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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.

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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-be-

created 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

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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

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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

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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

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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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