The myth won’t go away: Indians don’t pay taxes. The roots come from a phrase in the U.S. Constitution, “… Indians not taxed.” But that provision wasn’t even dealing with taxation, but how Americans are counted for representation in Congress.
“True or False? American Indians don’t pay taxes,” asks the American Indian College Fund. “American Indians pay federal taxes on their income and capital gains, just as any other American does.” The college fund site adds: “American Indians do not pay taxes on moneys earned from their land allotments, since those lease fees are from the government and were negotiated as part of a treaty. While earning money on the reservation, American Indians also do not pay state, corporate, or state license fees for income or enterprises on the reservations due to the sovereign status of the reservation. While earning money off the reservation, however, American Indians are subject to state income, corporate, and licensing taxes.”
But dig a bit deeper – at least on federal income taxes – and the answer becomes far more complicated because roughly half of all Americans no longer pay federal income taxes. That number is higher than normal because of the recession. It’s also misleading because all working Americans are subject to the payroll tax on wages.
However the Center for Policy and Budget Priorities says these figures “greatly overstate the share of households that do not pay federal taxes. Tax Policy Center data show that only about 17 percent of households did not pay any federal income tax or payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.”
So how much do American Indians pay in just income tax? That really depends where someone lives and how much they earn. It’s interesting to look at the poorest counties in America.
The Tax Foundation shows that Shannon County, South Dakota, pays an effective income tax rate of -1.49 percent, receiving tax credits worth $337 per year. (Only three other counties, two in Texas and one in Mississippi have lower tax rates.) Nine of the ten taxpayers in Shannon County are American Indian. Another county with a high Native population, Apache County, Arizona, shows an effective tax rate of 2.59 percent for federal income taxes. At the other end of the scale, North Slope Borough in Alaska – about 70 percent Alaska Native – pays an income tax rate of 9.77 percent. But these numbers are from 2004; they would most likely be lower after the recession and the Bush tax cuts. But the state rankings of “nonpayers” are likely to be about the same.
So how does this income tax burden match the men who would be president? President Barack Obama paid a 20.5 percent of his income in 2011. Romney released his 2011 return last week, showing a tax rate of 14.1 percent. (However, the Romney return said “generous charitable donations in 2011 would have significantly reduced their tax obligation for the year.” In other words: He overpaid his taxes. During an election year.)
Both Romney and Obama’s income tax rates are less than what most middle-income taxpayers fork over every year. The top 50 percent of all taxpayers pay an average tax rate of 12.5 percent; while the top 25 percent pay 14.68 percent. (The real rates are much higher, but that’s before deductions and credits, the very items that make U.S. taxes so complicated.)
Then remember that’s just income tax. The payroll tax is the biggest burden for most Americans, one that collects from 83 percent of all taxpayers. And I recently wrote, this is a tax that’s going up soon.
And while the income tax is supposed to be progressive, the payroll tax is regressive. That is people at the lower end of the income scale pay more because so much is spent on such things as gasoline (a federal excise tax for every gallon) than do richer folks. “Considering all taxes — federal, state, and local — the bottom 20 percent of households pays an average of 16 to 17 percent of their incomes in taxes,” according to the Center for Policy Budget and Policy. “The next 20 percent of households pays about 21 percent of income in taxes, on average.”
So what would be fair? That’s what the election will decide.
Romney says tax rates ought to decline by 20 percent. He would like to see the Bush tax cuts made permanent. As a way to at least partially pay for these tax reductions, Romney would eliminate a number of deductions. He won’t say which ones because he says that should go through Congress where the over all ideas could be debated.
Obama would keep tax rates the same for families that earn less than $250,000 per year. For those families above that, he would increase the rate from 36 percent to 39.6 percent.
Either way: Native Americans will continue to pay taxes – despite the mythology.