy line of decisions, the Supreme Court has seemed to say it
will only consider legal incidence when state taxes impinge on tribes. As
Justice Ruth Bader Ginsburg wrote in Oklahoma Tax Commission v. Chickasaw
Nation (1995), if a state says it is taxing "a tribe or tribal members
inside a reservation, that tax cannot be enforced absent clear
Congressional authorization." But, she continued, the court wouldn't take
the "more venturesome approach" of looking at economic reality.
"If we were to make 'economic reality' our guide," she went on, "we might
be obliged to consider, for example, how completely retailers can pass
along tax increases without sacrificing sales volume -- a complicated
matter dependent on the characteristics of the market for the relevant
product." Of course, economists and competent tax administrators do this
all the time. What Ginsburg is saying, in plainspeak, is "Ooh, these
numbers hurt my head."
The new chief justice, John Roberts, homed in on the problem, in the one
ray of hope in the Kansas argument. If the court only looks at what the
state Legislature says it is taxing -- the language of the law -- and not
its actual impact, what is to prevent some "bright young lawyer" from
designing the law to hurt tribes without saying so? The state can say it is
only taxing distributors or wholesalers, and not the reservation retailer
who has to swallow the added cost ... or the tribal government that is
foreclosed from collecting its own taxes by the economic reality that it
would price itself out of a market.
This is exactly the issue in Kansas, in Rhode Island in the raid on the
Narragansett smoke shop, and in state tax departments around the country.
If the Supreme Court continues the train of thought that Justice David
Souter started, it will intensify the insidious state campaign to destroy
tribal retailers. The result will be deeper confusion and more violent