Another ostensible justification for trying to tax Indian governments is that they are said to encroach on the tax bases of their neighbors. The Wash- ington Research Council (2002) asserts:
The diversion of economic activity to untaxed tribal business costs state and local governments revenue (1). The expansion of tribal businesses…reduces the ability [of] state and local govern- ments to fund services (7). The amount of foregone revenue is not trivial (1).
Holding aside for the next subsection the question of whether this claim is fac- tually supportable or not, the argument collapses in its conception. Jurisdic- tions everywhere witness competition for taxable activity. In 1968 New Hampshire developed the first state lottery, and Massachusetts residents flocked north of the border to participate. The amount of foregone revenue was not trivial. More recently, Detroit residents flocked to a large govern- ment-owned casino in Windsor, Ontario, to the alarm of Michigan taxpayers.
In neither case was intergovernmental taxation seriously considered as a solu- tion—it was unthinkable.
If governments did turn to intergovernmental taxation every time Boe- ing or Wal-Mart opened a new facility, a tangle of intergovernmental taxes and conflict would drag upon the US economy and system of government. Even if it could be arranged somehow, citizens would be denied a strong mechanism of disciplining their governments’ behavior. If a government could simply tax its neighbor rather than competing to attract productive residents and investors, the competition between governments to provide at- tractive tax rates, reasonable regulation, and efficient services would be dimin- ished significantly.
And supposing the principle of intergovernmental tax immunity were suspended for a moment: Is it a foregone conclusion that “special rights” of Indian self-government warrant sharing revenues with states because tribes deplete off-reservation tax collections? The economics of Indian reservations indicate otherwise.
At its core, this allegation begins with the sensible notion that a deci- sion by a non-Indian to spend some discretionary household income at an In- dian casino means that the income cannot be spent on a state-taxable transac- tion: a movie, a hamburger, or a car. It goes without saying that within fixed budgets, consumers must make substitutions between consumption alterna- tives. As reasonable as the observation is, however, there are potentially coun- tervailing effects. A casino may be an attractive destination that brings net new spending into a region. Thus, depending upon the economic geography in question, Indian gaming can precipitate net regional growth (e.g., as dem- onstrated in Grant, Spilde, Taylor 2004).
Because Indian gaming takes place on Indian land (with limited excep- tion) and Indian reservations are scattered around Washington in ways that have more to do with settlement history than with leisure business strategy (see Figure 1), customers have to drive further from their homes than would otherwise be the case. And in so doing, they move economic activity around the state more than they otherwise would. A visit to the Swinomish Casino by a Bellevue couple entails moving some of their discretionary spending out of the metropolitan area to Skagit County hotels and gas stations, to Casino em- ployees’ grocery budgets, and to the Swinomish Tribe’s housing program. That movement of money brings with it all the attendant positive implica- tions for local revenue collections. To be sure, this destination effect must be netted of local substitution effects. Nonetheless, the fundamental economic geography is clear: because Indian casinos are spread throughout Washington
(and often in economically depressed areas) they have destination effects that potentially surpass local customers’ substitution away from other in-region purchases. If and to the extent this is so, local jurisdictions’ tax bases will be augmented, not diminished by the introduction of Indian gaming.
In addition, tribes are incapable of economic isolation and they are forced to turn to the off-reservation economy for significant proportions of their purchases. These purchases, in turn, are associated with tax collections by non-Indian governments. Customers bring dollars to a tribal casino or other enterprise and those revenues are split between the providers of capital, labor, goods, and services, on the one hand, and the tribe on the other. The tribal revenues, in turn, are spent on government programs and services, which then require additional capital, labor, goods and services (see Figure 20).
Figure 20
Indian Gaming Finance at a Glance
Outside Jurisdictions Tribal Government Programs Casino Customers Profits Workers Vendors Tax es Tax es Workers Vendors Tax es Tax es Tax es Tax es
Try as they might, Indian governments cannot artificially keep dollars circulating in their reservation economies by buying these goods and services on the reservation. Tribal governments and their enterprises need carpets, banking services, electricity, graduate education, advertising, trucks, com- puters, asphalt, legal advice, and schoolteachers. And while tribes have every incentive to procure from reservation workers and companies so as to acceler- ate socioeconomic recovery, they cannot meet the demand for labor with “domestic” supply, and they certainly cannot meet the demand for goods, services, and capital. Reservation economies are too small and undiversified. The excess demand must be satisfied from off the reservation, and that de- mand then ripples outward with all the usual tax implications for the state.
In the main, only the initial purchase or sale is affected by the tax status of the Indian or tribal party to the transaction. And the impossibility of eco- nomic isolation on the reservations thus makes tribes relatively efficient at converting whatever destination benefit it may create into an off-reservation economic benefit, too. If the local off-reservation economy can provide the goods and services the tribe needs at economically advantageous terms, the tribe has every incentive to purchase locally, and many do.
Thus, the economics cuts two ways. On the one hand, spending a households’ discretionary dollar at a tribal casino means it is not available for spending elsewhere. On the other hand, destination effects and the depend- ency of reservation economies upon off-reservation suppliers tend to bolster taxable spending off the reservations. Which one of these countervailing ef- fects dominates is a matter of local conditions and customer behavior, and thus claims regarding the “non-triviality” of tax revenue losses off the reserva- tions can only be evaluated with systematic evidence. The next section exam- ines evidence from several sources.