Budget & Tax

Cherokee chief says no Oklahoma income tax for Indians

October 27, 2021

Ray Carter

Cherokee Nation Principal Chief Chuck Hoskin, Jr., said the U.S. Supreme Court’s decision in McGirt v. Oklahoma significantly increases the number of American Indian citizens who may now be exempt from paying Oklahoma state income tax.

“There’s nothing new about the law out there on the ability of a state to tax a member of a federally recognized tribe on a reservation,” Hoskin said. “What’s new of course is the scope of the reservation (because) of the McGirt case. So, we can look to existing law and we can see that taxation doesn’t attach to individual Native Americans who live on reservations.”

Hoskin made those comments as part of a panel on state tax-and-budget issues hosted by the Oklahoma Policy Institute.

The McGirt ruling found that the Muscogee Nation’s reservation was never disestablished. The ruling has since been expanded to include the reservations of the Choctaw, Chickasaw, Cherokee, Seminole, and Quapaw, a combined area that covers nearly half of Oklahoma. The affected area is home to roughly 2 million people of which 21 percent are estimated to be American Indian.

Members of federally recognized tribes have long been exempted from various forms of state taxation—if they live and work on tribal land. Prior to McGirt, that exemption covered only a small share of individuals working on much more geographically confined areas directly owned by Oklahoma tribal governments.

But under McGirt most of eastern Oklahoma is now considered reservation land, regardless of current ownership, potentially expanding the tax exemption to many more individuals. Hoskin conceded that may result in “revenue gaps” for state government.

Because of potential exemptions for tribal members on reservation land, the Oklahoma Tax Commission previously estimated that the McGirt decision could slash Oklahoma state tax collections by $72.7 million per year from reduced income tax collections and $132.2 million annually from reduced sales/use tax collections.

However, that estimate was based on McGirt applying only to the Muscogee, Choctaw, Chickasaw, Cherokee, and Seminole tribes. The Quapaw reservation has since been declared to have never been disestablished, and similar rulings could occur for other tribes now litigating reservation status.

Hoskin indicated the issue could be resolved through state-tribal compacts, although that process could result in a substantial share of state income tax collections going directly to tribal governments, which would still leave Oklahoma state government facing a shortfall.

“Tax issues have been raised before in the context of Indian tribes,” Hoskin said. “The tobacco-tax cases in the ‘80s and ‘90s, how were they resolved? They were resolved ultimately through agreement in which we share revenue.”

Under current tobacco-tax compacts signed between the state of Oklahoma and tribal governments, all outlets collect the same tobacco tax. However, tobacco tax collections from tribal outlets are then divided between the state of Oklahoma and the participating tribal government. The compacts generally stipulate that tribal governments receive at least half of the tobacco taxes they collect.

Similar compact agreements on income taxes would effectively divert tens of millions of dollars in revenue from state government to tribal governments, creating a state shortfall that could reduce funding for things like schools, roads, and public safety.

Hoskin conceded that McGirt has augmented potential tax disputes and challenges in Oklahoma.

“We’ve not seen this before—because McGirt is new—in some senses,” Hoskin said. “But in another sense, we’ve been down this road before.”

State Sen. John Michael Montgomery, who appeared alongside Hoskin at the Oklahoma Policy Institute panel, said the potential loss of state revenue is a significant concern for lawmakers. And he warned that the loss of state funding could result in fewer state services in the McGirt reservations.

“I think we would be interested in how do we work with the tribes on these issues and continue to make sure that the state is continuing to provide services in those areas as well—because that’s been a topic of conversation at times,” said Montgomery, R-Lawton. “I think there’s a pretty compelling argument to be said: ‘Why are we still funding things in areas if they’re not going to be paying taxes on services for those areas?’ There are challenges like that.”

Montgomery noted that in recent years lawmakers capped the amount of itemized deductions Oklahomans can claim on their income taxes. Although gambling losses are deductible, they are subject to that cap. But the tribal governments who operate casinos have since lobbied for gambling losses to be exempted from the cap on deductions to make their casinos more attractive to big spenders who accrue major losses.

If the state were to make that change, Oklahoma government would be “incurring the cost on income tax revenue” to benefit entities whose members may no longer pay any state income tax due to McGirt.

“There are a host of issues here that are not just tribal-citizen-type taxation,” Montgomery said, “but also other things that are outside of that as part of the relationship that we have with our tribes.”