B. Benjamin & G. Weiss, "Wheel of Fortune" (Abilene Music, ASCAP). The song was made popular by Kay Starr in 1952.
As older government scandals like Abscam and the Keating Five fade in memory, Jack Abramoff is all over the news. Yet what was his sin? What's the source of the outrage? To hear some tell it, Abramoff ripped off his client. There may well be some truth to this. Abramoff may have siphoned off money from one client to himself, or for work for another client. But the gist of the media outrage against Abramoff seems to be that he was just making so much money as a lobbyist.
Much of that money paid to Abramoff by Indian tribes was in connection with their gambling casinos. How did the federal government get involved with Indian casinos? Almost two centuries ago, the Supreme Court defined Indian tribes as "sovereign nations," independent of the United States and individual states in many respects. But Indian tribal sovereignty vis-à-vis non-Indian governments is an extraordinarily complicated affair.1 As concerns gambling, states are free to prohibit gambling within their borders, in which case Indian tribes are bound by state law (despite their "sovereignty"). In states banning gambling, such as Utah, there can be no Indian gambling casinos, either.
But if a state merely regulates gambling by non-Indians, it must allow gambling operated by Indian tribes. Thus, as more and more states have moved to allow gambling casinos, the question has become the extent to which state laws regulating gambling and gambling casinos are applicable to "sovereign" tribes on Indian land. In the 1980s, that other sovereign, the United States, inserted Washington into the process of deciding just how states could decide what sovereign Indian nations would do within a particular state.
Federal legislation concerning Indian casinos in effect established the national government as yet another player in establishing how tribal casinos would be established and operated in states that merely regulated gambling The federal government (including the Bureau of Indian Affairs) today involves itself in supervising negotiations between tribes and states over how Indian gambling will operate, requiring the states to negotiate in good faith with Indian tribes over various aspects of casino operation. In part, the federal government feared that the states would be driven by concerns over tax revenues the states were already getting from non-Indian gaming. If the states imposed regulatory burdens on gambling operated by Indian tribes in order to protect the tax haul that states were already pulling down, this would be an interference with the tribes' sovereignty, one the federal government would prevent.
For Indian tribes, the good news is that, in the federal government, they have a potential ally in their negotiations with the state over the establishment and operation of tribal casinos. The bad news, however, is that three-cornered negotiations among the tribes, the states and the federal government mean that it is never clear in advance who will be able to do what. As economist Ron Johnson summarizes, there are too many claimants for the right to allow and regulate tribal casinos. Property rights are unclear, and so every side has an incentive to produce the outcome it favors. Tribes want to open profitable casinos, states want to regulate and maximize their tax revenues, and the federal government, at least initially, wants to mediate between the two other interests.
In such convoluted situations, particularly with the profits from Indian gambling being so high, Indian tribes have a great incentive to find those who know the game when it comes to state and federal governments.2 Enter lobbyists like Jack Abramoff. Obtaining the license to operate a casino is obviously expected to be lucrative. The profits Indian casinos earn are substantial. But getting a casino that will be subject to Washington's supervision of Indian-state negotiations first requires satisfying Uncle Sam that a particular group of Indians in fact constitutes a tribe and thus is a sovereign nation. Indian or Indian wannabes' efforts to convince Washington that they are a "real" tribe are ferocious—not surprisingly, given the ultimate stakes.3 Indians therefore hire lobbyists in the states and in Washington to advance their cause.
Getting casino rights also requires that a recognized tribe satisfy the federal government in various other ways, such as how the casinos will be operated. Here, too, it is useful to have lobbyists familiar with how the game is played. The Wall Street Journal reports that "several political appointees in the Bureau of Indian Affairs" under President Clinton "tossed aside expert advice and recognized a bunch of new 'tribes' just before spinning themselves out the revolving door and into jobs as lawyers for Indian gambling interests."4
Consider an ongoing example of how the process works. In Illinois, there are ten casinos licensed to non-Indian owners (typically, established gaming firms such as Harrah's). But state regulation is tight: the largest casino is allowed to operate only 42 tables, and most Illinois casinos have fewer than 30 tables and about 1100 slot machines. The opportunity for more profitable gaming thus presents itself. And so, the Menominee Indians are in the process of opening a casino in Kenosha, Wisconsin, closer to Chicago than most of the Illinois casinos and easily accessible by high-speed commuter trains. The Menominee casino would operate 75 tables and 3100 slot machines, and would also feature a greyhound racetrack, simulcasts from other dog and horse tracks, a 5,000-seat theater, and a 400-room hotel. The Kenosha casino will not be on the Menominee reservation, and so land must first be transferred to the tribe, under the aegis of the federal Bureau of Indian Affairs. Then, negotiations with the state will proceed under the eye of a watchful Washington. The Menominees have hired a well-known lobbyist to pursue the tribe's goals, both in Washington and in Wisconsin.
Tribes also hire lobbyists to protect their rents from competition, once their casinos are up and running. For example, the Coushatta Tribe of Louisiana paid Jack Abramoff $32 million to fend off the application of another tribe for a casino that would compete with that of the Coushattas, which earns $300 million in annual revenues for 837 tribal members. Abramoff has also worked to stop legislation that would have prohibited Internet gambling.
But a tribe protected by the government sword from competition must also be wary of that sword. Once they are being earned, casino profits are of increasing interest to a tax-hungry federal government. Congress's ability to tax tribes is exceptionally complicated; many grants of land to Indians from the federal government contain specific clauses (which differ across different land grants), but others do not. More important, though, Congress can always alter or inaugurate taxation of tribes' revenues. Although taxing Indian tribes was of little interest in Washington when the tribes and their members had little income—the IRS initially opined that Congress did not designate Indian tribes as taxable entities—the rise of casinos has changed all that.5
In other words, Washington had no immediate financial stake when it first acted as an intermediary between the states and the tribes in establishing tribal casinos. But as casinos raked in money, Washington has become more and more interested in taxing Indian casino profits. The prospect of casinos being taxed sets the stage for the second aspect of lobbyists' ability to make hay. Working with politicians (such as Tom DeLay) who can influence the outcome of legislation, lobbyists (and politicians) can extract a portion of the tribes' profits by accepting fees to help mitigate or obviate threatened taxation. In effect, the tribes can pay lobbyists sums that, although in the millions of dollars, are paltry as compared to the multi-millions that would be lost if tax legislation were in fact passed. To be credible in demanding a portion of the tribes' rents, a lobbyist must demonstrate that he has access to key legislative players. That, Jack Abramoff was able to do. His links to DeLay staffers, to other legislators and to the White House were tight and well known.
Is there anything wrong with all this? Not legally, if the lobbying is done "right." Lobbyists are free to petition government on behalf of clients. Indeed, the process is protected by the First Amendment. Accepting money for the exercise of one's First Amendment rights is not forbidden, either. (Abramoff's biggest legal problems essentially concern tax evasion and defrauding his clients, not creating or extracting their rents.)
The First Amendment likewise protects the tribes' contributions to federal candidates, which increased from less than $2,000 to over $7 million from 1990 to 2004. As reported recently,
In California, Native Americans have become the largest contributor to political campaigns: They spent $70 million on the successful 1998 campaign to require the governor to approve any tribal casino proposal (the requirement was struck down by the state courts a year later). Native Americans also contributed another $30 million in a similar and also successful campaign in 2000. And nearly one-fifth of all the money that was spent in the 2003 gubernatorial recall campaign came from Native Americans.6
Abramoff seems to think that he hoodwinked the tribes for which he worked, that they were paying him large sums for nothing. That seems highly unlikely. The process of extracting rents from gambling casinos by threatening (and then forbearing from) taxation has been going on for a long time.7 How could people contributing massive sums to lobbyists and (as in the case of California) politicians not understand after so many years the way the system works? Of course, you won't win 'em all politically. You pay your money, you take your chances. But surely, casino operators understand that gamble. And if the Indians were paying something for nothing—that "nothing" being no taxation—they certainly were getting their money's worth.
So this is the way the tribal casino game is played. But is all this a good or a bad thing? Well, the answer is not as simple as it might seem. It depends on what tribes are buying from lobbyists and politicians.
The payments may be to seek rents, what economists call the profits that come from preferential treatment by government. In this case, Indian casinos make above normal profits because of the way they are treated relative to non-Indian casinos. Rent seeking is manifestly undesirable. Prices in enterprises propped up by government-granted privileges must be higher, because would-be competitors cannot get those same privileges. Consumers (here, gamblers) must be worse off. Moreover, more rent seeking means less production of goods and services of value. Resources (lawyers, accountants) are siphoned out of the widget-producing economy to lobby on Capitol Hill.8
But what of rent extraction, payments made to lobbyists and politicians to avoid taxation and other onerous acts of government? Here, "corruption" actually can be a good thing, if paying a small bit of baksheesh avoids political depredations that would wreak even greater economic havoc.9 Rent extraction payments are protection money, paid if the cost is less than the cost of being subject to even more costly government impositions. And, in the second-best world in which we live, they can be both personally and societally desirable. As Nobel laureates Gary Becker and George Stigler observed, for example, "corrupt" payments to officials in Nazi Germany not to enforce laws against Jews was a good, not a bad, thing.10 In the real world of rent extraction, the only thing worse than a corrupt government official is an honest one.
In short, there is good corruption and there is bad corruption. But the distinction between rent seeking and rent extraction is lost on those inside the Beltway. Politicians take the money, but then return it as fast as possible once the Washington Post writes about it, because it is all thought to be bad.
See Michael Munger's essay on campaign finance legislation: "Unintended Consequences 1, Good Intentions 0"
And then, if the payments are all bad, in today's McCain-Feingold world many in Washington believe that the solution is to impose limits on politicians' ability to accept favors offered by lobbyists and their clients. But as we have learned from the McCain-Feingold campaign finance law changes, merely imposing new limits will only divert, but never stop, transactions between private citizens and the lobbyists and politicians, be those payments motivated by rent seeking or rent extraction.
The real solution? Consider that both rent seeking and rent extraction are functions of the ability of government to create and extract rents. If governments did not arrogate to themselves the right to outlaw or regulate gambling, there would be no need for government lobbyists. There are no Jack Abramoff's needed to persuade government to allow you to open a grocery store, or me to start a law office. Why? Because, for the most part, government has no ability to stop us from doing so. If government did not have the ability to siphon off tribal revenues by taxation, lobbyists would have no work in that area, either.
As government gets bigger—as it can dispense special favors or threaten to tax—lobbyists have the constitutionally-protected ability to sell their services to influence outcomes sought by their clients. Again to quote the Wall Street Journal, "Where opportunities for enormous, instant wealth are sloshing around at the discretion of bureaucrats and legislators, invariably is bad policy to be found." If one does not like what the Jack Abramoffs in Washington do, the only way to stop it is to reduce government control of gambling. On the other hand, if you like bigger government, be prepared for the next Abscam or Keating Five... and the next Abramoff.
B. Benjamin & G. Weiss, "Wheel of Fortune" (Abilene Music, ASCAP). The song was made popular by Kay Starr in 1952.
For an excellent summary, see Johnson, "Indian Casinos: Another Tragedy of the Commons," in Self-Determination: The Other Path for Native Americans (T. Anderson et al., eds. Forthcoming 2006).
Johnson, supra note 1. Johnson details the extent of Indian-gambling profitability, noting that "Indian gaming has been capturing an ever-larger share of total gaming industry revenues."
Another issue, usually resolved initially within a tribe but often then appealed to federal courts, is whether a particular Indian is a member of ("enrolled in") a tribe, and so entitled to receive his pro rata share of casino profits. The stakes in these disputes can be quite large, as the number of Indians in many tribes operating casinos is very small.
Jenkins, "Indian Taker," Wall St. J., Jan. 11, 2006, p. A15.
Cowan, "Leaving Money on the Table(s): An Examination of Federal Income Tax Policy Towards Indian Tribes," 6 Fla. Tax Rev. 345 (2004):
Given the activities and financial status of Indian tribes at the time of the earliest rulings, the issue of whether Indian tribes could or should be subject to federal income taxation was unimportant. Presumably there was simply not enough tax revenue at stake to warrant the IRS spending time and resources attempting to interpret an ambiguous IRC [Internal Revenue Code] in light of the vast body of statutes, treaties, case law, and constitutional issues dealing with Indian law. Today, however, with the income provided by Indian gaming and the rapid expansion of tribal economic activities, the issue of whether Indian tribes could or should be taxed merits more attention.
Bordewich, "The Least Transparent Industry in America," Wall St. J., Jan. 5, 2006, p. A 16.
It was noted, for example, in a book published almost ten years ago. F. McChesney, Money for Nothing: Politicians, Rent Extraction and Political Extortion (Harvard U. Press, 1997).
For the seminal and still best discussions of the operations and costs of rent seeking, see Tullock, The Welfare Costs of Tariffs, Monopoly, and Theft, 5 Western Econ. J. 224 (1967); Rent Seeking (1993).
See McChesney, "Corruption: A Survey of the Economic Literature" for the Elgar Companion to Property Rights (with B. Benson) (E. Colombatto, ed., 2004); McChesney, "Ever the Twain Shall Meet," 99 U. Mich. L. Rev. 1348 (2001) (review of S. Rose-Ackerman's Corruption and Government).
Becker & Stigler, Law Enforcement, Malfeasance, and Compensation of Enforcers, 3 J. Legal Stud. 1 (1974).