Marijuana Legalization

Marijuana Sales Can Make U.S. Tribes Richer and Poorer

The tax-free cannabis business might be a revenue gusher. Whether tribal members will benefit is another issue.

Gambling on a new revenue stream.

Photographer: Joe Raedle/Getty Images

"This is going to be bigger than bingo," James Billie told CNN over the summer. A former chief of the Seminole, whose company MCW gives financing and legal counsel to American Indian tribes to help them grow and sell marijuana on their land, Billie could barely contain his excitement about this new venture. 

With good reason. Marijuana is projected to be a $21 billion industry by 2020. Medical marijuana is legal in most states, and eight states already have recreational marijuana laws. And the Justice Department decided in December 2014 to allow marijuana to be grown on reservations -- even if the drug is illegal in the state where the reservation is located.

Not only does it seem as if tribes will get regulatory advantages, but they will also be subject to fewer taxes than non-Indian neighbors engaged in similar enterprises. They won’t have to pay federal income tax on revenues from the cannabis business, and they won’t have to charge customers state sales tax on their purchases.

If this sounds familiar, it’s because we’ve been down this road before. American Indians were also offered significant advantages on the sale of cigarettes, alcohol and gasoline. In the 1980s and 90s, businesses on Indian territories weren’t charging state sales tax, and they attracted customers with their significantly lower prices.

Although their economies weren’t exactly thriving as a result, many small businesses earned some pretty startling profit margins. A Seneca leader in upstate New York told me that business owners regularly made 300 percent profit on these items.

Because American Indians can’t actually own land on reservations and have trouble getting business loans (since they have no collateral), there are a limited number of enterprises they can get into. But convenience stores don’t require a big investment, so many Indians went into those businesses.

In 1991, the profits began to taper off with the settlement of the case of Oklahoma Tax Commission v. Citizen Band, Potawatomi Indian Tribe of Oklahoma. The Supreme Court held that although tribes needn’t charge tax on their own members, they did have to collect tax if they sold cigarettes to nonmembers. Enforcement of the law was difficult, for obvious reasons.

Are you really going to prove that you’re an Indian every time you buy cigarettes? What counts as proof? Why can’t you buy them for someone standing outside the store? In principle, it could be no more difficult than checking someone’s ID before the purchase of liquor.

But in some areas, enforcement was simply nonexistent, because the reporting procedures for taxation required by the federal government and by the individual states weren’t the same as the ones on the territories.

The real change came in 2010 with the passage of the Prevent All Cigarette Trafficking Act, whose goal was to halt the sale of untaxed cigarettes online. The main idea was to curb the sales of cigarettes to minors -- who knows how many kids were going online to order their smokes? -- and to limit the tobacco black market, which the feds said was being used to fund organized crime and even terrorist activities. The major effect of the new law, though, was to ensure that online and mail-order retailers couldn’t evade state and federal taxes.

The result, explains Michael A. John, the manager of the Small Business Incubator Program on the Seneca territory in upstate New York, was “major economic devastation.” The businesses that weren’t meeting the reporting requirements had to close down. For others, without the advantage of being able to sell cigarettes tax-free, profit margins plunged. The problem, John says, is that these businesses simply couldn’t undercut the competition off the reservation anymore.

Meanwhile, tribes were exploiting another advantage that Indian reservations have: the right to set up gambling businesses. Most gaming operations on territories are small, catering mostly to Indians themselves. But a number of them have hit the jackpot.

According to an article in Forbes last year, the Seminoles have a “privately owned global business that spans 71 countries and boasts 168 Hard Rock cafes, 23 hotels and 11 casinos. Including franchisee sales, system-wide revenue is slightly more than $5 billion.” Tribal members receive a yearly stipend of $128,000, and thanks to trust funds set up for children, members are already multimillionaires by the time they turn 18.

But the gaming industry is not what it used to be. Or rather it’s gotten much more crowded now that more and more states have legalized casino gambling. The Mashantucket Pequot tribe, which runs the Foxwoods Resort in Connecticut, once paid its thousand or so members more than $100,000 annually from its profits, but in 2012 they got nothing. Some tribe members moved elsewhere in search of work. The casino was $1.7 billion in debt.

Marijuana promises to bring a whole new round of profits to some tribes. But like the casinos, marijuana will be a tribal business -- meaning that the money will go to the tribal government to be distributed like lottery winnings (or welfare payments, depending on your perspective).

The kind of dependency that these tribal enterprises have created is not surprising. Tribes like the Seminoles and the Senecas (whose gaming operation made about a billion dollars between 2002 and 2014) find that their members have little incentive to work or get an education, and they too often get tangled in drug and alcohol addiction. 

In 2008, when the Seminole tribe was already handing out $120,000 a year to members, the Orlando Sentinel reported that “young Seminoles die at an alarming rate from drug overdoses, alcohol-involved car crashes and suicide.” “I call it the ‘Rez disease,’” former Florida Atlantic University football star Jarrid Smith told the paper at the time. He said that at least seven of his friends and former classmates had died, or were in jail or rehabilitation facilities.  

When Billie was re-elected chief in 2015, one of the tribe members in attendance told the Sentinel that she wanted “a renewed focus on protecting young people from drug addiction, which she said has claimed some of her family members.”

Growing more marijuana on reservations probably won’t help.

But there may not be much more that tribal leaders can do. With few options for individuals to earn income, the tribes depend on these collective enterprises to survive. And the federal government continues to put incentives in place for these tribes to pursue loophole economies -- rewarding them for finding areas in federal and state law that Indians can exploit to gain a financial step up.

The biggest hurdle is that American Indians on reservations do not have private property rights, a problem that is deeply rooted in federal and constitutional law. We could certainly give Indians more control over their own land by scaling back the Bureau of Indian Affairs, which right now regulates everything from the extraction of natural resources to the sale of a few acres of land from one Indian to another on reservations.

But if we were serious about giving Indians the autonomy over their land that, as American citizens, they are entitled to, we should look to a proposal in Canada. The First Nations Property Ownership Act, which is working its way through parliament, would give Indians the underlying title to their land, allowing them to buy, sell or borrow against it. The land itself would still remain part of the reserve, but the reserves would act more like small independent cities. They would still be subject to the national government’s laws, but residents would gain more autonomy over their property.

While waiting for solutions, we have made Indian territories into places where fewer and fewer Americans would choose to live and raise families. Making cigarettes, gambling and drugs cheaper and more widely available than in surrounding areas is a recipe for more poverty, crime and social dysfunction. Sadly, American Indians are the victims of that.   

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Naomi Schaefer Riley at Naomisriley@gmail.com

    To contact the editor responsible for this story:
    Katy Roberts at kroberts29@bloomberg.net

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