Few people understand the nuances of how taxes work in Indian Country. As a result, taxation authority in Indian Country has been one of the most litigated issues between tribes, states, and local governments. Furthermore, there is much misinformation and many missed opportunities for innovative and mutually beneficial inter-governmental collaborations that respect tribal sovereignty.
MBPC is pleased to bring you a series of Policy Basics reports that break down this complex issue. This blog provides an overview of Part 1 and the taxes that individual American Indians in Montana pay. You can get all the details by reading our full report, which will be released early next week. Tribal governments and the taxes they pay and assess will be the focus of Part 2, which will be released later this fall.
Taxes and Individual Tribal Members
According to the U.S. Constitution’s supremacy clause, the Constitution, federal laws, and treaties override conflicting state laws. Additionally, a variety of U.S. Supreme Court rulings have recognized the absolute power of Congress to regulate Indian affairs and property. Altogether, this means that in most instances state and local governments cannot tax tribal members, tribal governments, or their property. However, tribal members living or working off their own reservation are subject to state and local tax laws.
In generally, individual tribal members are subject to federal income taxes. American Indians are also subject to state income taxes if they live or work off the reservation. Regardless of residence, American Indians pay into social security and Medicare, referred to as Federal Insurance Contributions Act, or FICA, taxes.
The U.S. Supreme Court has ruled that tribal members must pay state and local property taxes on their privately owned land held in fee simple status, even if their property is located on their reservation. Likewise, tribal members are also subject to all state motor vehicle taxes if they live off the reservation where they are enrolled. Regardless of residence, all tribal members in Montana must pay vehicle registration fees consisting of vehicle registration, vehicle disposal, weed control, county motor vehicle computer, and where applicable, the gross vehicle weight fees.
Tribal and state governments have each asserted their right to collect excise taxes on reservations, leading to years of costly litigation and tension. As a result, the state of Montana and the seven reservation tribal governments have negotiated a variety of revenue sharing agreements for excise taxes on alcohol, tobacco, and fuel (and in once instance oil and natural gas taxes). The goal of these agreements is to “prevent the possibility of dual taxation by governments while promoting state, local, and tribal economic development.”
Therefore, American Indians in Montana pay excise (or sales) taxes on alcohol, tobacco, and fuel that they purchase. The single exception is members of the Confederated Salish and Kootenai Tribes (CSKT), who do not pay the state tax on cigarettes they purchase on the Flathead Reservation. Because of this, the CSKT government does not receive a remittance share of this particular tax from the state; instead, they receive a limited number of tax-free cigarettes according to quotas set by Montana law. However, any sales above the quota are taxed.
Below is a visual snapshot of the taxes that individual American Indians in Montana pay. The yes-no answers paint a clear picture of what in reality is a complex statutory issue that is still being worked out between governments, Congress, and the courts.
It is important for policymakers and the broader public to understand how taxes work in Indian Country. This can reduce tensions and help maximize the potential for innovative and mutually beneficial inter-governmental collaborations that respect tribal sovereignty. Check out our blog early next week for Part 1 and stay tuned for more information on taxes and tribal governments, coming this fall in Part 2.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.