Tribal governments in the United States have faced significant challenges when it comes to accessing tax-exempt bonds for financing projects. Unlike state and local governments, tribes are constrained by the essential government function test, which limits their ability to issue tax-exempt bonds for projects that are not traditionally considered essential government functions. This restriction has hindered tribal governments’ ability to invest in infrastructure and economic development projects that could benefit their communities.
A recent paper titled “Tax code constraints limit tribal tax-exempt bonding” highlights the disparities in tax-exempt bonding between tribal governments and state/local governments. The authors of the paper, economists from the Federal Reserve Bank of Minneapolis, argue for tax code reforms to allow tribes greater access to tax-exempt financing. They emphasize the importance of expanding capital access for tribal governments to accelerate economic prosperity and support the growth of their private sectors.
According to the paper, the estimated cost of providing tribes with increased access to tax-exempt bonds is around $77 billion over 10 years. Despite this cost, experts like Randy DelFranco believe that it is essential to level the playing field for tribal governments. DelFranco points out that tribes are currently at a disadvantage compared to municipalities and are eager to achieve parity in accessing tax-exempt financing.
One of the major obstacles faced by tribal governments is the prohibition on issuing private activity bonds, with limited exceptions. This limitation restricts tribes from financing revenue-generating projects through tax-exempt bonds, hindering their ability to service debt efficiently. As a result, tribal governments have limited access to a financing tool that could help support self-sustaining projects in their communities.
Tribal advocates are hopeful that Congress will address the issue of tribal access to the tax-exempt market in the near future. The upcoming discussions around the U.S. tax code, particularly in the context of the expiring Tax Cuts and Jobs Act, provide an opportunity to push for reforms that will empower tribal governments. By removing barriers such as the essential government function test and renewing the volume cap on Tribal Economic Development Bonds, policymakers can help tribal communities thrive.
The authors of the paper recommend making more comprehensive tribal bond data available to better understand the impact of tax-exempt financing on tribal governments. By shedding light on the disparities in tax-exempt bonding between tribes and state/local governments, policymakers can make informed decisions to support tribal economic development. As the U.S. tax code takes center stage, there is a growing momentum to address the challenges faced by tribal governments and create a more equitable system for accessing tax-exempt financing.
Empowering tribal governments through tax-exempt financing reform is crucial for promoting economic prosperity and self-sufficiency in tribal communities. By advocating for policy changes that remove barriers to accessing tax-exempt bonds, policymakers can support tribal governments in investing in projects that benefit their citizens. It is time to level the playing field and ensure that tribal governments have the tools they need to thrive and grow.