Tribal Tax Parity Legislation Gains Ground in Congress

by Holland & Knight LLP
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In the past month, members of Congress have introduced two important bills that promote parity for tribal governments and their tribal council members.

  • The Tribal Social Security Fairness Act would allow tribal governments, like state and local governments, to "opt-in" to Social Security coverage for their otherwise excluded tribal council members.
  • The Tribal Tax and Investment Reform Act would provide parity for tribal governments in the areas of tax-exempt financing, excise tax exemptions, employee plan administration, tribal charity funding, child support enforcement and adoption tax credit determinations.  

Below is an overview of the bills.

FICA Tax Parity Legislation Introduced in Both Houses

Under current law, elected tribal council members (i.e., legislative officials) are unable to contribute to or receive social security benefits with respect to their compensation as council members. The Internal Revenue Service (IRS) has consistently held that amounts paid to tribal council members are considered taxable income under section 61 of the Internal Revenue Code, but do not constitute "wages" for the purpose of the Federal Insurance Contributions Act (FICA). As a result, tribal council members are required to pay income tax on such amounts but do not have the option to pay into and receive benefits from the Social Security program. A legislative fix is needed to correct this inequity.  

Understanding the frustration that tribal leaders face, Sens. Maria Cantwell (D-Wash.), Patty Murray (D-Wash.) and John Thune (R-S.D.) introduced S.1309, the Tribal Social Security Fairness Act, on June 7, 2017. The bill would allow tribal council members (including tribal council chairmen) to contribute to, and receive, social security benefits. The following day, Reps. David Reichert (R-Wash.), Suzane DelBene (D-Wash.), Derek Kilmer (D-Wash.) and Tom Cole (R-Okla.) introduced an identical version, H.R.2860. Note that under the legislation, an election to contribute must first be made by the tribal council as a whole, and not by individual council members.

The Tribal Social Security Fairness Act is widely supported by the National Congress of American Indians and other organizations. Although the Trump Administration has not yet officially offered its support, staff from the U.S. Social Security Administration and the IRS informally advised staff of the legislative sponsors during the drafting of the bills. The legislation is not expected to have a material impact on federal revenues. If the Tribal Social Security Fairness Act is included in tax reform or in a separate social security reform package, there is a good chance that it will be enacted.  

Tribal Tax and Investment Reform Legislation Introduced in House

State and local governments often use federal tax and financing tools to promote economic development, increase employment opportunities and build important infrastructure in order to address their citizens' needs. Many of these tools are unavailable to tribal governments or are difficult for tribal governments to utilize because of restrictive compliance and reporting requirements. For example, the "essential governmental function" test, which only applies to tribes, puts the tribes at a distinct disadvantage in issuing tax-exempt bonds. The test also prevents tribes from establishing and maintaining flexible pension and employee benefit plans.

In response to input from tribal leaders on these barriers to development, several members of the House Ways and Means Committee, the Chairman and Ranking Member of the House Subcommittee on Indian, Insular and Native American Affairs, along with the Co-Chair and Vice-Chair of the Native American Caucus have banded together to advance five important tax provisions that will put tribes on a more level playing field with state and local governments.

Reps. Ron Kind (D-Wis.), Lynn Jenkins (R-Kan.), Suzan DelBene (D-Wash.), David Reichert (R-Wash.), Tom Cole (R-Okla.), Norma Torres (D-Calif.) and Doug LaMalfa (R-Calif.) on June 29, 2017, introduced H.R.3138, the Tribal Tax and Investment Reform Act. The legislation amends the Internal Revenue Code to treat tribal governments in the same manner as state governments with regard to:

  • bond issuances
  • excise taxes
  • treatment of pension and employee benefit plans maintained by tribal governments
  • treatment of tribal foundation and charities
  • providing access to the Federal Parent Locator Service and tax refund offset program for purposes of collecting child support
  • determination under the adoption tax credit whether a child has "special needs"

The enactment of these provisions will reinforce the governmental status of tribes, facilitate equal access to federal tax and financing tools that state and local governments already enjoy, and allow tribes to make important investments in their own communities.

The U.S. Chamber of Commerce and the National Congress of American Indians have consistently expressed their support for the bill. However, a Senate companion bill has yet to be introduced. Advocates hope to generate sufficient support among the U.S. Department of the Treasury and both houses of Congress to have the provisions added to a consensus tax reform package that is being worked on by Republican leadership. One potential hurdle could be the size of the expected loss of tax revenue associated with excise tax exemptions, the more relaxed tax-exempt financing rules and the ability of tribal plans to achieve exemption from certain tax rules applicable to private employer plans. However, if the revenue loss scored by the Joint Committee on Taxation proves to be too high, the scope of the bill's provisions could be cut back.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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