Indian Gambling Tax Case Argued

August 14, 2007

For several years, California has struggled to close a “structural deficit”-a built-in excess of state spending over state revenues. Each year, the state has cobbled together revenue sources to produce a mostly balanced budget, and one such source has been payments by Native American tribes.

Under the federal Indian Gaming Regulatory Act of 1988, tribes offering gambling must enter compacts with their states to ensure regulatory oversight. California withholds approval of such compacts unless the tribe gives the state general fund a cut of the money ($301 million in 2005-06). Compacts continue to be signed, but increasingly grudgingly, because the state steadily demands more money, and some tribes think they don’t need the state’s permission under the California Constitution (which was amended in 2000 to authorize tribes to operate casinos on their own land).

The state has been careful not to call these assessments “taxes,” because states cannot tax tribes under federal law. But when a tribe refuses to pay, the state refuses to approve the compact. That’s what’s happened with the Rincon tribe, near San Diego.

The Rincon seek to expand their casino, and the state is demanding a hefty cut as the price of approval. Negotiations with the state have stalled for three years, culminating in the tribe filing a lawsuit that was argued yesterday in San Diego federal court.

The Rincon casino brings in $242 million, and after expenses, the tribe ends up with $60 million each year for itself. The expansion would bring in additional $39 million, but the state is demanding all but $1.7 million of it-an effective 95 percent tax rate.

“The state has now stepped over the line,” said Scott Crowell, one of Rincon’s lawyers. “We’re not willing to pay a tax into the state to be used as discretionary general fund revenue.”

Governor Schwarzenegger’s office replies that the tribe is raking in money and should share the wealth and help balance the state’s budget, which sure sounds like a justification for a tax. However, his lawyers note that the state is not obligated to approve gambling expansion.

For more on gambling taxes, and the definition of “tax,” check out our Lottery and Gambling Taxes section.

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