Statement of Honorable Bobby Whitefeather, Trival Council Chairman
Red Lake Band of Chippewa Indians
Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means
Hearing on Unemployment Insurance Reform
April 24, 1997
Mr. Chairman, and distinguished members of this Subcommittee, thank you for this opportunity to comment on behalf of the Red Lake Band of Chippewa Indians, a federally-recognized tribal government, in support of the amendments proposed in H.R. 294, the "Indian Tribal Government Unemployment Compensation Act Tax Relief Amendments of 1997".
Since the early 1990s our Tribe has actively sought administrative and legislative relief from a very unfair interpretation and application of the Federal Unemployment Tax Act (FUTA) to tribal governments recently made by the Internal Revenue Service (IRS).
We are indebted to Members like the Honorable Rep. John Shadegg (H.R. 294 in the 105th), the Honorable Rep. Collin Peterson (H.R. 838 in the 104th, H.R. 1382 in the 103rd), and the Honorable Sen. John McCain (S. 1305 in the 104th; S. 391 in the 103rd) who have pressed forward on this issue, year after year. We are now also indebted to you, Mr. Chairman, for including this matter for hearing today.
My Tribe testifies today in strong support of H.R. 294. This bill has the active support of many Indian tribes as well as the National Congress of American Indians. [See attached NCAI Resolution SPK-95-060 on predecessor bill H.R. 838].
We support H.R. 294 because it would foster:
(a) fairness and equity -- H.R. 294 would treat tribes like all other governments and non-taxable entities are treated for purposes of unemployment insurance;
(b) orderly and efficient FUTA administration -- H.R. 294 would save federal, tribal, and state governments significant sums of governmental revenue by resolving uncertainties that cause sporadic enforcement, coverage, and expensive disputes; and
(c) government-to-government relations -- H.R. 294 would require a consistent application to the FUTA tax laws of the government-to-government relationship that has been recognized by the Federal Courts and by the Congress to exist between the United States and federally-recognized Indian tribal governments.
A. Background on the Red Lake Tribal Government and Reservation.
Our Tribe's Red Lake Indian Reservation is a relatively large, rural Reservation with over 800,000 acres of tribal trust land and water within the boundaries of the State of Minnesota. Most of our lands are located within the boundaries of our diminished Reservation, which has never been broken into individual allotments and lost to non-Indians. Our Reservation is not governed by Public Law 83-280. This means the Red Lake tribal government and the United States government have full civil and criminal enforcement responsibilities for the Red Lake Reservation. As a consequence, our tribal government provides a full range of governmental services to Reservation residents. We administer police, judicial, penal and fire protection services, natural resource protection and management, social services, health and other emergency services, economic development and planning, and many other governmental activities. Although we are somewhat isolated by our rural location, the Tribe has a variety of economic enterprises which serve the community and provide important governmental revenue to the Tribe. The State of Minnesota has neither civil nor criminal enforcement responsibility or authority over our Reservation.
A December, 1995 study carried out by the Department of Economics, Bemidji (MN) State University found that approximately 6,130 of our tribal members live on the Reservation in 1,560 households. A majority of Reservation households (59%) have incomes below the federal poverty line for a family of four. Forty percent of all Reservation households receive income from employment with our tribal government, making tribal government jobs the single most important source of income on our Reservation. Our Tribe employs approximately 2,400 workers in its governmental programs and enterprises, for a total annual payroll of $17.4 million. In addition, many of our tribal members survive on a traditional subsistence economy of fishing and small-scale timber cutting.
B. FUTA and Tribal Governments.
Introduction. H.R. 294 would correct a serious oversight in the way Indian tribal governments like Red Lake have been treated by the IRS in recent years for unemployment tax purposes under the unique, state-federal unemployment program authorized by FUTA. Red Lake and other Indian tribes are governments. We deserve consistent treatment as governments. The changing IRS practice is based on a fundamental disregard for, or lack of knowledge of, what tribes like Red Lake do as governments.
How FUTA Works. FUTA involves a joint federal-state taxation system that levies two taxes on most non-governmental and taxable employers: An 0.8 percent federal unemployment tax (after credit for state taxes that are paid) and a state unemployment tax ranging up to more than 9.0 percent of a portion of an employer's payroll.
Since its enactment in the 1930s, FUTA has treated foreign, federal, state, and local government employers differently from private commercial business employers. FUTA exempts all foreign, federal, state, and local government employers from having to pay the 0.8 percent federal tax that is used to administer the FUTA system nation-wide. It allows state and local government employers, as well as tax-exempt charitable organizations, to contribute into the state unemployment funds on a reimbursable basis, meaning they reimburse the State funds only for those claims actually paid out to former employees. All other private sector employers pay both the federal and state FUTA tax rates in advance without reimbursement. The FUTA statute does not expressly mention tribal government employers within the definition of governmental employers.
How the IRS Treatment of Tribes, for FUTA Purposes, Has Changed. In a turnabout from historical practice, but with increasing frequency over the past decade, the IRS has begun to treat tribal governments as if we are private-sector commercial business employers for purposes of determining how we must participate in unemployment insurance programs under FUTA.
The IRS has begun to try to retroactively collect federal and state FUTA taxes from tribal governments, even though, as is the case with Red Lake, to our knowledge all of the employees our tribal government laid off before 1995 were denied unemployment insurance payments from the State fund because the State has treated our Tribe as an exempt governmental employer.
Red Lake's experience is not unusual. At the request of Senator McCain and the Senate Committee on Indian Affairs, the Congressional Research Service (CRS) issued a report on October 1, 1993 of a telephonic survey it conducted of all state unemployment programs. The report concluded that state treatment of tribal governments under FUTA was uneven and varied widely. Some states considered tribal governments exempt. Some treated them as governmental entities and allowed them to reimburse the state fund on a claims-made basis. Some states accepted tribal contributions at commercial rates. The treatment of tribes has lacked any rational consistency.
The Red Lake Tribe conducted its own survey of other tribal governments experience with FUTA. We learned that IRS policy has varied widely from region to region during the 1990s and even up to this day. Some tribes who have paid FUTA taxes have received their tax payments back from the IRS with the message that tribal governments were exempt. Many tribes who have not paid FUTA taxes have contributed to state funds and have not been challenged. Others have not paid either the federal tax or the state contribution and gone unchallenged. Still others, like Red Lake, have been told they are exempt and then have been vigorously pursued by the IRS for huge, retroactive assessments at the full federal FUTA tax rate (there is no credit because no contributions were made to the state fund) for many years into the distant past.
Tribes Like Red Lake Have Suffered Inequitable Treatment At the Hands of the IRS. My Tribe has suffered great legal and programmatic costs as a result of the changing IRS interpretations of FUTA. The IRS has come against us for several million dollars worth of what it calls back taxes, interest and penalties that reach back as far as 1989. Red Lake was completely surprised by this change of position by the IRS in the early 1990s. We had on file two exempt letters from the IRS for several of our Red Lake programs. We had never paid into the State fund. Indeed, the federally-approved Minnesota Unemployment Insurance Plan specifically described Red Lake and other tribal governments as "exempt." The relatively few tribal employees we laid off in prior years were always denied benefits because they worked for what was deemed an "exempt employer." Our Tribe did not cost the FUTA system anything. Suddenly we were ordered to pay huge amounts of money for no benefit.
Faced as we were with the threat of millions of dollars in IRS taxes, penalties and interest continuing to mushroom at an exponential rate, about two years ago our Tribal Council decided under protest to begin to pay into the State unemployment fund in order to contain our costs and at least get something (employee coverage) for our money. We continue to refuse to pay the federal portion of the tax the IRS considers remaining due after a credit is calculated for our contributions to the State fund.
A total in excess of $2.5 million remains at issue for tax years 1989 through 1994, adding up all the tax amounts, penalties and interest that IRS is trying to get from the Red Lake tribal government. Should the IRS succeed, none of these funds will ever return to benefit any former employees of our tribal government. None of these funds will ever return to the State of Minnesota or its unemployment insurance fund.
Analysis of the FUTA Law and Practice. It is well-settled that Indian tribal governments like Red Lake are not taxable entities under the federal tax code because of our status as governments. Until the late 1980s, this same interpretation was applied uniformly by the IRS to its collections under the somewhat ambiguous language of FUTA.
While FUTA expressly exempts all Section 501(c)(3) tax-exempt organizations and all state and local units of government from paying the federal portion of the FUTA tax, the New Deal-era statutory language of FUTA does not expressly mention tribal governments. Based on a re-reading of the statute, the IRS has changed course over the past decade and begun to pursue a number of tribal governments for FUTA taxes as if we are taxable for-profit commercial enterprises rather than governments. This change of interpretation and practice has proven to be quite burdensome to tribal governments like Red Lake who were caught unawares by the change in IRS policy.
The IRS has chosen in recent years to pursue some tribal governments for unpaid FUTA taxes who had proceeded on the good faith assumption that we were immune, as governmental employers, from the federal portion of the tax. Some tribal governments also chose not to participate in the state unemployment programs. Red Lake's experience with the State of Minnesota is not unique. We have learned that other tribes in other states have likewise laid off employees who were subsequently denied benefits by the state unemployment program solely because they had worked for what the states deemed was an "exempt" employer -- a tribal government. While this caused hardship on the former employees of tribal governments, it meant that the state unemployment funds paid out no benefits and experienced no loss.
The change in this IRS interpretation of the FUTA statute has not been uniform. The resulting unevenness has caused additional problems for Red Lake and other tribal governments as we have been subject to differing interpretations over whether and how we are covered under FUTA. Compounding this problem have been the varying views of different state governments and the U.S. Department of Labor. As a result, different tribes have been treated differently in different periods of time. This has led to considerable confusion among tribal governments about whether they are covered and how much they are supposed to pay.
Tribal Experience With the Changing IRS Practice. In the past decade, some tribes have paid the federal FUTA tax and then enjoyed the unusual experience of having the IRS return their payments to them with the notation that the IRS considered them to be exempt employers. Other tribal governments have not paid any FUTA contributions in a good faith and reasonable belief that they were exempt. For example, two employer subdivisions of our Red Lake tribal government, the Red Lake Tribal Job Training Partnership Act Program and the Red Lake Tribal Comprehensive Health Services Program, received written communications from the IRS treating them as if they were tax exempt.
IRS Collection of Unpaid FUTA Contributions is Punitive. The IRS effort to collect unpaid FUTA assessments is the equivalent of a punitive tax under FUTA's unique enforcement mechanisms. The statute permits the IRS to collect the full tax from a non-paying commercial business regardless of its experience rating. These provisions act as "teeth" designed to encourage private sector businesses to pay the tax in advance.
However, now that the IRS interpretation of the law has changed, the IRS effort to collect back taxes from Indian tribal governments like Red Lake means that none of the funds assessed and collected by the IRS will ever be paid out as unemployment benefits to former employees of a tribal government like Red Lake that has not participated under FUTA. Nor will these dollars return to the state funds in which Red Lake and other tribal governments did not participate. Instead, the federal IRS will collect the highest possible state and federal unemployment taxes and place all of these funds directly into the U.S. Treasury without credit or benefit to any workers, tribal employees or otherwise, in Minnesota. The IRS approach would result in a windfall for the United States Treasury, and break the back of our Tribe's government and Reservation economy.
How can it be fair to impose this kind of taxation without benefit on the meager funds of an Indian tribal government like Red Lake simply because we have followed an interpretation of FUTA that some regional offices of the IRS and the states previously followed but now have abandoned?
H.R. 294 Would Fairly Resolve the Problem. H.R. 294 would amend existing FUTA tax statutes to clarify expressly that tribal governments should be treated just as state and local units of government are treated for FUTA unemployment tax purposes.
Under H.R. 294, the IRS would have no authority to assess federal FUTA taxes against tribal governments, just as it cannot do so against like state and local governments and tax-exempt organizations. In addition, H.R. 294 would expressly authorize tribal governments, like state and local governments and tax-exempt organizations, to contribute to a state unemployment insurance fund on a reimbursable basis for unemployment benefits actually paid out to former employees.
If a tribal employer does not lay off employees, under H.R. 294 there would be no reimbursements owed because no benefits have been paid out. If a tribe does lay off someone for whom benefits are paid, the tribe pays the benefits, dollar for dollar. In contrast, private sector employers typically must pay an advance unemployment tax. The FUTA law spreads the insurance costs across the private sector, with commercial employers paying flat rates only partially adjusted by their experience rating. The public policy underlying this approach seems to be that the burden of unemployment insurance should be borne somewhat evenly by all private sector interests.
The rationale for public sector employers having a reimburser status is that governmental employers, such as Indian tribes and states, have a far more stable employment environment than that of the private sector. Equally important is the rationale that governmental revenue, whether it be federal, state or tribal, should not be "spent" in advance of when an obligation to pay actually arises.
Finally, H.R. 294 would also remove a theoretical unemployment tax liability of tribal governments like Red Lake who did not pay unemployment compensation taxes in the past in the good faith and reasonable belief that we were exempt, provided that no benefits were paid to their former employees. If former employees were paid benefits by a state fund, the tribal government would be obliged to reimburse the state for those benefits actually paid out.
This last point is very important to Red Lake and to other tribes who have been caught in the net cast by the changes in IRS policy and practice. It is our understanding that Section 2(e) of H.R. 294 (transition rule) would assure that federal and state portions of the FUTA tax for years prior to the effective date of H.R. 294 could not be asserted or collected except to the extent that benefits have been paid out by a state fund for service attributable to the tribe for such period. If this is not your reading of this language, we would want to work closely with your staff to amend the language to ensure that IRS is prohibited from collecting the unfair windfall it is seeking to gain from our Tribe and others similarly situated for past years.
Questions That Have Been Raised on H.R. 294. Three years ago, the U.S. Department of Labor raised a concern that, because tribal governments, like all governments, are immune from suit by virtue of their sovereignty, a state fund may not be able to force a participating tribal government to reimburse the state fund for money it has paid out to a former tribal employee. There do exist several ways by which a state in such a situation could collect the necessary reimbursements from a tribe (for example, it could reduce other funds going to a tribe for other state-funded services administered by the tribe). However, a provision was added to the bill that would allow a state to insist that any tribe wanting to have "reimburser" status post a payment bond to assure that reimbursements will be made. Section 2(c) of H.R. 294 contains this provision and of course has our support.
A second question has been raised about whether H.R. 294 should be amended to address only those tribal government employees who carry out what are seen as "traditional" governmental activities like law enforcement, judicial services, social services, or natural resource protection, removing from H.R. 294 those tribal government employees of tribal enterprises wholly-owned and controlled by an Indian tribal government. Tribal governments and their employees do engage in business-type activities in order to generate governmental revenue and provide jobs and services in what are, more often than not, rural and isolated economies. But it should be noted that State governments do the same thing. Any effort to exclude certain tribal government employees in this way would be patently unfair. State and local government employees throughout America are engaged in a wide variety of business-type activities that are wholly-owned and controlled by state and local governments. A recent CRS survey preliminarily concluded that state governments annually raise $46.5 billion from business-type activities. That is $46.5 billion, not million, in revenues from the direct operation of business-type activities by State government employees. All of these state government employees, from the liquor store stock clerks in Pennsylvania to the massage therapists in the State park resorts of West Virginia to the lottery gambling clerks in dozens of states, are treated as governmental employees for purposes of FUTA. To be fair, our tribal government employees who are engaged in business-type activities run by the tribal governments should be treated no differently than these State and local government employees. Like states, Indian tribal governments dedicate the revenues from these business-type activities to governmental purposes. This is consistent with the longstanding Federal policy that encourages tribal government self-determination and self-sufficiency. It would be the height of unfairness for the United States to discriminate against Indian tribes who do the same thing that state governments are doing.
C. Conclusion.
The Red Lake Band of Chippewa Indians, along with other federally-recognized Indian tribal governments, seeks prompt enactment of H.R. 294.
H.R. 294 would restore fairness to the administration of the FUTA program and tax structure, because it proposes to once again have the United States uniformly treat each Indian tribal government the same as it treats state and local governments and tax exempt organizations for purposes of FUTA. Our participation as tribal governments in the FUTA program under H.R. 294 would be on the same terms that all other governments and non-taxable organizations participate. There is no special favor or special treatment involved. H.R. 294 would simply clarify that tribal governments like Red Lake should be treated for what we are -- governmental employers.
My Tribe stands ready to assist the Subcommittee in refining and securing passage of H.R. 294. Thank you for this opportunity to be heard.
ATTACHMENT
National Congress of American Indians
Resolution SPK-95-060
Title: Supporting Legislation Designed to Exclude Tribes From Being Assessed Under "FUTA"
WHEREAS, we, the members of the national Congress of American Indians of the United States, invoking the divine blessing of the Creator upon our efforts and purposes, in order to preserve for ourselves and our descendants rights secured under Indian treaties and agreements with the United States, and all other rights and benefits to which we are entitled under the laws and Constitution of the United States to enlighten the public toward a better understanding of the Indian people, to preserve Indian cultural values, and otherwise promote the welfare of the Indian people, do hereby establish and submit the following resolution; and
WHEREAS, the National Congress of the American Indians (NCAI) is the oldest and largest national organization established in 1944 and comprised of representatives of and advocates for national, regional, and local Tribal concerns; and
WHEREAS, the health, safety, welfare, education, economic and employment opportunity, and preservation of cultural and natural resources are primary goals and objectives of NCAI; and
WHEREAS, the Internal Revenue Service has taken the position that federal unemployment tax act assessments will be applied to tribes; and
WHEREAS, other governmental units and non-profits are specifically exempted from such assessments; and
WHEREAS, member tribes view their resulting treatment as a "private employer" as an infringement upon tribal sovereignty; and
WHEREAS, legislation entitled "Indian Tribal Government Unemployment Compensation Act Amendments of 1995" has been introduced in Congress as H.R. 838; and
WHEREAS, the legislation, if passed, would include "an Indian tribe" along with other governmental and political subdivisions now specifically exempt from the assessment.
NOW THEREFORE BE IT RESOLVED, that the NCAI go on record as supporting legislation designed to exclude tribes from being assessed under "FUTA" and thereby retain for tribes their status of being exempt from such federal taxation.
Certification
The foregoing resolution was adopted at the 1995 Mid-Year Conference of the National Congress of American Indians, held at the Sheraton Spokane in Spokane, Washington, on June 6-8, 1995 with a quorum present.
gaiashkibos, President
ATTEST:
S. Diane Kelley, Recording Secretary
Adopted by the General Assembly during the 1995 Mid-Year Conference of the National Congress of American Indians, held at the Sheraton Spokane in Spokane, Washington, on June 6-8, 1995.