Native tribes would be treated the same as U.S. states for the purposes of tax-exempt debt issuance under the House reconciliation bill that is currently being debated.
The provision eliminates the requirement of native tribes to complete the often burdensome essential governmental function test and replace it with a new Section 7871 (c), which would put native tribes and states on a similar playing field.
“What this bill seeks to do is establish greater tax fairness and equality, between what state and local governments do versus what tribal governments do,” Townsend Hyatt, leader of Orrick’s Indian Tribal Finance practice said.
Most tribal debt issuances are done through commercial loans, but market participants agree that this development will boost issuance volume.
But some of the specifics still need to be worked out as to what this will actually mean for individual tribes.
“The tax code says that tax exemption is really primarily for the benefit of governments and to the extent that there are private parties involved, they want to greatly limit their ability to use or benefit from tax exemption,” Hyatt added.
For states, this is the function of a volume cap, which limits the number of private activity bonds issued each year based on a state’s population. This becomes more complex when dealing with individual tribes, of which there are roughly 550 currently active in the US.
The essential government function test essentially means that in order for a tribal bond to be tax-exempt, it must not finance any function not customarily performed by state and local governments. State and local issuers have no such provision attached to their bonds.
Since the introduction of tribal economic development bonds in 2010, tribes have been able to issue these bonds as an exception to the essential governmental function test, with a $2 billion volume cap.
“In other words, we can do through 10 bonds what we could otherwise not do, as an essential governmental function. But Congress limited that to $2 billion volume cap nationally, and now almost all that volume cap is gone,” Hyatt said.
Removing the essential governmental function test would allow tribes to issue tax exempt bonds just as states can, but instead of having a volume cap on individual tribes as it works for individual states, there will be a national volume cap, similar to the $2 billion cap for economic development bonds, on how much tribes issue nationally. The total value of the cap is to be determined as the language of the bill is finalized.
These changes in favor of more equitable access to debt issuances haven’t been at the
The amendments to Section 7871(c) of the Tax Code that are contained in Section 135601 of the proposed legislation appear to be consistent with the 2011 Treasury Department recommendation, which recommended eliminating the essential governmental function test, limit any tax-exempt financing for gaming, establish a national volume cap for tribal private activity bonds, as well as establishing project location criteria for eligibility.
