Scott A. Taylor


In order to provide the fullest consideration of these very complicated issues, I have divided my discussion into six parts. In the first part, I discuss specific state statutes to show how their application to the state income taxation of interest on tribal bonds is textually unclear. The primary purpose of this part of the discussion is to show that the analysis must start with the particular state income tax statute itself to see if it purports to tax the interest income generated by a tribal bond. In some instances, the more reasonable interpretation of the state statute may lead to the conclusion that the statute does not impose a tax on the interest from the tribal bond. None of the relevant statutes contains an explicit exemption for tribal bonds, although California has proposed one that it has yet to adopt.

In Part II, I explore the special treatment of federally recognized Indian tribes and the broad exemption they enjoy from state taxation when the legal incidence of a state tax falls on the tribe for activities that take place wholly or primarily within the tribe’s reservation. I conclude that the legal incidence of the state income tax falls on the bond owner, not the tribe. As a result, tribal immunity from state taxation does not extend to the interest it pays on tribal bonds and therefore, this immunity by itself does not bar state income taxation of the interest from the tribal bond. In Part III, I investigate the application of the Indian preemption doctrine and conclude that the federal statutes, regulations, and administrative authority dealing with tribal bonds so occupy the field that the state’s power to tax tribal bond interest is preempted. The discussion in Part IV explores whether a state income tax on tribal bond interest impermissibly infringes tribal sovereignty. The current Supreme Court has paid little attention to state infringement of tribal sovereignty and needs to develop meaningful standards for limiting state encroachment on tribal sovereignty. A state’s taxing power is a good starting place, especially when this power directly impedes a tribe in its exercise of an essential governmental function. In Part V, I discuss application of the Indian Commerce Clause. Supreme Court jurisprudence is in its infancy on this question and should expand to impose a constitutional barrier against states whose taxes discriminate against tribes. Finally, in Part VI, I discuss whether states that discriminate against tribes within their borders are engaging in unconstitutional racial discrimination. I conclude that the discrimination is political, not racial, and, therefore, does not violate the Fourteenth Amendment.

Included in

Tax Law Commons