Tribal governments have long faced obstacles when it comes to accessing tax-exempt financing. In a recent paper titled “Tax code constraints limit tribal tax-exempt bonding,” Federal Reserve Bank of Minneapolis economists highlighted the disparities between tax-exempt bonds issued by tribes versus state and local governments. The limited access to this financing tool has hindered tribal governments’ ability to accelerate economic prosperity and grow their private sectors.
One of the major roadblocks for tribal access to the tax-exempt market is the essential government function test, also known as Section 7871. This provision prohibits tribes from issuing tax-exempt bonds for projects that are not customarily performed by state and local governments. Unlike state and local issuers, tribes are not able to tap into tax-exempt debt for revenue-generating projects, such as convention centers and stadiums, which are considered outside the scope of an “essential government function.” This limitation puts tribes at a significant disadvantage when it comes to financing vital infrastructure projects and economic development initiatives.
In addition to the essential government function test, tribes are also restricted from issuing private activity bonds, with minimal exceptions. Private activity bonds allow for project-specific revenue bonds, which can be an efficient way to service debt since the projects pay for themselves. The limited access to this financing tool has further hindered tribal governments’ ability to fund essential projects and initiatives. The disparity in access to tax-exempt and private activity bonds has resulted in tribal tax-exempt bond proceeds being significantly lower compared to state and local governments.
To address the challenges faced by tribal governments in accessing tax-exempt financing, there have been calls for reforming the tax code. One potential solution is to eliminate or amend the essential government function test and provide tribes with equal footing to issue tax-exempt bonds for a wider range of projects. Legislative changes, such as lifting or renewing the volume cap on Tribal Economic Development Bonds, could also help expand tribal access to the tax-exempt market.
As discussions around tax code reform and the expiring Tax Cuts and Jobs Act continue, there is growing optimism that Congress will take up the issue of expanded tribal access to tax-exempt financing. The findings of the Federal Reserve Bank of Minneapolis economists’ paper have brought increased awareness to the challenges faced by tribal governments and the need for legislative changes to level the playing field. With the support of tribal advocates and policymakers, there is hope for greater access to tax-exempt bonding for tribal governments in the near future.