NATIONAL GAMBLING IMPACT STUDY
COMMISSION

NATIVE AMERICAN GAMING

Issues: economic and social impact on reservation members and on surrounding communities; problem gamblers; constitutional status of reservations; state and federal authority regarding Indian gaming; level playing field regarding taxes and regulation vis-à-vis non-Indian gaming

Native American gaming (also referred to as Indian gaming or tribal gaming), at least on its current scale, is a relatively recent phenomenon and has developed in ways that even its proponents did not anticipate, very quickly becoming an enormous and still-rapidly-growing industry. It has generated very complex legal issues and problems, ranging from constitutional clashes over state and federal powers to rivalries within and between tribes and states. As a result (or perhaps a cause), this industry has been shaped to a very large degree by federal court rulings, rather than the political process; several ongoing cases are currently making their way through state and federal courts, several with the potential to significantly alter existing conditions and practices. As in most constitutional issues, principal and self-interest are conflated: the most abstract and noble principals cannot be easily separated from narrow self-interest. Because of the large sums of money at stake, disputes over Indian gaming have been the means of bringing many of these otherwise abstract issues to a head.

The Federal-State-Tribal Triangle

Federally-recognized Indian tribes are grouped under the legal status of "defeated nations." (Several non-recognized tribes, including some thought defunct for almost two centuries, are currently seeking official recognition, for a variety of motivations. Without such a designation, constitutionally they are little more than private associations). These tribes, both as collective units and their individual members, are wards of the federal government, which has a legal responsibility for their protection and the promotion of their welfare. As such, they enjoy rights, or suffer restrictions, not applicable to other Americans. For example, reservation land is not owned by the tribes or their members but instead is held in trust by the federal government. And reservations are virtually off-limits to state and local laws and authorities, even though reservation members vote in state elections. This triangular relationship between individual tribes, the respective states, and the federal government forms the center of the debate over Native America gaming, and is never absent from any aspect of it.

One key part of this many-faceted debate is the ever-present debate between those who believe assimilation into the larger American society is a worthwhile objective, and those who vociferously oppose it. As part of this contest, the image of reservations for many has changed from being places in which the residents were involuntarily confined to being places of protection from outside forces, especially against the several state governments, traditionally seen as hostile to Native American rights (The federal government, despite all of its possible benign neglect -- and the Hollywood image notwithstanding -- has traditionally been regarded as their protector). A desire to protect their "sovereignty" against state and federal encroachment has motivated both proponents and opponents of Indian gaming, with many proponents seeing it as a means of gaining financial independence from the federal government, and some opponents seeing it as the means by which both state and federal government can increase its presence on the reservation. This argument, among others, was successfully employed by leaders of the anti-gambling movement in the two occasions when voters on the Navajo reservation, the largest in the country, turned down gambling.

Creating the Industry

The Supreme Court, in the so-called Cabazon decision of 1987, in effect removed virtually all existing restrictions on gambling on Indian reservations. What had previously been a relatively small and isolated phenomenon suddenly began growing rapidly. In response, Congress passed the Indian Gaming Regulatory Act (IGRA) in 1988, which in effect authorized casino gambling on Indian reservations and provided a regulatory framework and oversight body for the industry in the form of the National Indian Gaming Commission (NIGC). Indian gaming was divided into three classes for purposes of licensing and regulation; Class I covers charitable and social gaming for nominal prizes; class II includes bingo, punch-boards and pull-tabs; Class III facilities include casinos, high-stakes bingo, slot machines, and all other commercial forms of gambling.

As of December 31, 1996, there were 184 tribes operating 281 gaming facilities on and off reservations. 24 states have Indian gaming; of these, 14 have casinos on Indian reservations. In 8 of these states, the only casinos in the state are on Indian reservations. In 1995, total Class III gaming revenues (money wagered minus payouts) from all sources: over $4.5 billion, with 8 facilities accounting for 40% of the total (in addition, over $300 million in revenues was earned from sale of food, hotel rooms, etc., for combined total revenue of approximately $4.9 billion). Net income (revenues minus expenses): $1.9 billion, or 38% of the $4.9 billion.

Of the $1.9 billion in net income ($1.7 from casinos, $200 million from non-charitable bingo), approximately $1.6 billion was received by 106 tribes from the operators (usually non-Indian corporations). Ten of the tribes accounted for over half of this total.

For purposes of comparison, in 1995 the 109 Class III Indian gaming facilities (casino-type gaming) generated about the same total amount in gaming revenues as the 12 Atlantic City casinos, and surpassed them in 1996. They also grossed more than 50% of the gaming revenues of the 213 Nevada casinos. This works out to 18% of the national total of casino gaming revenues and 10% of all gaming revenues. Of these 109 facilities, 8 accounted for almost half of the total revenues. This uneven distribution of revenue earned by individual casinos is similar to that of the industry in Nevada, where a handful of the 213 licensed casinos account for the bulk of the gambling revenues, and unlike that of the Atlantic City casinos, which are far more equal in their share of the local business.

It need be noted that there is no regular, comprehensive reporting of income, expenditures, etc. by Class III casinos. Many of the figures in the public literature ascribed to Indian gaming are estimates based on dubious statistics. The most reliable information comes from a General Accounting Office (GAO) study in 1997 which reported accurate data for the first time. No ongoing reporting source of accurate information is as yet in place.

Gambling as a Panacea

In addition to purposes such as regulating an industry recently brought into existence and beyond the reach of state regulators, IGRA's proponents wanted to use gambling as a means of providing money for financing tribal governments, which often had little or no tax base, and also as part of a general effort to promote the economic self-sufficiency of the tribes. For this and other reasons, the IRS has determined that for purposes of income taxation, the gambling income of the Indian tribes and their federally-chartered corporations (the form casinos usually take) are not subject to federal income tax. Some tribes have chosen to distribute all or a portion of the tribe's net income from gambling to individual tribal members. However, distributions of tribal money to individual members can only be done if approved by the Secretary of the Interior, following criteria set forth in IGRA. Money received by individual members of the tribes is fully subject to federal income tax.

Manna in the Desert

Without question, Native American reservations have some of the highest rates of poverty, unemployment, welfare dependency, school dropout, alcoholism, and other indicators of poverty and social distress of any communities in the U.S. Many are located in remote areas with little indigenous economic activity. Given this background, it is not surprising that gambling has been seized upon by many tribes, as it is one of the few proven and available means of generating income for them. The prospect of sudden wealth after seemingly endless poverty has given the disputes an element of emotional immediacy that the complex and intransigent constitutional issues themselves probably would lack.

The issue of economic benefit is further complicated by the fact that much of this accrues not to the tribes or their members but to outside individuals, such as non-Indian locals who usually comprise the overwhelming majority of workers in Indian casinos, and the non-Indian corporations which are the usual operators of the casinos.

State-Tribal Conflict

Under federal law, the individual states have little or no authority over Indian reservations, including the ability to tax or regulate gambling or any other activity. For example, state officials, including the police, cannot exercise their authority on a reservation without tribal permission. Although in theory the several states can ban any form of gambling throughout their territory, in practice the lack of authority of state officials over reservations makes enforcement difficult there. Because the Supreme Court's decision in Cabazon threatened to create islands of virtually unregulated gambling throughout the U.S., IGRA included the provision that tribes wishing to conduct Class III gaming had to sign a "compact" with the respective state (or states: reservations often overlap state borders) which typically includes measures for state regulation and for sharing of revenues. Other issues may be included. For example, states have typically required tribes to surrender any outstanding land claims in return for approving the compact.

This measure has produced controversy of its own. Some states have been accused of using this proviso to prevent the opening of all or some specific type of gaming facilities, both on and off reservations, either by refusing to negotiate with the tribes, or by allegedly presenting unreasonable conditions. For their part, some tribes do not want their gambling activities to be restricted at all by any state, however accommodating it may in fact be. The Interior Department recently announced a plan to give the Secretary of the Interior the power to bypass those state governments which have not negotiated "in good faith" and directly grant permission to any Indian tribe petitioning to open a gambling facility. This proposed measure has drawn strong protests from several states and raises important issues concerning state and federal constitutional law. (This measure is separate from the subject of current investigations into possible campaign finance irregularities in 1996 involving Indian casinos).

The Power to Regulate

Indian gaming also directly concerns both the legal and actual power of the federal and states governments to regulate economic and social activities. States may be powerless to prevent gambling activities on reservations that the citizens and legislature of the state have decided to ban or to regulate, and the federal government may be unwilling or unable to assist this effort.

This far-from-abstract question has entered another level this year with the opening by the Coeur d'Alene tribe in Idaho of a site on the Internet for gambling, the first in the U.S. This innovation promises to test all sorts of issues, including the ability of state and federal governments to regulate the Internet. As the name U.S. Lottery indicates, this is billed as a national lottery, available not only on the Internet but also over the phone. A series of additional games are planned for the site. Many states ban gambling advertising and gambling on out-of-state operations (or even any form of gambling), and a coalition of state attorneys general immediately filed suit to block its operations on the Internet, but this has not prevented the Coeur d'Alene tribe from continuing its operations or changed its plans to expand.

A Government-Sanctioned Monopoly

A recurring theme is fairness: can the government sanction guaranteed privileges for one group of citizens over another? Non-Indian casino operators, for example, claim that Indian casinos have an unfair advantage, as the former are far more heavily regulated and taxed by both the state and federal governments than are the latter. In Nevada, for example, Indian gaming operates under significantly different conditions than their non-Indian competitors. Proponents of Indian gaming retort that they have been the objects of economic discrimination for centuries and that their residence on poor reservations was not their choice.

Much of the success of Indian gaming comes from their monopoly or near-monopoly of legalized gambling in a particular state or region. For example, the giant Foxwoods casino in Connecticut (reportedly the largest in the world), along with the smaller Mohegan Sun casino, between them have a near-monopoly on casino gambling in New England, one that is guaranteed by the state of Connecticut (at least for that state). Similar situations in other states has led to inter-tribal conflicts, conflicts between Indian and non-Indian areas over gambling revenues, conflicts with states seeking to restrict gambling, etc. The example of Foxwoods has led seemingly defunct tribes in New England to petition for federal recognition. As each tribe has broad freedom to determine its membership, based on some formula of percentage of tribal ancestry, such designation may carry large economic benefits. The individual states are generally opposed to new recognitions of this type.

Proponents and critics alike acknowledge that Foxwoods casino is unique in the world of Indian gaming. Foxwoods' success is the result of a deal struck with the state of Connecticut in 1991 (the casino opened in February 1992). In the deal, the state was granted 1/4 of the gross revenues from slot machines in exchange for legalizing slot machines exclusively for Foxwoods and the nearby Mohegan reservation, in addition to other provisions such as the surrender of old land claims making their way through the unpredictable federal courts.