Tax Reform: What It Could Mean for Tribes and Territories

Comments for the Record

 Senate Finance Committee

 Tax Reform: What It Could Mean for Tribes and Territories

 Tuesday, May 15, 2012, 10:00 AM

 By Michael G. Bindner

Center for Fiscal Equity

  

Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to submit these comments for the record to the Senate Finance Committee. As always, our comments are in the context of our four part tax reform plan:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

The effects on various tribes and territories will vary. We will address each in turn. OASI provisions are, of course, not relevant to this analysis.

Native American tribes will be affected in the same manner as states. To the extent that they have a tribal tax system, they will likely bring it into conformity with the federal system. Tribes which exist mainly on casino revenue, where members pay no direct taxes, can still benefit from harmonizing with the federal tax reforms we outline here. This is especially the case if an NBRT is adopted with offsets for employers who perform or fund social welfare functions in lieu of payment of taxes.

Our proposal replaces TANF with privately or publicly provided adult education, with participants funded at the minimum wage and receiving the same refundable child tax credit as workers, along with the same health plan as employees of the provider organization. This feature could also be used to replace Tribal TANF, allowing participants to achieve real education rather than job training for low wage work. This is especially the case if program participants can then transition into either technical education or even college – where the employer pays a wage while paying tuition in exchange for both a NBRT credit and a work requirement/student loan.

High income surtaxes may or may not be used, based on tribal debt loads. Use of a VAT will be entirely based on the circumstances of the tribe, although we expect that a federal VAT, which will likely apply to both commerce and gambling, will be used by tribal governments. In addition, because the purchase of gambling tokens will be covered by VAT, winnings need not be, although we expect that the tribal casinos will follow federal policy toward gambling winnings as a whole. To the extent that federal income taxes are owed on gambling winnings for high income earners at non-tribal casinos, they will likely be federally taxable if won from tribal casinos. If a VAT is serious considered, we expect separate hearings on this question of gambling winnings.

Territorial governments, not including the District of Columbia, are not taxed and will therefore be under no obligation to enact tax reform to conform to federal law. As with tribal governments, however, they may enact such reforms as the NBRT in order to harmonize social welfare system delivery with state programs and replace any territorial income tax for non-high earners with the VAT/NBRT proposals outlined in our plan. The District of Columbia government will benefit greatly from a shift from an income tax based system to a consumption tax based system, provided it is treated in the same way as the several states for purposes of payments in lieu of taxes for NBRT revenue that would otherwise be owed to them for federal payroll, especially in regard to payments to neighboring jurisdictions whose employees cross state lines to work.

To not treat the District equally in this regard would give an undue subsidy to the Commonwealth of Virginia and the State of Maryland and would prolong the District’s colonial status. Settling this issue in the same way it is settled for all other cross-border workers will remove the thorniest obstacle to statehood for New Columbia (along with first offering Maryland a chance to reclaim territory not retained by the residual District of Columbia – which should only include the Capitol grounds and office buildings where staff members can file state income taxes (and presumably NBRT PILT payments) in the member’s home state. The remainder of the federal core should be part of New Columbia, including military bases, so that military members cannot claim the three electoral votes provided for in the 23rd Amendment.

If federal operations are treated as if they were non-profit companies, than VAT would not be paid on them by either the states or the District of Columbia. Commercial operations would, of course, be VAT eligible at the local level for purposes of state, District and federal taxation. High-income taxation will be changed in exactly the same way as any other state which practices fiscal conformity.

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.