Clarkson testifies before Senate Finance Committee
University of Michigan School of Information
Assistant Professor Gavin Clarkson testified before the U.S. Senate Finance Committee recently as an expert witness on the regulation of tax-exempt municipal bonds issued by Native American Indian tribes.
Clarkson, who has faculty appointments in the School of Information, the Law School, and the Native American Studies Program, spoke of the need to recast federal legislation that severely restricts the the tax-exempt status of municipal bonds issued by Indian tribes as compared to those issued by towns, cities, counties, and states.
"There's $50 billion of unmet capital need that goes unfunded each year in Indian Country," Clarkson testified. As an example, he pointed to the fact that 20 percent of Indian Country does not have running water or plumbing facilities.
He blamed these unmet needs on a restriction in the U.S. tax code that applies an "essential government function" test to tribal applications for tax-exempt status for their municipal bonds.
"The essential government function test … is a test that only applies to tribes," Clarkson testified. "State and local governments do not have to pass the essential government function test to issue tax-exempt bonds. They have no restrictions."
This test not only unfairly limits which projects can be funded by tax-exempt bonds, Clarkson said, but also increases uncertainty around bonds that are issued by an Indian tribe. Uncertainty breeds higher interest rates.
"You have situations where tribes have to pay more to do the exact same thing, even if they can qualify for tax-exempt bonds," Clarkson said, "because it is uncertain whether their water treatment plant will survive scrutiny by the IRS."
Clarkson also referred to models he had created that showed that removing the essential government function test would result in a net increase in federal revenue because of additional income taxes collected from workers on new bond-financed projects on Indian lands.