OLYMPIA, Jan. 8.—It probably couldn’t have happened at a worse time for the Legislature’s upcoming transportation debate, but the state’s independent service station operators are back in the state’s capital city with a long-running lawsuit that challenges the big cut of the gas tax the state gives to Indian tribes.

The suit, filed four years ago by the scrappy Automotive United Trades Organization, an association of independent service-station operators, has been out-of-sight, out-of-mind since a Supreme Court skirmish in the summer of 2012. Now the gas dealers are back before the state Supreme Court, asking it to rule on their challenge to the state’s uber-controversial Indian gas-tax deal. Brokered by the Gregoire Administration in 2007, the deal gives Indian tribes a growing share of the state’s fuel-tax receipts. In some people’s minds it is a multi-million-dollar giveaway, benefiting an interest group that has shown great generosity during political-campaign season.

And as lawmakers contemplate a possible 11-and-half-cent gas-tax increase, AUTO director Tim Hamilton offers a word of warning. The higher the gas-tax goes, the more money will go to the tribes – upwards of a half-billion dollars if the tax passes. Hamilton says you better believe somebody is going to raise the point when the gas-tax increase inevitably goes before the voters.

“I will tell you this – if they pass an 11-and-a-half-cent gas-tax increase without addressing this problem, if the voters have anything to say about it, this will be a poster child for what is wrong in Olympia.”

If Hamilton’s legal play works, the issue will be before the Supreme Court right about the same time voters might be making a decision on the gas tax this fall. State Sen. Doug Ericksen, R-Ferndale, a leading critic of the gas-tax deal in 2007, says he wouldn’t be surprised to see it become an issue in a campaign against a gas tax. “I think the tribal gas tax highlights mismanagement of gas tax dollars by the Legislature in the past,” he says.

Caused Furor Seven Years Ago

Hamilton’s trade group has kept the tribal gas-tax issue alive in the courts long after most lawmakers have forgotten about it — or perhaps after they decided it is in their best interest to say nothing. But anyone who was around the statehouse in 2007 will remember it as one of the biggest issues of that year’s legislative session. A federal judge decided Indian tribes could ignore state gas taxes if they wished, and then-Gov. Christine Gregoire argued that the state faced disaster. Indian stations could undercut the market, she said, customers would flock to their stations, and the state would run short of money for highway construction. The Legislature had a simple solution. Instead of levying the tax at the pump, when a motorist buys gas, lawmakers moved the taxable event to the sale from a refiner to a distributor. So the tax is paid long before the gas gets to a tribal gas station.

Nevertheless, Gregoire asked the Legislature for authority to negotiate gas-tax agreements with Indian tribes. The argument was that they might enter the distribution or refining businesses, though it was unclear whether that was possible, or whether it would have enabled tribes to avoid paying tax. Outcry was fierce among Republicans, in part because the tribes had been especially generous to Gregoire’s Democratic Party during previous election cycles.

Yet after one of the most convoluted legislative debates of recent history, Gregoire got her dealmaking authority, and her staff eventually negotiated compacts with 23 of the state’s 28 Indian tribes. Under the terms of the compacts, Washington gives Indian tribes a payment that is equal to 75 percent of the tax levied on fuel sold at their stations. Since then the state’s service-station operators have been screaming bloody murder.

More Even-Handed Contributions

Indian sales of gas and diesel have been booming as tribes have built high-volume stations along busy highways, on off-reservation “trust land.” The amount going to tribes rose from $5 million before the deal in 2005 to $28 million in 2010, the last year for which statistics are available. In 2011, a Department of Transportation projection indicated a total $424 million in state gas-tax money would go to tribes over the succeeding 10 years. But that was at the current tax rate of 37.5 cents a gallon. If it goes to 49 cents, the take goes up by a third, and while it all depends on the phase-in, the 10-year total clearly would be well over a half-billion dollars. That DOT estimate also presumed the tribes would not enter the lucrative truck-stop business – something Hamilton says he fully expects.

Suspicions abound among non-Indian gas dealers. The tribes are not supposed to use the state money to undercut the local market, but their prices usually are the lowest around, and Hamilton insists the state is subsidizing the competition. But the furor of 2007 seems to have died down, and these days Hamilton appears to be the only one around the statehouse who is complaining about it. The issue is just too hot for lawmakers to handle, he complains – particularly now that tribes have started to cut campaign checks in both directions. They spent $1.6 million on state and local races in the 2012 election cycle, about half of it for Democratic-party campaign funds, but an increasing number of campaign checks went to individual Republicans. “It just makes the hair on the back of my head stand up,” he says. “Everyone wants in on the money.”

Issue Back in Spotlight

AUTO’s lawsuit plucks the matter out of the political arena and drops it in the courts. Litigated by attorney Phil Talmadge, the former Supreme Court justice who has made a specialty of high-profile public-policy cases, the suit alleges that the gas-tax deals are a clear violation of the state constitution.

The argument is this: The 18^th amendment to the state constitution, passed by voters in 1944, says that gas tax money must be spent for road purposes – which in this state also mean ferries. Clearly the tribes aren’t spending it that way. Exactly what they’re spending it on isn’t certain, because the tribes are considered “sovereign nations” under the law and are not subject to public records disclosure requirements — the Gregoire Administration might have demanded disclosure when it negotiated the deals but it did not. Still, at least for the first few years, six of the tribes voluntarily provided partial reports, and what little information is available demonstrates that at least some of the money is not going toward roads.

The reports showed state gas-tax money has paid for boat-launch docks, housing developments, public parks, general “public works” budgets, even collateral for tribal loans.

One skirmish has already put the case before the state Supreme Court. In 2012, the state attorney general’s office attempted to defeat the suit by arguing that citizens had no right to challenge a deal struck between state governments and tribal governments. Appeals went to the highest level, but finally the Supreme Court said no to the state. The court ruled that the way the state spends gas-tax money is certainly a matter of public interest. Just as important, it agreed with Talmadge that the case does not directly challenge the state’s gas-tax agreements. At least theoretically the state could find another pot of money from which to pay the tribes, though it is hard to say where cash-strapped lawmakers would find the money.

The 2012 Supreme Court decision sent the case back down to the Superior Court level, this time to be tried on the merit of the argument. In November Grays Harbor Superior Court Judge Gordon Godfrey ruled against AUTO, for reasons that are unclear because no written ruling was issued. AUTO is asking the state Supreme Court to hear the appeal directly, rather than forcing the case to go through the state Court of Appeals, a process that might take two years to complete.

Right About Election Time

Now here’s the political punchline. A direct review of the case means the Supreme Court would likely hear arguments in the case – and maybe even make a ruling – sometime before the November 2014 election. And all the talk of gas-tax giveaways could have quite a bearing on a public gas-tax vote. If lawmakers pass a gas-tax increase this year, voters will probably be asked to ratify the measure on the November 2014 ballot. Either the Legislature will refer it to voters or someone is likely to file a repeal initiative or referendum, as has happened two out of the last three times the Legislature has raised gas taxes. And so right about the time voters will be making up their minds about the gas tax, the state’s decision to give a piece of the action to the tribes will be a front-and-center issue.

Ericksen says it is another argument for transportation reform before a gas-tax passes – the argument advanced by House Republicans and the Senate Majority Coalition Caucus. Add it to embarrassments at the Department of Transportation – freeway connectors that don’t line up, bridge pontoons that leak, ferryboats that list, and most recently the breakdown of the Seattle tunnel-boring machine, caused by a forgotten DOT-installed pipe. There are also matters of state policy, like the fact that the state siphons money from the gas-tax fund by charging sales tax on construction materials – and the tribal fuel compacts. The state never needed to negotiate them, he says. Making the distributors pay the tax did the trick.

“It does not help legislators who want to pass a gas tax, whether it is in Olympia or by sending it to the public,” Ericksen says. “There are lots of factors that don’t help – the 520 bridge problem, the sales tax. The whole litany of things that need to change before people approve another gas-tax increase is large, and the Legislature needs to step up and address them all.”

State Relies on a Curious Definition

Until last fall, the state didn’t make any direct arguments against the AUTO case, instead trying to defeat it on fine points of law. But the renewed litigation in Grays Harbor Superior Court finally forced it to reveal its line of argument. It appears its entire case depends on a definition you won’t find in any dictionary.

The 18^th Amendment to the state constitution – the one that governs the use of gas tax money – allows the state to make “refunds” of gas taxes.  So ever since the compacts were negotiated in 2007, the state’s lawyers have been using the word “refund” to describe the payments the state is making to the tribes. Obviously refunds are permissible, the state says.

So what’s a refund? The Supreme Court has offered up a definition of the word – in a previous case it adopted a dictionary definition that says the word means “money that is paid back.” Historically that term meant repayments to people who actually paid taxes in the first place – end-users like farmers and off-road-vehicle enthusiasts who bought fuel at gas stations but didn’t use highways.

But the tribal gas stations don’t pay gas taxes. Not in a technical sense – since 2007, distributors have been paying them. Indeed, in numerous speeches in the House and Senate that year, lawmakers made their intent clear. They declared they were making distributors liable for paying taxes, because they couldn’t compel the tribes to pay.

The tribal gas stations don’t pay gas taxes in a moral sense, either. Ultimately it is the end-user who pays – the motorist — when he or she buys fuel that has already been taxed. Gas stations merely resell a product. Yet the state’s brief ignores both issues and argues that a tribal station pays the tax “because the tribe purchases tax-burdened fuel from suppliers.” Thus it says the state can refund tribal money. But if the tribes don’t actually pay the tax, it is hard to see how the state can give them their money back, Hamilton says. It isn’t a refund, he says — “It is a giant hole in the gas tax fund.”