Indigenous tribes would be treated the same as US states for the purpose of issuing tax-exempt debt under the House reconciliation bill that is currently being debated.
The provision eliminates the requirement for native tribes to fulfill the often burdensome essential government function test and replace it with a new section 7871 (c), which would place 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 and what tribal governments do,” said Townsend Hyatt, chief practice officer. Indian Tribal Finance Orrick.
Most tribal debt issuance is done through commercial loans, but market participants agree that this development will increase issuance volume.
But some details have yet to be determined as to what this will actually mean for individual tribes.
“The tax code says that the tax exemption is really primarily for the benefit of governments and as long as private parties are involved, they want to significantly limit their ability to use or benefit from the 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. It gets more complex when it comes to individual tribes, of which around 550 are currently active in the United States.
The core government function test essentially means that for a tribal bond to be exempt from tax, it must not fund any function that is not usually performed by state and local governments. State and local issuers do not have such a provision attached to their obligations.
Since the introduction of Tribal Economic Development Bonds in 2010, tribes have been able to issue these bonds as an exception to the essential government function test, with a volume cap of $ 2 billion.
“In other words, we can do through 10 bonds what we could not do otherwise, as a core government function. But Congress limited that to a volume cap of $ 2 billion nationwide, and now almost all of that volume cap is gone, ”Hyatt said.
Removing the essential government 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, it There will be a national volume cap, similar to the $ 2 billion cap for Economic Development Bonds, on the amount of tribal emissions nationwide. 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 issuance have been overlooked. at the top of the list of the priorities of the industry, but have certainly been a long time to come.
The amendments to Section 7871 (c) of the Tax Code contained in Section 135601 of the proposed legislation appear to be in line with the 2011 Treasury Department recommendation, which recommended eliminating the essential government function test, limit any tax-exempt funding for games. , establish a national volume cap for private tribal activity obligations, as well as eligibility criteria for the location of the project.