Tribes Seek State Law Granting Tax Breaks to Expand Resorts

Wealthy California Indian tribes that use millions of dollars in federal tax breaks to finance expansion of gambling resorts are gathering support for similar tax breaks from the state.

The tax benefits are at the center of lobbying battles in Washington and Sacramento.

In Washington, the tribes are fighting the IRS over their use of tax-exempt bonds to pay for expanding hotels and other resort facilities on their reservations.

On Tuesday, a tribe near Palm Springs learned that it lost one round in that fight. The IRS has ruled against the tribe’s use of $145 million in such bonds to build a 12-story luxury hotel and a convention center. The order is under appeal, but if it stands, the tribe and the people who invested in its bonds could be liable for millions of dollars in taxes.

In Sacramento, 19 tribes -- several with major casinos -- have joined a legislative push to create state tax exemptions that potentially could be used to help pay for hotels, golf courses and other resort projects.

If the measure becomes law, California could be the first state to legalize tribes’ use of such advantages, at a time when Sacramento is struggling with a multibillion-dollar budget gap and faces cuts in school spending and other key areas. The proposal is scheduled for a committee hearing this month.

Tribes backing the change include some of the largest campaign donors in the state. Some legislators endorsing the bill have accepted $100,000 or more in donations from tribes since 1998.

Tax-exempt bonds are typically used by governments to pay for the construction of sewers, roads and other public improvements. Because investors who buy the bonds pay no federal income taxes on the interest they earn, the bonds can be sold at discounted interest rates.

The lower interest rates can save millions of dollars in the financing of large construction projects. But the exemption costs the government millions in forgone taxes. Making the interest exempt from state taxes would lower the interest rate further and increase the cost to taxpayers.

At issue in the fight between the tribes and the IRS is whether building casinos and resorts complies with federal tax law, which says tribes can use tax-exempt bonds only for “essential government purposes.”

“We are not OK with tribes issuing tax-exempt bonds for commercial tourist facilities,” said Charles Anderson, who heads the IRS unit that audits tax-exempt bonds.

Tribal officials deny that they are stretching the rules.

In arguing for state tax benefits, the tribes and their supporters say that their sovereign status should entitle them to issue such bonds on an equal footing with cities, counties and states.

“Tribes are governments,” said state Sen. Denise Ducheny (D-San Diego), whose district includes several Indian reservations. “What they’re asking for in this legislation is to be treated as a government, not as a corporation.”

State Sen. Dean Florez (D-Shafter), the prime sponsor of the bill, SB 995, makes a similar argument: “If a city and county can do it, I see no reason a tribe can’t do it,” he said.

Opponents of the legislation say that the tribes are seeking an unfair advantage that the state cannot afford.

Unlike cities and counties, tribes claim exemption from most state laws. For example, they do not have to pay state taxes on casino profits, said state Sen. John Campbell (R-Irvine), who opposes the tax exemption.

“They want to use state law when it is to their financial advantage,” Campbell said. “And they want to not use state law when it is to their financial advantage. That is just not right. Either take it all or take none of it.”

Lawmakers overwhelmingly approved legislation last year that was similar to Florez’s proposal. Gov. Arnold Schwarzenegger vetoed last year’s bill, but left open the possibility of signing similar legislation in the future.

Tribes have used tax-exempt bonds for a broad range of projects. The Cabazon Band of Mission Indians, a tribe in Ducheny’s district with 30 adult members, is the latest to attract IRS attention. The tribe issued $145 million in tax-exempt bonds to transform a casino along Interstate 10 near Palm Springs into the Las Vegas-style Fantasy Springs resort.

To make the bonds exempt from state and federal taxes, the tribe enlisted an organization of county governments to issue the bonds. The financing will save the tribe -- and cost the state and federal governments -- close to $25 million.

Among the amenities the bonds paid for were a 12-story luxury hotel with a high-end bistro, a nightclub and a 12,000-seat convention center that recently presented Huey Lewis and the News. Other tribes want to put together similar deals.

Last month, IRS agents arrived at the Cabazon reservation near Indio to begin auditing the bonds issued to expand the Fantasy Springs site.

The hotel and convention center are adjacent to the casino, which has 2,000 slot machines, poker and blackjack tables, an off-track betting parlor and a bingo hall.

The Cabazon project is one of two involving Indian casinos nationwide that the IRS is auditing. The other is in Florida and involves a Seminole casino.

Anderson has ruled against the tribes in both cases so far. Both tribes are challenging the rulings, and the audits continue.

Anderson would not discuss specific audits in an interview. But in a letter obtained by The Times, he called Cabazon’s attempt to use the tax break “absurd” and “a misguided perversion” of the law.

Greg Cervantes, the Cabazon Band’s public affairs director, said tribal officials, who were already in Washington this week lobbying U.S. Senate committees to investigate the IRS audits of the tribes, would fight to protect the exemptions.

“They are going to have to come before the Congress and show why there is a double standard in this process, and why the Indians are any different than the rest of America,” he said. “They are going to have a lot of explaining to do.”

Using their relatively newfound wealth and influence, tribes have retained blue-chip lobbyists and law firms to push the issue. John Theberge, an attorney with the firm Holland & Knight in Washington, D.C., dismissed Anderson’s audits: “He is a mid-level IRS employee.... He is an agent.”

Theberge previously worked for the IRS, overseeing tax-exempt bond sales.

In Washington, tribes are lobbying for a new law that would explicitly permit use of the bonds for resort projects. A bill to that effect cleared the Senate late last year, but fell short in the House.

The Sacramento bill could add momentum to that effort, according to Thomas Rodgers, a Washington-based lobbyist for tribes. “What you do out there [in California] matters,” he said.

Mark Nichols, the Cabazon Band’s chief executive officer, says the tribe infuses tens of millions of dollars into the local economy by stimulating tourism and creating jobs.

From the top floor of the Fantasy Springs Hotel, he looks out at the 1,700-acre desert reservation, much of it vacant, and envisions more expansion -- hundreds more hotel units, a golf course, maybe time-share condominiums.

Those benefits to the state’s economy justify making the bonds tax exempt, Nichols says.

But Lenny Goldberg, a lobbyist and president of the California Tax Reform Assn., a group that advocates for low-income groups and unions, said using tax exemptions to pay for such projects is a “public subsidy for private businesses.”

“You want to build a hotel?” he said. “Fine. Use the revenues from your casino.”

The Cabazon Band reported in a filing to investors that in the 12 months ending in March 2004, its Fantasy Springs Casino generated $75.2 million in revenue -- before the convention center and hotel were completed.

In a separate filing, the band predicted that Fantasy Springs would generate $98.5 million this year and $108.8 million next year.

At least three other California tribes have used bonds exempt from federal taxes for construction projects in recent years:

* The Morongo Band sold $51 million in such bonds last year to build a parking garage for its new casino, which towers above the desert near Banning. Some of the money also paid for roads and a water and sewer system.

* The Agua Caliente Band, owner of two casinos in and near Palm Springs, used $11 million in tax-exempt bonds in 2003 to rebuild its Indian Canyons Golf Resort and $10 million for a tribal community center.

* The San Manuel Band of Mission Indians used a $48.2-million tax-exempt bond issue to construct roads on its mile-square reservation, install a 1.2-million-gallon water tank, build a fire station to protect the reservation’s 48 homes, and refinance debt on the tribe’s four-story headquarters.

“It’s more efficient to use other people’s money, which is what everyone else does,” said Deron Marquez, chairman of the San Manuel Band.

Given the scrutiny tribes face, he was careful to make sure the tax-exempt bonds his tribe sold were used for “essential government services,” he added. Unlike other casino-owning tribes, his band is not supporting Florez’s bill.

In the Capitol, Florez’s bill is being portrayed by supporters, who include state Controller Steve Westly, the state’s top elected tax official, as a way for tribes to get basic services.

A form letter to legislators signed by several tribes last year said the tax-exempt bonds would “only be used for projects that are essential government functions such as schools, libraries, roads, tribal administrative centers, parks and affordable housing.”

Some legislators embracing Florez’s bill said they assumed the bill would permit bonds for roads, clinics and other basic services, not for hotels and golf courses.

“If I thought that’s where all the money is going to go,” said Assemblyman Paul Koretz (D-West Hollywood), a coauthor of the bill, “I would be off this bill in a minute.”