The 5 Cent Empire

Native American tribes parlayed legalized gambling into a $22 billion lifeline. Now states want a piece of the action.

Instead, state officials have used the compacting process to extract gaming revenues that go way beyond regulatory oversight. “The act entitles states to only a minor amount of regulation of certain Class III games,” notes David Wilkins, a professor of American Indian studies, political science, law, and American studies at the University of Minnesota. “But that’s all some states needed.”

The loophole was first hit upon in 1991. That’s when Connecticut struck a watershed deal with the Mashantucket Pequot, a once landless tribe that, just 15 years earlier, counted only two members in its tribe. The state had little choice but to negotiate, since the U.S. Supreme Court had ruled four years earlier that states could not prohibit reservation gaming if it allowed charitable bingo games or ran a lottery (a Class III game). Under the setup, Connecticut granted the Pequot a virtual gaming monopoly. In return, the Pequot agreed to share a percentage of net win revenue (gaming proceeds minus payouts) with Connecticut. This swap — market exclusivity for cash — was considered an exchange of equal value. Thus, it sidestepped one of the key provisions of IGRA: states shall not levy fees or charges on tribal gaming revenues.

The deal shocked many in Indian country. Some decried revenue sharing as little more than a legislative shakedown. Critics countered that the tribe was gaining a valuable asset — a monopoly — and should therefore be willing to pay up. Either way, the arrangement in Connecticut turned IGRA (and its stated goal of helping Indians) on its head. “The compacting process was intended to give states a voice in Indian gaming,” insists Kevin Washburn, associate professor at the University of Minnesota Law School. “It was not intended to give states an opportunity to demand a cut of the profits.”

And oh, what a cut. The Mashantucket Pequot agreed to pay Connecticut 25 percent of its net gaming profits (about $220 million last year). Since the inking of the Foxwoods Resort Casino compact, lawmakers in other states have started to ask why they’re not getting similar deals. Conly Schulte, a partner in the Omaha office of Monteau & Peebles, has represented several Native American tribes in talks with states. “Twenty-five percent now seems to be the measuring stick in compact negotiations,” he says.

That’s a stiff vig, considering the average state corporate tax rate is around 7 percent. In fact, the whole notion of covering regulatory costs seems to have been lost in the mad dash for gambling cash. According to the “Indian Gaming Industry Report,” by Alan Meister, an economist with the Analysis Group, gaming tribes paid $22 million to states to defray regulatory costs in 2005. By comparison, the tribes made nearly $1 billion in revenue-sharing payments to state governments. “The fees-for-services exemption,” says one attorney bluntly, “is the exception that swallowed the rule.”

You Can’t Tax Belgium

Indeed, states are asking tribes for money faster than their casinos can generate it. Last year, tribal sharing of gaming revenues with state and local governments shot up by 20 percent, says Meister, even though tribal gaming revenues rose by only 16 percent. The ever-increasing house rake doesn’t surprise the University of Minnesota’s Wilkins. “States are never going to stop,” he says. “They’re always going to try to extract more tribal revenues.”

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