Article by Erik Smith. Published on Monday, May 17, 2010 EST.

Will Cost Taxpayers Millions – But State Didn’t Have to Pay a Dime

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, May 17.—Three years ago, there was controversy galore about Gov. Christine Gregoire’s deal with Indian tribes to expand casino gambling, and whether she should have held out for a cut of the revenue. Voters heard all about that one last election, again and again and again. But the governor made another deal with the state’s Indian tribes at the same time that seemed to slip under the radar – and unlike the gambling deal, this one scores a direct hit on taxpayers. 
            That deal, on Indian gas-tax revenue, has already cost the state tens of millions and could rise into the hundreds of millions, every year. And critics say the worst thing about the deal is that the state never had to make it.
            The deal gives tribes 75 percent of the state gas-tax revenue generated at tribally-owned gas stations. It’s a fast-growing business for the 15 tribes that have taken the state up on the bargain. Last year they got $23 million. The tribes are supposed to pass the gas taxes along to customers and use the proceeds to pay for reservation highways. Now a lawsuit from an association of service-station operators says the tribes are plowing the money back into their stores, and are using state money to undercut the competition by about five cents a gallon.

            Nothing prevents the tribes from entering the lucrative truck-stop business along the state’s major highways – and when that happens, says Tim Hamilton, director of Automotive United Trades Association, the hit on the state highway budget could be in excess of $100 million a year.

            And it raises the question – why did the state make the deal in the first place?

            At the time, state officials said they wanted to settle lawsuits from the tribes on gas-tax revenue. But there was another solution to the problem that wouldn’t have cost the state a dime.

            What happened back in 2007 was really a giveaway of state money, critics say. And they say the reason for it is obvious – the tribes are flush with casino cash, and they’re using it to influence the political process. Some of it even flowed directly to the governor’s campaign. It was a sweetheart deal, complains state Rep. Doug Ericksen, R-Ferndale. “If you look at the way this issue played out, with the governor’s involvement in the gas tax bill in the waning hours of the session, it shows me that it was really pure politics.”

            State Has Right to Collect Tax

            To understand what happened, you need to know how gas taxes work in Washington state. Every time you buy a gallon of gas, 37.5 cents goes to the state. But technically speaking, you aren’t paying the tax yourself. The state changed the law in 1999 to declare that the tax is collected when a supplier – an oil refiner – sells to a distributor. The tax gets passed along through the system, and as far as motorists are concerned it doesn’t make a whit of difference.

            Yet it’s an important point. It’s cheaper for the state to collect the tax that way, and it’s harder to evade it. And just as important, it means the state can tax Indian tribes.

            That’s because the sale doesn’t take place on Indian land. Federal law says the state can’t tax tribes or their members for sales that take place on tribal land. But if the “taxable event” takes place before gasoline gets to a tribal gas station, the state gets to keep every penny. A 2005 U.S. Supreme Court decision upheld a similar law in Kansas.

            The state used to think it was in the clear. It kicked some money back to the tribes for upkeep of reservation highways, but the amount was limited, and the state got to decide what was fair. The amount was based on gas sales to tribal members, and an estimate of the miles they traveled on reservation highways. Two tribes wanted a better deal, and they sued in federal court to get it.

            Gregoire Makes Choice

            The Swinomish tribe, with a gas station near La Conner, and the Squaxin Islanders, with a store near Shelton, hit on a technical weakness in the state law. The language had been carefully crafted by the state’s oil distributors to help them avoid up-front costs. The distributors collect money from the retailers, the distributors pass the tax money back to the suppliers, and the suppliers pay the state. When the month ends, the law gives everyone about three weeks to settle up the accounts. The arrangement keeps the distributors from having to take out loans, saves them millions of dollars in interest charges, and allows them to extend credit to retailers. And the way the law used to read, it said that end users paid the tax.

            That was the crux of the lawsuit. The tribes said the language meant the “taxable event” took place at the gas station, so they shouldn’t have to pay any tax at all. In January 2006, Judge Thomas Zilly agreed with them. Because of the way the law was worded, the tribes were tax-exempt.

            That left the state with a few choices. It could appeal, but state officials and industry observers figured the state would lose. It could do nothing, and that would mean tribal stations could sell gas so cheap that no one else could compete, and the state would lose hundreds of millions of dollars in tax revenue.

            It could rewrite the law, clean up the language, preserve the “float” for the distributors, and keep on collecting every penny in tax that it had coming.

            Or it could negotiate a new deal with the tribes, give them more money, and ask them not to sue.

            Gregoire’s office chose the last option, and that’s what the critics find so galling. Changing a few words in the law would have been easy. That’s why they call it a giveaway.

            A Package Deal

            Looking back on it three years later, the issue probably seems a bit clearer now than it did to lawmakers during the 2007 legislative session. Gregoire needed a bill that gave her the right to strike new deals with the tribes. Meanwhile, the oil distributors needed a bill that would rewrite the gas-tax law and preserve their float. The governor’s office and Democratic leaders decided to twist the two issues together, and they insisted that they be covered in the same bill.

            The tactic forced the Washington Oil Marketers’ Association to lobby for the tribal deal. A fair number of reluctant Republicans voted for the bill, to keep small distributors in rural Washington from suffering major losses. Ericksen said the Democrats were basically saying “unless you go along with these tribal compacts, we’ll screw you on the float.” And the whole issue was so complicated and confusing that no one in the press raised the question in a direct way – did the state really need to make the deal?

            Yet a review of the tapes from the 2007 session makes it clear that there were plenty of questions at the time – and that it really was Gregoire’s decision. At one point, during a House Transportation Committee hearing, Ericksen kept pressing state officials for an answer. Was there anything compelling the state to deal with the tribes? Couldn’t the Legislature just rewrite the law so that the state could keep its gas-tax money? Couldn’t the Department of Licensing ask the attorney general’s office to come up with bulletproof language that would stand up in court?

The clearest answer came from Sharon Whitehead, deputy director of the Department of Licensing.

            “Although there are questions about could we, should we, might we – there is no question from our position, or from the governor’s position that I know of, that would not have an interest in trying to do right by the tribal representatives on this issue.”

            Tough Talk With a Genteel Tone

            Of course the state had a choice, Republicans said, and the governor’s decision was as smelly as they come. The state’s tribes have become an important patron of the state Democratic Party, contributing more than $1 million to Democratic political action committees since 2004. They contributed $80,000 directly to Gregoire’s campaigns in 2004 and 2008. The state Indian Tribal Gaming Association paid $50,000 toward the ballot recount that sealed Gregoire’s first election.  

And on the other end, it sounded like the Indians were getting their money’s worth. One estimate indicated the tribes would receive $363 million through the gas-tax deal over the course of 16 years. That’s if the tribal sales never increased – and they keep rising every year.

            But the rules of the Legislature require a bit of decorum. Members aren’t allowed to attack political motives during debate on the House and Senate floors. So Republicans twisted the knife by offering helpful amendments to the bill.

One Republican amendment showed legislators how they might have done it – by rewriting the law without authorizing tribal compacts.

Another amendment would have deducted the tribal payments from Seattle’s big-ticket highway projects – the new 520 bridge and the tunnel that will replace the Alaskan Way Viaduct – just to help everyone understand the impact. Another would have required the tribes to prove that they were actually spending the money on highways, and force them to open their records for public inspection. Another would have required the Legislature to approve each gas-tax deal negotiated by the governor.

And one amendment would have barred the governor from taking campaign money from the tribes. Rep. David Buri, who sponsored that one, offered a dry observation: “Appearances are very important.”

            But all were shot down by majority Democrats. And on the final day of the session, when the Senate still hadn’t passed the bill, after senators passed their end-of-session resolutions and most of the Republicans had left the Capitol and were driving home, the governor mounted a last-minute lobbying push and convinced the remaining senators to vote the bill out. It was the final act of the 2007 session.

Not the Sharpest Bargain

Three years later, Ericksen admits there might have been one argument for the tribal deal. The tribes might have built an oil refinery on a reservation and gotten around the state tax that way. Or they might have used casino money to buy a refinery, and then declared the property to be tribal land. But acquiring your own oil refinery can be mighty expensive. “Short of them building a refinery, we had a legislative fix,” he said.

 Nothing against the tribes, he said – in their shoes he might have played it the same way. But he said the governor’s office didn’t drive much of a bargain. The deal forbids the public from looking at the way the tribes spend the money. It places no limits on tribal gas sales and no limits on the markets they enter. Wherever a tribe erects a station and convert the property to tribal trust land, the state loses 75 percent of the tax money. If tribes build along state highways and siphon revenue from truckers, Ericksen wonders, who’s going to pay for the roads?
             And how are lawmakers going to sell the public on future gas-tax increases if the state is giving the money to the tribes?

 Hamilton, of the service-station association, said everyone seems to be watching the state’s tribal-gambling compacts, but the gas-tax deal was a bigger stinkeroo. The gambling issue was about money the state might have gotten but didn’t. This one is about money the state had and gave away.

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