ANALYSIS OF THE IMPACT OF THE KEWEENAW BAY INDIAN COMMUNITY PROPOSAL
Prepared for: Upper Peninsula Petroleum Association
By: Dr. Donald L. Alexander, Professor of Economics, Western Michigan University & William D. Keip, President of Keip Government Solutions
January 29, 2013
The Upper Peninsula Petroleum Association (UPPA) has concerns about a proposal by the Keweenaw Bay Indian Community (KBIC), a federally recognized tribe, to convert fee simple land in Marquette County into land that is held in trust for the benefit of the tribe and build a gasoline station and retail location. The site of the land is in Marquette Township on a former restaurant location known as the “Los Tres Amigos” (LTA). If the land is in trust, the KBIC is not subject to the pre-paid gasoline sales tax, currently at 20.5 cents per gallon1.That would give the KBIC a significant price advantage over an estimated 35 other Marquette county retailers2 and could adversely affect their businesses. This research has revealed that the KBIC initiative will have negative impacts on non-tribal petroleum retailers in the community. Trade associations used the following terms and phrases to describe the environment should the KBIC be allowed to move forward with a pre-paid tax-free station: “Inequitable,” “lack of a level playing field,” “able to undersell,” “adverse effect on the business environment,” and “unfair advantage.”
The KBIC initiative is preceded by the KBIC Pines Gas Station and Convenience Store located just outside of Baraga on land held in trust. The KBIC remits the federal excise tax on fuel and tobacco products and the state motor fuel excise tax, but via the refund process, gets all of the pre-paid gasoline sales tax back from the Michigan Department of Treasury. There is no statutory provision exempting the KBIC from the sales tax obligation. The Michigan Department of Treasury and the KBIC appear to be in agreement that the “legal incidence” of the pre-paid gasoline sales tax falls on the retailer (the tribe) and not the consumer. Under U.S. Supreme Court authority, given that “legal incidence” of a state sales tax falls on the tribe, the state cannot enforce collection.3
Unlike The Pines in Baraga, the KBIC Marquette County location is not on-reservation nor contiguous to the reservation. In fact, the LTA is almost 70 miles from the reservation. Therefore, we do not believe the KBIC’s Marquette parcel is similar to the Baraga parcel; the Marquette parcel constitutes an “off reservation” acquisition and therefore should have greater scrutiny.
This analysis presents Marquette County petroleum retailers’ current contribution to the local economy (jobs, sales and wages) and examines the effect on the marketplace of allowing one business to operate outside the burdens of sales tax collections (job losses, business closures, and taxes). This analysis supports the UPPA position and will assist the UPPA during the Bureau of Indian Affairs application process. The analysis will emphasize the KBIC initiative and the pre-paid gasoline sales tax issue and by inference the tribal trust issue.
Dr. Donald L. Alexander is a professor in the Department of Economics at Western Michigan University. He received his B.S. in economics from Bowling Green State University in 1978 and his Ph.D. in economics from Penn State University in 1983. Dr. Alexander has held several professional academic and government positions throughout his career. From 1983 to 1984, he was a visiting assistant professor at The College of William & Mary, and then an assistant professor at Penn State University from 1984 to 1988. He left to join the Antitrust Division at the Federal Trade Commission in 1988. From 1989 to 1991 he was an economist with the consulting firm, Capital Economics, and then served as an economist with the International Trade Commission before joining the faculty at Western Michigan University in 1991. Dr. Alexander has published articles in the areas of industrial organization, antitrust economics, economic regulation, and sports economics in professional economics journals such as the Southern Economic Journal, Applied Economics, The Review of Industrial Organization, Economics Letters, and the Journal of Sports Economics. He is the co-editor of Networks, Infrastructure, and the New Task for Regulation (The University of Michigan Press) and has contributed a chapter to the AEI volume Competitive Strategies in the Pharmaceutical Industry. His current research interests include exclusive dealing arrangements, patent pools, and sports economics. In 1986 and 1988, Dr. Alexander was the recipient of the Philip S. McKenna fellowship for the Study of Market Economics.
William D. Keip is president of Keip Government Solutions, a consulting firm that provides economic analysis, tax/budget research, and consulting services to companies and trade associations that interact with state and local governments. Mr. Keip received his M.B.A. from The Ohio State University and has been recognized as an expert source of government tax and budget knowledge for 30 years. He has served as state budget director for Ohio Governor James A. Rhodes, as a guest lecturer at Ohio universities, as a consultant delivering quality research to his clients, and as a guest speaker on major state issues.
The views expressed herein solely reflect the views of the authors and not those of Western Michigan University. Report contents are to be utilized solely for the use of the Upper Peninsula Petroleum Association in its efforts to defeat the KBIC application to the Bureau of Indian Affairs (BIA). Co-authors may not be involved in legal, legislative, or other actions associated with the KBIC application to the BIA. Other consultants, using different time periods, assumptions, or data sources may arrive at different conclusions.
TABLE OF CONTENTS
• Executive summary
• Indisputable facts
• Marquette County petroleum marketers metrics
• Estimate of negative impact on Marquette County from KBIC initiative
• Estimated state tax loss and local tax loss to Marquette County
• Quotations from petroleum retailers
• Quotation from Marquette County local official
• Unintended consequences
• The KBIC, taxes, and the state of Michigan
• The KBIC initiative could result in a loss of up to 63 jobs, $1.25 million in annual wages, and $10.7 million in annual inside sales in the Marquette County area. Additionally, local retailers could lose over $25 million of petroleum sales.
• The potential loss of public school funding and revenue sharing may cause harm to the Marquette community and its ability to provide critical services.
• State and local tax revenues will be reduced at a time when critical services are needed.
• The KBIC initiative is anti-small business; petroleum retailers average 12 employees per store.4
• The resulting uneven playing field is due to KBIC tax aversion, not economies of scale or costs differences.
• Public schools and higher education funding will be reduced.
• Michigan Governor Snyder's administration recently cited that the tribe should not have an unfair commercial advantage over surrounding competitors and should compete on the same terms as Michigan's other businesses and accordingly denotes that “the State respectfully asks DOI to decline any request by KBIC to have the specified land taken into trust by the United States."5
• Marquette County petroleum retailers provide 248 direct jobs in Marquette County.
• Marquette County petroleum retailers provide vital retail services to local residents.
• Marquette County petroleum retailers contribute to the Marquette County economy.
• Marquette County petroleum retailers remit all federal, state and local taxes.
• Marquette County petroleum retailers welcome competition, assuming a level playing field.
• Marquette County petroleum retailers, operating in a free market, may experience a temporary business loss and may, at times, struggle to survive.
• The KBIC has repeatedly sued the state of Michigan to avoid payment of lawful taxes.
Marquette County petroleum marketers metrics
The starting point is the current contribution of the Marquette County petroleum retailers. A survey of Marquette County retailers provides an estimate of the impact of such retailers.6
These petroleum retailers are community members, church attendees, members of the PTA and civic groups, and some have been in business for almost half a century.
In Michigan, the industry includes 5,500 stores employing almost 55,000 people (NACS Lyle Beckwith letter to Gov. Snyder May 9, 2012).
Marquette County petroleum retailers employ 248 people in the gas stations; however, the Marquette County petroleum retailers provide 317 “total” jobs in Marquette County. The number of “total” jobs is comprised of direct, indirect, and induced jobs.8 Direct jobs are those employed by petroleum retailers (cashiers, owner-operator, clerks, etc.); indirect jobs occur when firms that employ direct employees purchase goods and services from their suppliers; lastly, both direct employees and indirect employees purchase goods and services from businesses outside of their employment (groceries, tires, autos, home maintenance, etc.) and is denoted as induced jobs. The same relationships apply to store sales and compensation.
Similarly, these petroleum retailers are responsible for “total” wages of $6.2 million, and “total” inside sales of over $53.0 million. Conversely, when an initiative similar to the KBIC initiative occurs, we use the same relationships (direct-indirect-induced) to determine the “total” potential job-wage-sales loss.
Estimated negative impact on Marquette County from KBIC initiative
Marquette County petroleum retailers provide jobs, wages, and in-store products and make a material contribution to the Marquette County economy. The KBIC initiative would begin as a gas station with convenience store9 and would have a negative effect on petroleum retailers that remit the pre-paid gasoline sales tax.
The first KBIC gas station in Baraga resulted in the closure of a BP gas station (later acquired by the KBIC and re-opened under tribal management.) The Holiday Stationstore in L’Anse suffered a severe loss in customer traffic due to the extreme difficulty in “competing” with a party that has a significant price advantage. To control costs, store hours were reduced from 24 hours to 18 hours; through attrition three full-time positions and one part-time position were eliminated. Without inside sales including a pizza program, this store would likely not be viable. The local Oasis unit experienced a similar scenario of reduced hours, staff cutbacks, and lost sales, and without a Subway program, it would also likely be closed.
Given a sales tax free operation, it is highly unlikely that any other competing businesses would open. If local Marquette gas stations go out of business due to the KBIC initiative, it is also possible that, after business closures occur, the tribe will return retail prices to the level before the tribal outlet was open for business, or perhaps even higher.
Generally, the gas sales tax is passed on to the consumer. If the KBIC has a six percent sales tax advantage (18 cents per gallon assuming a $3.00 motor fuel retail price)10, then petroleum retailers affected by the KBIC tax advantage may respond to the lower KBIC pump prices by lowering their pump prices, thereby reducing their profit margins.11 Additionally, they may reduce part-time staff hours or eliminate part-time or full-time staff. Other options include increasing non-gas item prices or using profits from non-gas entities. These actions may result in a break-even scenario, a business loss (even if temporary) or worse, a business cessation.
Keip Government Solutions, after discussions with petroleum retailers, presents the economic impact in terms of “business lost.” “Business lost” includes the loss of sales on petroleum products, in-store sales, employee head count, and employee wages and assumes that there is a direct relationship between the loss of sales and the number of employees needed to provide the services.
Scenarios for a range of “business loss” of 10 percent, 15 percent, and 20 percent are included. However, some business owners predict business losses as high as 30 percent.
After discussions with selected petroleum retailers, Keip Government Solutions estimates that up to 50 direct jobs could be lost if the KBIC initiative is successful. Similarly, gas sales could decline by over $25 million per year, wages lost could total $910,000, and lost inside sales could total $7.4 million in the Marquette area.
Jobs lost include the reduction of full-time or part-time jobs, or a reduction of working hours.
Wage reductions could result from the layoff of full-time employees, layoff of part-time employees, the shift of full-time employees to part-time status, and reduction of work hours for some or all employees. Staffing decisions, of course, vary by gas station.
Lost gas sales represent the retail gas price times the number of gallons no longer sold at current retail outlets. Motor fuels, nationally, represent 71.4 percent of convenience store revenues.12
In-store sales loss results from gas customers who also purchase in-store products. Some Marquette area petroleum retailers stated that 80 percent of their gas customers purchase in-store items. Data from the National Association of Convenience stores (NACS) suggest a one-to-one relationship between gallons of gas purchased and in-store dollar purchases but is considered only a generalization. Suffice it to say that in-store sales would be impacted by a loss of gas customers.
Marquette County grocery stores would also be affected by the KBIC initiative but are not included in the analysis.
However, such impacts fail to include economic impacts beyond those most visible to the industry and the customers.
Using the “direct” job count, wages and in-store sales from the Marquette County petroleum retailers as the base, Keip Government Solutions estimates, when including direct-indirect-induced impacts, that a one-time loss of up to 63 total jobs could be realized if the KBIC initiative is successful. Similarly, annual wages lost could total $1.25 million and annual inside sales lost could total $10.7 million.
Note that over $12.7, $19.0, and $25.4 million of gas sales would still be lost at the 10%, 15%, and 20% business loss assumptions.
Finally, additional negative economic impacts could occur, coupled with unintended and immeasurable consequences, if additional tribal initiatives are successful in Michigan.
Estimated state tax loss and local tax loss to Marquette County
Job losses, lost wages and lower in-store sales are traumatic by themselves, but beyond these losses are Michigan’s major tax sources which would be affected by the KBIC initiative, including the state personal income tax and state sales tax.
How much gas and in-store products are sold in Marquette County and subject to the state sales tax? A review by Gadzinski Accounting & Tax Services stated that an estimated $8.4 million of sales tax was paid in the most recent 12 months by 35 retailers. A portion of the $8.4 million, $6.2 million, is allocated to the state School Aid Fund.13
Tax revenue losses
The 10, 15 and 20 percent projected business losses previously presented result in annual lost taxes totaling exceeding $1.7 million annually at the 20 percent loss projection.14
• When store jobs are lost or employee work hours are reduced, state personal income tax receipts will be reduced.
• Local property tax receipts are affected.15
When a petroleum retailer closes its doors, local government may temporarily lose tax revenues as the retailer’s property tax payments become delinquent.16
Note that public schools may not be affected as the state will replace the loss of most local property taxes on businesses with State Aid.17
• There is no state motor fuel excise tax (19 cents per gallon) revenue loss since the tribe must remit the tax if fuel is sold to non-tribal customers (tribes do not remit tax if fuel is used in a tribal related activity).
• Michigan does not impose a local sales tax.
• Twenty-two Michigan cities impose an income tax; none are in the Upper Peninsula.
• State corporate income tax would be paid by convenience store owners who are C-corporations but is not included in this analysis.
• State sales taxes revenues will be reduced as the petroleum retailer will no longer sell gas subject to the six percent sales tax. State sales tax revenues will also be reduced as the petroleum retailer may no longer sell in-store products subject to the six percent sales tax.18
• Tax losses beyond those from direct taxes will occur but modeling techniques are not as reliable as needed, and therefore are not included in this analysis.
Unrestricted expansion of tribal units beginning at Baraga may result in unknown future tax losses to state government, local government, and public schools.
Gasoline sales tax’s effect on the local community and effect of lost money
Michigan earmarks the state sales tax for public purposes as follows:
State School Aid Fund
Article IX Section 11 of the Michigan Constitution of 1963 establishes the state School Aid Fund, which shall be used exclusively for aid to school districts, higher education, and school employee's retirement systems. Proposal A amended Title IX (Finance and Taxation) of the Michigan Constitution, Sections 3, 5, and 8 (www.educ.msu.edu). The size of the School Aid Fund in the current law budget for fiscal year 2013 is $12.9 billion. (State Budget Office/House Fiscal Agency)
While 11 Michigan tax sources contribute to the state School Aid Fund, the sales and use tax (gas and non-gas) contributes just under $5.3 billion (40.7 percent) of the state School Aid Fund for fiscal year 2012-2013.19
The state School Aid Fund provided $15.1 million to Marquette County public schools in fiscal year 2011.20 If the KBIC initiative is successful, reduced sales tax revenues will result in reduced contributions to the state School Aid Fund, thereby affecting Michigan public schools, including those within Marquette County. Michigan schools are constantly seeking funds to operate, and while the impact on a specific school district is difficult to measure, it is assumed that all Michigan school districts monitor their budgets, and are adverse to any initiative whose result has the potential of directly or indirectly affecting their revenue stream.
“Strong financial support for Michigan schools, made possible in part by the state sales tax, continues to be critical to the quality of education students receive and the contributions they later make. Schools require adequate funding from federal, state and local sources and from individuals and businesses across the state.” (Jan Ellis, Office of Public and Government Affairs, Michigan Department of Education)
State Revenue Sharing Reserve Fund
The state Revenue Sharing Reserve Fund ($856.1 million for FY13 statewide) assists counties, cities, villages and townships that provide fire, police, water, sewer and other vital services. In fiscal year 2013, the state Revenue Sharing Reserve Fund provides $973,113 to Marquette County, villages, and townships, $287,546 to Marquette Township, and $1.5 million to the city of Marquette.21 If the KBIC initiative is successful, reduced sales tax revenues will result in reduced contributions to the state Revenue Sharing Reserve Fund, thereby affecting Marquette area cities, villages, townships, and Marquette County. The impact on a specific local entity is difficult to measure and varies by government entity; however revenue sharing funds are assumed to be necessary to fund critical services.
Considering current tenuous national and state economic conditions, complicated by budget cuts and an insatiable need for public services and education, the KBIC initiative would restrict tax revenues to state government, local government, and public schools when such revenues are needed most. Public officials must determine if providing such tax exemption to the KBIC provides a net benefit to the state and local government and public schools. Public officials should also recognize the KBIC initiative, if approved, as a stepping stone to future tax-exempt tribal entities, when totaled, could eventually have a material negative effect on state and local government and schools.
Quotations from petroleum retailers
The presentation of statistics and projections concerning the impact on Marquette County are relevant and important in the illustration of the negative impact of the KBIC initiative. However anecdotal comments from those on the front lines cannot be ignored. Three store owners commented as follows:
"If one car dealer could sell cars without the sales tax and the other car dealers include $2,000 in the sale price, the first dealer would eventually be the only car dealer in town. We could see a 25% drop in our family business of 30 years if the tribe arrives and drives down the pump price since they don't need to pay the same taxes I do. Our children work at our stores, their jobs are in jeopardy. Who knows what will happen? It could be worse than 25%." (Glenn and Cheryl Kassell, owners of Kassells’ Korners)
“Not only do I lose gas sales, but I lose the walk-in traffic that buys cigarettes and in-store products. I pay all my taxes and consider myself a part of this community. Why should a tribe be able to not pay the same taxes I pay? They create an unfair market for all other businesses. I have run this business for 20 years and have been an active member of this community. My profits margins do not permit a price war with someone who is unwilling to pay taxes.” (Martha Querfeld, Michigamme Market)
“Based on what I experienced from the Baraga tribal store, I cannot lower my pump prices and survive in this market; I must pay all state and local taxes while they get a free-ride. Is the tribal idea fair to hard-working, tax paying Marquette owners? If the Marquette unit becomes a reality, local stores will likely either reduce store hours or reduce staff hours; neither is a good choice. So I hope that our local officials will kill this unfair deal that hurts our community.” (Kyle Bianco, Oasis dealer)
Quotation from Marquette County local official
“The concerns we would have with the development of a gas station by the KBIC involve the land being placed into trust, which then would remove the KBIC from having to comply with the township’s zoning ordinance. We have worked hard over many years to develop and adopt zoning ordinances that protect our residents, commercial area, and visitors and believe in the importance of all parties needing to comply with these to insure the safety and welfare of all citizens. Even signage and lighting can have a big impact on a small community, and we hope that this issue can be addressed.” (Dennis R. Liimatta, supervisor, Charter Township of Marquette)
The potential negative economic impact on Marquette County petroleum retailers has been estimated and is included in this report. But if the KBIC initiative is successful, other non-economic impacts could be equally significant but difficult to measure.
• The KBIC initiative is a typical “camel-in-the-tent” scenario. KBIC tax-free goods are not restricted to gas. Consider the following list of goods and services that are either not taxed or are opportunities for additional tribal tax aversion.
• Current retail outlets may choose to reduce stores hours, thereby reducing service to the community. Other businesses that are forced to close result in fewer options in rural areas of Marquette County.
• Current retail outlets may choose NOT to expand operations, resulting in a loss of future jobs, wages, and economic activity.
• The ability to purchase gas at lower prices may come at a price. Are Marquette County residents willing to trade lower (perhaps temporary) gas prices for the opportunity to attract new industries and the jobs and tax revenues that they bring?
“There are areas of the country in which companies will not locate new stores to sell motor fuels or tobacco due to the unfair advantage brought about by tax evasion from tribal stores” (NACS letter to Governor Rick Snyder May 9, 2012)
• Could the KBIC take advantage of the tax aversion in Michigan? “State treasury officials said in court that since then, competitors have accused tribal businesses of selling large quantities of cigarettes for below the tax-prepaid wholesale cost. After police seized a number of untaxed cigarette shipments headed for the reservation, the tribe began purchasing taxed tobacco products from the state and seeking refunds. But the tribe said its sales plummeted from $556,789 in 2001 to $125,963 in 2002…..In 2003 and 2004, the state rejected some of the refund claims, saying the tribe was claiming more sales to members than the members could have been expected to consume. The state said at least one member was selling tobacco over the Internet.” (“Judge tells (KBIC) tribe to begin collecting state tobacco taxes,” CSPnet.com 9/16/05)
• Besides the KBIC tax advantage, the KBIC would limit Marquette County’s ability to enjoy other non-economic benefits including but not limited to the township’s ability to regulate the use of property to comply with zoning restrictions (e.g. setbacks), restrictions on local police powers, restrictions on environmental conditions, proper maintenance of underground storage tanks, and signage, lighting, and age restricted compliance. The state could not conduct age restricted compliance checks for tobacco or alcohol sales; the KBIC station could be lax in denying sales of such products to underage parties. The KBIC could also disregard state oversight on weights and measures as they are exempt from inspection, health department compliance matters may not be enforced etc.
Unrestricted tribal units beginning at Baraga may result in additional, unknown but difficult to measure, impacts to the Marquette County area.
The KBIC, taxes, and the state of Michigan
The KBIC claims to have “contributed” over the years $8 million toward road improvement.22 The UPPA further states “In 1993, the KBIC and other tribes settled a lawsuit with the State of Michigan, giving them ‘the exclusive right to operate electronic games of chance in the State of Michigan.’ In exchange, the KBIC agreed to pay 8% of the ‘net win at each casino’ to the Michigan Strategic Fund and 2% of the ‘net win’ to ‘any units of state government in the immediate vicinity of each tribal casino.’ We believe the 1993 settlement agreement is what the KBIC is referring to which is a legal obligation, not a contribution, in exchange for exclusive electronic gaming rights.” Keip Government Solutions agrees with the UPPA conclusion.
The Upper Peninsula is not alone in this fight as NACS outlines in a letter to Governor Snyder on May 9, 2012. “In New York, for example, the state has been unsuccessful in collecting tobacco and motor fuels taxes since its first efforts in the 1980s. This maddening saga has included tribal members blocking the New York Thruway with burning tires, and the state losing more than $1 billion per year in revenue. Plus, there have been multiple court cases that have gone through the New York and federal courts (including the U.S. Supreme Court) without resolving this crisis. But that is just one state. Such disputes have led to strife and court disputes in Idaho, Oklahoma, New Mexico, Washington, and many other states. These fights last for decades and while they drag on states and law-abiding businesses suffer losses. But it doesn’t have to be that way.” (NACS letter to Gov. Rick Snyder May 9, 2012)
The KBIC appears to have a track record of fighting Michigan taxation. Ten of 12 federally recognized Indian tribes have entered into tax agreements with the state of Michigan. Why is the KBIC unable to work with the state of Michigan on tax issues?
• The KBIC had a tax agreement with Michigan from 1977-1992, and negotiations with extending the agreement failed in 1994. (KBIC v. Rising II June 26, 569 F.3d 589 (2009))
• Ten of 12 Michigan tribes waived sovereign immunity.
• Ten of 12 tribes displayed a willingness to work with the state of Michigan. “Whereas the State and the Tribe, acting on a government to government basis, seek to develop a fair and workable understanding regarding the application and administration of the State taxes that are subject to this Agreement and to provide certainty as to issues that may arise between the Tribe and the State regarding those taxes by explicitly addressing and agreeing upon the imposition of and exemptions from those taxes.” (Sampling of two agreements, Recitals; MI-Department of Treasury, State/Tribal Tax Agreements and Amendments)
• Rather than be a taxpaying member of the community and work with the state of Michigan, the KBIC has attempted (and failed) to make the case that the KBIC should not pay Michigan taxes.
• In Rising I (Keweenaw Bay Indian Community v. Rising, 477 F.3d 881 (6th Cir. 2007)), the KBIC brought suit against Michigan challenging the state’s effort to tax tobacco products sold by the KBIC pursuant to the Tobacco Product Tax Act (the “TPTA”). The tribe claimed that the TPTA could not be applied to the tribe because, among other reasons, (1) the legal incidence fell on the KBIC and not on the consumer and (2) the statute imposed more than minimal burdens on the KBIC. The Sixth Circuit Court of Appeals rejected both arguments, holding that the legal incidence of the tobacco tax fell on the consumer, not the tribal retailers, and the statute’s requirement to prepay the tax (and then seek a refund for purchases by tribal members) did not impose more than minimal burdens on the KBIC.
• In one of two cases , the court noted the “Community’s repeated, brazen, and willful attempts to avoid remittance of the tax so as to profit from illegal sales of tax-free cigarettes to non-tribal members.” Consequently, the court was convinced that the state’s “prophylactic refund system” was reasonably tailored to collect valid taxes from non-Indians.” (Keweenaw Bay Indian Community v. Rising, 477 F.3d 881, 892 (6th Cir. 2007))
• After losing the tobacco tax fight, the KBIC moved to the sales and use tax in another case and threatened to withhold gambling net win payment to the Michigan Economic Development Corporation, but its claims were not justifiable and had to be dismissed. (Rising II (Keweenaw Bay Indian Community v. Rising, 569 F.3d 589 (6th Cir. 2009))
Three other comments
• A U.S. Department of Interior news release dated 12/20/2011 states approval of a (KBIC) gaming facility… “would not be detrimental to the surrounding community.” Keip Government Solutions’ analysis concludes that the Marquette County KBIC gas station initiative would have a detrimental effect on the Marquette community (job losses, losses of retail sales, gas sales, wages, and taxes).
• The Daily Mining Gazette reported on May 15, 2012, that legislation was introduced to stop the practice of transferring non-member property with delinquent taxes to the KBIC tribe, thereby preventing foreclosure and essentially wiping out the debt. It would appear that the KBIC tribe was a willing participant in the transaction.
• A KBIC Determination Factsheet implies the proposed facility will generate additional revenues for the tribe’s government without a tax break. However, if the KBIC implies that the proposed Marquette county gas station/convenience store cannot compete in the Marquette County area, then it admits that its business model is “we can only survive if we don’t pay taxes.”
This limited analysis asks the question “what is the KBIC’s aversion to paying Michigan taxes and ensuring a level playing field?”
This analysis has shown that the KBIC initiative may result in a loss of local jobs, wages, and in-store sales, have a negative effect on the Marquette county community, is anti-small business, results in an uneven playing field, reduces state and local government tax revenues, and reduces funding for public schools and higher education funding.
In addition to the negative economic impact on the Marquette area, the analysis presents unintended consequences resulting from a successful KBIC initiative and a “camel-in-the-tent” scenario. However four compelling questions should be asked.
Question 1: Where does it end?
How much tax revenue is the State of Michigan willing to lose if tribes expand their operations far from reservation land throughout Michigan? Are state and local coffers so flush with tax receipts that the tax loss from the Marquette County tribal gas station and unknown future tribal endeavors is a non-issue?
Question 2: Does the KBIC initiative impact the local community?
This analysis provides data and anecdotal comments that should assist the UPPA to contest the KBIC application to the Bureau of Indian Affairs. Perhaps the most applicable objection could be the negative economic impact on the community and area gas outlets that remit all state and local taxes without objection. It appears that, at least in one case, the BIA does not approve initiatives that “would be detrimental to the surrounding community,” as implied by the Keweenaw Bay Indian Community Determination Factsheet – BIA related to the KBIC request for an off-reservation gaming facility.
Question 3: What is the net effect of permitting the KBIC to not pay taxes?
If one Marquette gas customer saves less than $200 per year in gas costs, does the potential for reduced pump prices outweigh the negative economic impact on the state and local government and public schools? Do the lower pump prices outweigh the loss of Marquette jobs and business owners of over 50 years? Do the lower pump prices outweigh the growth of unlimited expansion of untaxed tribal operations?
Question 4: Why hasn’t the media asked the KBIC how much it receives in gasoline sales tax refunds for The Pines in Baraga?
The KBIC has been operating The Pines for years. The amount of sales tax refunds is unknown as this is confidential information. However, the media should call on the KBIC to voluntarily disclose this amount so we can have a transparent discussion on the amount of money the state is losing in gasoline sales taxes.
For the reasons stated in this analysis, the UPPA and the local community should oppose the KBIC application to the Bureau of Indian Affairs.
1 Michigan Revenue Administrative Bulletin 2012-2.
2 There are approximately 250 convenience stores and gas kiosks in the Upper Peninsula – National Association of Convenience Stores (NACS) data.
3 Oklahoma Tax Comm’n v. Chickasaw Nation 515 U.S. 450 (1995).
4 NACS State of the Industry – Annual Report 2011 Data/NACS CD Data files.
5 January 7, 2013 letter to the Bureau of Indian Affairs, Department of Interior
6 Survey included 13-18 respondents, extrapolated to 35 retailers.
7 Survey respondents may or may not have included all grades of gasoline and diesel, therefore an average price per gallon cannot be derived from the data received
8 Bureau of Economic Analysis, Regional Input-Output Modeling System, RIMS II, UP counties multipliers; note that NACS code 4A0000 Retail Trade used; NACS code for convenience store not available, therefore economic projections may be greater than convenience stores by themselves. Also note that multipliers for the UP and for the state of Michigan provide a similar, but greater, effect.
9 Uppermichigansource.com Feb. 22, 2011 reported that the KBIC is considering a retail center on the property.
10 Gas sales tax base is motor fuel retail price including federal excise tax but not the state motor fuel excise tax.
11 Local businesses face a competitive disadvantage even if the tribe does not lower its pump prices, enabling the tribe to either subsidize its establishments or keep the profits.
12 NACS State of the Industry – Annual Report 2011 Data/ NACS CD Data files; sample of 18 Marquette retail outlets suggest 77.5%.
13 100% of the 2% sales tax and 60% of the 4% portion of the sales tax is dedicated to the state School Aid Fund via Article IX of the State Constitution.
14 The loss projections are intended to be conservative. The UPPA provided the following projection concerning gas sold at the Baraga tribal gas station and not subject to the state sales tax. KBIC refunds for the Pines-Baraga were reported as $75,000 for December 2011 (KBIC Newsletter March 2012 page 4). Extrapolating to a calendar year yields almost $1.0 million, resulting in a projected $700,000+ loss to the state School Aid Fund. Applying this calculation to the proposed Marquette County tribal store would result in a $4.4 million loss to the state School Aid Fund as the new site is estimated to realize $6.0 million is gas sales tax (Brooke Ferns, letter to The Mining Journal June 17, 2012)
15 Money raised through property taxes goes toward financing local services, such as police and fire protection; public education; the operation of city, village, township, and county governments; and special projects such as sewers, streets, and parks. All property taxes collected by local units of government, other than the state education tax which is sent to the School Aid Fund for distribution are kept locally and no part of that revenue is sent to or used by the state. (Michigan Taxpayer’s Guide 2012)
16 It is also possible that the gas station is not replaced by another business entity that will remit the property taxes.
17 State replacement of lost local dollars does not address millage beyond operating levies; therefore some districts may suffer a loss of property tax dollars.
18 Note that 36.7 percent of in-store purchases are not subject to the Michigan sales tax. In store items that are exempt are: grocery, soda pop, chips & snacks, dairy products, and candy. In store items that are taxed are: automotive products, cigarettes, food prepared for immediate consumption (hot food), paper products, chewing tobacco, and non-grocery items.
19 House Fiscal Agency.
20 Michigan Department of Education; State Aid Financial Report 8/22/2011.
21 FY2013 Office of Revenue & Tax Analysis, Michigan Department of Treasury May 29, 2012.
22 UpperMichiganSource.com, Feb. 22, 2011.