The Akaka Bill:  What Tribal Sovereignty Would Mean to Hawaii

By Lyle Beckwith, 8/17/2007 6:26:56 AM

Before creating a new Indian tribe and introducing the concept of tribal sovereignty to Hawaii on a massive scale, it may be wise to consider some of the lessons learned in other parts of the country.

Tribal sovereignty – while an important governmental principle that should be honored as such – breaks down when tribes get involved in commercial activity. Our system of commerce just doesn't work when some businesses operate outside of the constraints of the law. That is why, for example, Congress has taken sovereign immunity away from every foreign nation in the world when those nations act in a commercial (rather than governmental) capacity.

Based on the Foreign Sovereign Immunities Act, if France or another nation decides to sell cigarettes or gasoline, they are subject to suits under U.S. law, just like any other business that sells those products. Native American tribes, however, are not. This has caused problems in states from coast to coast.

When states want to enforce their laws against tribal businesses that sell to citizens of that state, they can't do it because of sovereign immunity. When businesses enter into contracts with tribal businesses, they can't enforce those contracts unless sovereign immunity is waived. When American citizens are injured by tribal businesses (such as if they don't maintain their premises in a safe manner), those citizens can't sue to recover for their injuries.

You may ask whether these problems really occur? Unfortunately, these problems come up every day – particularly when tribal businesses sell cigarettes and gasoline through smoke shops, truck stops, or similar retail outlets.

Cigarettes, liquor, and gasoline may seem like odd products for tribes to sell. The reason these are often the businesses tribes open first on reservations is that state and local taxes are a large percentage of the cost of these products. Tribes have found that they can use their sovereignty to protect against the imposition of state and local taxes when they sell these products.

The result is that cigarettes and gasoline can be sold on the reservation at a price that undercuts off-reservation competitors. Not surprisingly, those off-reservation businesses lose sales – and sometimes close entirely.

This creates a vicious cycle for states and local governments. They lose excise and sales tax revenues on cigarettes and gasoline. Then they lose additional income, sales, and property taxes when off-reservation businesses lose business or close.

The problem, of course, is that these tribal businesses thrive by marketing their products to people who are not members of the tribe. Those consumers are liable for the taxes on their purchases – though most of them don't know it and the tribal businesses have no incentive to point it out. Finding these consumers and getting them to pay the taxes is very difficult and, in some ways, unfair because these consumers have been duped. In the end, this amounts to an elaborate scheme of tax evasion.

Some might be tempted to ignore these violations of the law on the theory that it helps make up for past wrongs committed against Native American tribes. Unfortunately, however, this system harms the tribes more than it helps them.

One of the pillars of the U.S. economy that has helped encourage entrepreneurship and economic growth is a sound legal system that gives Americans the chance to protect their property rights.

But that pillar isn't there when dealing with Indian tribes.

That is a major reason why U.S. businesses are reluctant to invest in on-reservation businesses or joint ventures with tribes. Those businesses must constantly worry that their investments will be lost and that they will have no recourse to the courts due to tribal sovereignty. The result is that there are few on-reservation investments (with casinos being one of the few exceptions) and most tribal economies continue to stagnate.

And, in truth, it hurts the businesses that form on the reservation. These businesses too often rely upon their ability to evade taxes on sales and, therefore, don't have an incentive to innovate and diversify to improve their businesses in other ways. This creates a ceiling on the growth of these businesses and, ultimately, on reservation economies.

What does this mean for Hawaii? It means that granting sovereignty can have many problematic, unintended consequences. If those problems aren't dealt with, then businesses and local governments throughout Hawaii as well as any tribe(s) created are likely to suffer, not benefit, from passage of the Akaka bill.

Lyle Beckwith is the Senior Vice President of Government Relations for the National Association of Convenience Stores (NACS).

Congress has taken sovereign immunity away from every foreign nation in the world when those nations act in a commercial (rather than governmental) capacity.