Cigarette Tax Hearing

October 27, 2009

Good morning.

Thank you for your invitation. The complex issues presented by the sales of untaxed cigarettes on Native American territories are subject to very frequent review. This is an update.

It is very important to stress at the outset that meaningful analysis requires a broad and realistic view. The arguments involved are legal and historic. They are deeply rooted in culture, human nature, antiquity, treaties, and principles of comity among sovereign nations. The issues involve the rights of both individuals and groups, and of generations not yet born. The issues also involve governmental policy objectives that may be in conflict. For example, it is the State’s policy to discourage smoking as a matter of public health. But it is also the State’s policy – and duty – to protect and promote public safety. We seek to reconcile circumstances that bring those objectives into contest. So too, we are obligated to endeavor to see all contours and dimensions of the problems we find. The velocity of money circulating in the State’s economy is an important consideration in that endeavor. A US dollar spent on an Indian reservation in New York is a dollar put into motion in the New York State economy. Every time that dollar is re-spent or invested is good for New York. So there is a texture to these issues that we try to recognize. 1

Within this analytical framework and at a time when the State is experiencing a severe and unprecedented revenue crisis, it is wise to discuss the central question raised by this hearing. Permit me to begin with the policy of forbearance as established by the Pataki Administration. That policy, simply stated, was not to pursue collection of sales and excise taxes on cigarette and fuel sales at Native American reservations or sales of cigarettes and fuel to reservation facilities. That policy, as well articulated by Mr. Comiskey, was not continued by the Spitzer Administration and is not embraced by the Paterson Administration. Rather, each Administration subsequent to Governor Pataki has or is pursuing active negotiation and litigation in an effort to achieve a peaceful resolution to this complicated matter. The Paterson Administration also is vigorously enforcing against bootlegging and smuggling, and is assisting Federal enforcement actions. There are many who argue that the only correct policy choice is to enforce existing law with respect to tax collection. While that remains an option, it is a one dimensional choice that could have deleterious consequence that could include resistance, violence, retrenchment, crime, economic harm, and poisoned relationships that otherwise should be nurtured and be characterized by mutual respect, as they are now by the Paterson Administration. A policy choice preferred by Governor Paterson within the context of negotiation is to arrive at a variant of tax parity. Under such a regime, cigarette and fuel products sold by Native Americans on Native American lands would be at a price that would be roughly

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equivalent to prices charged by non Indian merchants on non Indian land. This would create a roughly level competitive landscape, and also would discourage cigarette consumption. A principle of comity, however, namely that each purveyor of product, be it a Native or non Native American, has a right to pursue profit maximization, also would and should be respected. Thus, an objective sought is that the Indian nations would establish minimum price floors for their tobacco and fuel products, and if that minimum price were to be lower than the State’s proscribed minimum price, then the differential would be contributed to to-becreated regional entities and be a revenue stream to back the issuance of tax free debt by those entities. The differential contributions would be matched by the State and the proceeds of the ensuing borrowings would be supplied to regional economic development and infrastructure projects designed specifically to benefit equally Native Americans and New York residents living adjacent to or near tribal reservations. The to-be-created infrastructure projects would result in roads and bridges, water projects, environmental measures and health care facilities. The State broached this approach in intense negotiations it held with the Oneida Nation this past spring. The Oneidas proposed a tax parity regime in exchange for a variety of State and county actions primarily, but not exclusively, concerned with land claims and real property tax disputes. The Oneidas’ version of tax parity was that they would add to their pricing schemes the amount of applicable state taxation. With respect to cigarettes, where the State requires a minimum price and the Oneida Nation does not, that meant that a carton of cigarettes sold at a tribal facility would cost about seven 3

dollars less than the same carton sold at a non tribal facility in the same area. Similarly, the differential for each gallon of gas sold at a Savon gas station owned by the Oneidas would be about five cents. The State proposed that there be tax parity with price equality. Pursuant to that proposal the differentials of seven dollars a carton of cigarettes and five cents a gallon of fuel would be contributed to an entity qualified to issue tax free debt. The State estimated that just the Oneida contribution alone would support a borrowing of $38 million. An equal State match, about $2.5 million/yr, would allow a borrowing of about $76 million, all of which would be invested in Oneida and Madison Counties where the Oneida Indian lands and lands in dispute among the Oneidas and the Counties are located. If some of the proceeds of the land issue were to be employed as the local match for Federal highway grants or other federal programs requiring matching funds, the leverage effect of the borrowing and the infrastructure improvements it would support would be substantially greater. The Oneida negotiations did not come to flower because Madison County vehemently opposed land concessions the Oneidas sought from it, and Oneida County ultimately rejected the land claim tax settlement its County Executive had negotiated. These land claims dimensions were not items of discussions between the Oneidas and the State, although they are evidence of the complexity that can affect State and Indian nation negotiations. As the Paterson Administration has learned, there are a variety of issues between the State and each Indian nation. Each issue that arises deserves careful attention and open mindedness. Solving them and other issues that may evolve requires healthy courses of dealing, cooperation, comity and trust. Any precipitous action that 4

would adversely impact these essential elements of positive dialogue would set back progress on all important matters of concern among the Indian nations and the State. Although negotiations with the Oneidas stalled, a principle was established, and the State intends to pursue a tax parity approach with respect to cigarette and fuel sales by other Indian nations. There can be many useful variations on this theme and the Paterson Administration is open to creative approaches and endeavors to develop variations designed to produce reduced cigarette consumption and shared economic development. All negotiations require a strategy and the tactics necessary to implement the strategy. A strategic element that has been achieved is that Governor Paterson has met personally with representatives of the Indian Nations. The Nations have no reason to doubt the Governor’s good faith or his commitment to meaningful negotiations. They also have no reason to doubt his commitment to law enforcement action against blatant disregard of the tax laws as witnessed by the State’s robust actions against smuggling, bootlegging and sham financial transactions involving cigarette sales. The State’s very vigorous pursuit of litigation with respect to cigarette taxes underscores its commitment to peaceful resolution. But litigation also should be viewed as a tactic designed to promote productive negotiations. As Mr. Comiskey described, the question whether the injunction imposed by the Fourth Department against tax enforcement focused on licensed stamping agents may be before the New York State Court of Appeals this winter. If the State prevails, as it hopes to do, it immediately will proceed to enforcement against licensed agents who will be required to pay the applicable taxes. The State will be able to do so by issuing coupons to Indian nations, a move that 5

likely would be resisted, perhaps with violence, but certainly with widespread non compliance. Until there is a litigation result the State will endeavor to reach a negotiated solution. At all times, the option to promulgate regulations and issue coupons will be a possibility. Selective enforcement, taking the path of least resistance, also remains a possible tactic. Some final words about possible violence and its cost: In 1992 and 1997, there were violent reactions to attempts to collect cigarette taxes. Members of the Senaca Nation engaged in activities that caused serious injury, major disruptions and threats to public safety that required deployment of substantial State Police resources at significant cost. On both occasions the State suspended its collection efforts. The latter episode gave rise to the policy of forbearance and subsequent legislative efforts to proscribe less intrusive methods of enforcement as, for example, the proscription to issue coupons allowing native members to purchase cigarettes tax free at reservation facilities, but requiring full taxation of purchases of cigarettes by non native members at such facilities. Governor Paterson has been several times advised that were he to order tax enforcement, particularly at Senaca Nation facilities, there again would be violence. Interpolating to today’s values the actual costs incurred in 1992 and 1997, which costs are projected to be quite similar in scope, the Governor has been advised the costs of law enforcement would offset whatever gains might be achieved by tax collections. And that is without trying to assess the cost of physical injury or the loss of life or possible property damage, or the psychic harm of forgone opportunity to live in peace with those 6

who are entitled to sovereignty and their interpretation of what that means. It is the product of State Police intelligence that violence and resistance at other Indian Nations also may occur. I also should relate that the Governor is advised that should he not relent (and the cost of relenting may be incalculable), a police problem could quickly escalate to a military one. The assumptions underlying such advice are informed by intelligence gathering. But the assumptions are untested and the intelligence is being reviewed. As part of that review, on September 23, 2009, Governor Paterson wrote to the U.S. Attorneys for the Western, Northern and Eastern Districts of New York, each of whom have sovereign Indian nations who engage in cigarette sales within their jurisdictions. The Governor asked them for their assessments of the likelihood of violence were he to commence enforcement. He also asked them what they would intend to do to mitigate any violent resistance they foresaw. Although I have called these U.S. Attorneys several times there has been no formal response. On an informal basis I am advised that the Department of Justice will defer all threat assessments and law enforcement decisions to the State Police. That is one more reason why the decisions the Governor considers are fraught with difficulty and uncertainty. In due course, information may be received, negotiation advanced, and litigation determined. And in due course, the Governor will make the decisions he must. In mid course, though, this is the update I can present to you.

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