SACRAMENTO — Wealthy California Indian tribes that use millions of dollars in federal tax breaks to finance expansion of gambling resorts are gathering support for similar tax breaks from the state.
The tax benefits are at the center of lobbying battles in Washington and Sacramento.
In Washington, the tribes are fighting the IRS over their use of tax-exempt bonds to pay for expanding hotels and other resort facilities on their reservations.
On Tuesday, a tribe near Palm Springs learned that it lost one round in that fight. The IRS has ruled against the tribe's use of $145 million in such bonds to build a 12-story luxury hotel and a convention center. The order is under appeal, but if it stands, the tribe and the people who invested in its bonds could be liable for millions of dollars in taxes.
In Sacramento, 19 tribes -- several with major casinos -- have joined a legislative push to create state tax exemptions that potentially could be used to help pay for hotels, golf courses and other resort projects.
If the measure becomes law, California could be the first state to legalize tribes' use of such advantages, at a time when Sacramento is struggling with a multibillion-dollar budget gap and faces cuts in school spending and other key areas. The proposal is scheduled for a committee hearing this month.
Tribes backing the change include some of the largest campaign donors in the state. Some legislators endorsing the bill have accepted $100,000 or more in donations from tribes since 1998.
Tax-exempt bonds are typically used by governments to pay for the construction of sewers, roads and other public improvements. Because investors who buy the bonds pay no federal income taxes on the interest they earn, the bonds can be sold at discounted interest rates.
The lower interest rates can save millions of dollars in the financing of large construction projects. But the exemption costs the government millions in forgone taxes. Making the interest exempt from state taxes would lower the interest rate further and increase the cost to taxpayers.
At issue in the fight between the tribes and the IRS is whether building casinos and resorts complies with federal tax law, which says tribes can use tax-exempt bonds only for "essential government purposes."
"We are not OK with tribes issuing tax-exempt bonds for commercial tourist facilities," said Charles Anderson, who heads the IRS unit that audits tax-exempt bonds.
