Let the Games Begin: Competitive parity is a good idea


In a recent edition of "Let the Games Begin" we praised the St. Regis Mohawk Nation and Governor George Pataki, R-NY, for negotiating a comprehensive settlement package announced on May 12. The deal included, among many other provisions, an idea called "price parity" under which Mohawk-owned businesses with annual sales of over $2 million would increase prices charged to customers with the intent of reducing the competitive advantage held by Indian business owners who do not collect state sales taxes.

While tribal members have yet to ratify the agreement, they have in the meantime elected a new government. The fact that the former St. Regis government made such a concession on the pricing issue indicates a definite desire to resolve the matter, but does the seating of a new government there reflect a backlash against the price parity concept? Prior to a full tribal referendum on the negotiated settlement, it may be hard to tell. But if the deal as negotiated falls through, perhaps "tax parity" may better suit Indian businessmen and women than does price parity.

The basic premises of tax parity and price parity are similar - the leveling of prices between non-Indian businesses who do collect state taxes and Indian-owned retail operations that do not. Gasoline and tobacco products are the commodities most critically affected. Both are taxed at the state level, sometimes quite heavily, and thus have become the primary means for Indian-owned business, especially remote ones like those owned by Mohawks, to draw customers.

Attacking the competitiveness issue from the pricing end, however, is not the best solution. By definition price parity involves price regulation, a mandate that all merchants sell a particular product at the same given price. Under the proposed St. Regis settlement agreement, Mohawk vendors would not collect any state or tribal tax, but would instead raise their prices to a level equivalent to the total price charged plus the state sales tax by non-Indian businesses for the same product. At first glance, this might seem reasonable - doesn't it represent more money in Mohawk pockets?

According to several legal experts, price parity is a faulty idea for several reasons. For one, it strongly resembles price-fixing, which violates federal anti-trust laws. In addition, enforcement and administration would be difficult if not impossible - how and where would you set benchmarks or standards? Gasoline prices in particular tend to fluctuate, sometimes wildly, based upon all kinds of economic factors at the national and global levels over which the retailer, Indian or not, has no control. Prices between city and rural gas stations can vary significantly. Does the Indian vendor peg his per-gallon gasoline price to a non-Indian gas station in the nearest city or to a rural one just off the rez?

Artificially pegging prices to a particular level eliminates market considerations and unnecessarily increases prices paid by consumers. This will most likely drive business away from the remote Indian shops - if prices are theoretically equal, the consumer has no incentive to drive any great distance if he or she is not going to save any significant amount of money. What incentive does the Indian businessman have for accepting such an arrangement?

Instead, adding a tribal "tax" or "fee," at a level comparable to state taxes, onto an item's purchase price accomplishes two ends. One, by charging the tribal tax, the tribe generates a revenue stream to be used for governmental purposes and is not considered a "profit." This money can be of great use to tribes but in the absence of a tax code is not currently being collected. Not only that, but enacting taxes represents a strong display of governmental sovereignty.

Two, it does indeed compel Indian retailers to charge a higher overall price, thus reducing the overall competitive advantage they now enjoy. Yes, this new "tax parity" price will still likely undercut non-Indian prices in most cases, and will result in a loss of business. It does, however, represent a significant concession on the part of tribes, largely because it is inconceivable that any tribe would ever willingly compromise its sovereignty by accepting full price parity.

But if price parity is somehow forced upon a tribe, all is not necessarily lost. As some tribes have begun to discover, a wholesale production business operating on reservation land cannot be touched by state tax collectors for any reason. This is "black letter law," meaning that the issue is not open to dispute or appeal. Thus a tribe that manufactures its own cigarettes or refines its own gasoline at a reservation facility cannot come under state jurisdiction for taxation or regulatory purposes. Period.

Any state foolish enough to insist on competitive parity through artificial price fixing is also shooting itself in the foot for another reason. Under the multi-state tobacco settlement reached a few years back, states receive compensatory funds based upon the number of packs of cigarettes sold throughout the state. Regardless of where in a state they are sold, at an Indian-owned or non-Indian business, all cigarettes manufactured by the big tobacco companies in the settlement count toward that funding amount. But cigarettes manufactured on a reservation do not. Thus states with a reservation-based cigarette factory within their boundaries are potentially losing some big bucks. Why force more tribes to go that route when tax compacts can be negotiated to benefit both tribal and state governments?

Tax parity is indeed a concept frequently found in many of the approximately 250 tax compacts already in effect between various tribal and state governments around the country. Price parity will, in all likelihood cripple or destroy reservation economies. While it is disadvantageous to individual Indian businesses that stand to lose market share and profit, tax parity creates a revenue stream for tribal governments. And because it is only through government-to-government negotiations that a tax compact can be achieved, it is a manifestation of sovereignty.

A compromise can be deemed fair when both parties cede something in order to gain something else, and when both sides can live with the arrangement. Tax parity represents a fair compromise - tribal businesses give up competitive advantage to appease non-Indian businesses while the state recognizes tribal sovereignty and concedes on price parity - in which both sides on the whole are winners.