The new Era of Constriction -- shrinking all levels of government -- is both an opportunity for tribes and a threat.

First, the problem. State and local governments are in deep financial holes. The optimistic view is that state governments have seen the worse and have turned the corner; they are still facing shortages, but far less than a couple of years ago. There are a lot of numbers to back up this argument. State budgets are smaller by some 14 percent, there are fewer employees, and budget deficits have been steadily getting smaller. The Center on Budget and Policy Priorities says 24 states are predicting shortfalls of $46 billion for fiscal year 2013, down from $191 billion in fiscal year 2010.

But that optimistic accounting is tempered by a couple of problems. The federal stimulus money is gone. “So even though significant budget gaps remain in 2012, there will be little federal money available to close them,” says the CBPP report, States Continue to Feel Recessions Impact. “As a result, states' final 2012 budgets have contained some of the deepest spending cuts since the start of the recession.”

On top of that, as I wrote last week, future federal budget cuts will cause state revenues to drop even more. And, if that weren’t enough, states have seriously underfunded many longterm obligations such as pensions. One Wall Street analyst, Meredith Whitney (who was right about housing in 2007) predicts hundreds of billions of dollars in debt defaults by local governments. She recently told CNBC that states are in worse financial shape than they were six months ago.

So what is the impact of all of this on Indian Country?

Seattle attorney Gabriel Galanda puts it this way, on the social network, LinkedIn: “Tax-starved states and counties will continue to attempt to extract value from reservation economic development projects, through taxation or otherwise. Tribes must be vigilant in their defense against illegal inter-local cash grabs.”

On Galanda’s blog he writes that Washington state Republicans are proposing to “close” tribal tax loopholes worth $110 million. His message is clear. “Make no mistake about it,” he writes, “the state tax man cometh to Indian Country. Be prepared.”

On the spending side, the most important conflict between tribes and states will be over Medicaid. This is one of those federal programs that is not supposed to be about Indian Country, yet its impact is huge because it represents expanded funding for the Indian health system.

But states, not the federal government, write the rules and regulations to pay for Medicaid programs, even though the cost is reimbursed by the federal government for patients within the Indian health system. (A further complication: Both Democrats and Republicans protect the share of Medicaid that pays for nursing home and institutional care, while the debate about the program ends up shifting to serving the “poor” rather than looking at Medicaid as a whole.”)

This is all pretty dark stuff. State budgets represent choices of bleak and bleaker. So what’s the opportunity for tribes?

But tribes (and states) have far more to gain with cooperation over confrontation. Tribes are large employers and contribute to regional economy in huge ways. States should be protecting and enhancing that spirit of enterprise, rather than destroying it with short-sighted attempts to tax. In Idaho, for example, a study by Abelardo Rodriquez of the University of Idaho Extension found that Idaho tribes created some 7,500 jobs (4,500 of those gaming related) with wages near $160 million generating $17 million in property and income tax payments.

If these jobs were created by, say, IBM instead of five Idaho tribes, the state legislature would be falling all over itself to protect this asset. Tribes need to reframe the debate along these lines.

Another opportunity is to reframe Medicaid rules. It’s time to remove states from making rules about the Indian health system and shift this power to tribal governments. The Affordable Care Act already sets out a plan for the Navajo Nation, but as budget tightens, other tribes need to assert authority over Medicaid.

State governments need solutions right now -- and tribal governments could be and should be the unexpected partners. (Next week: Where local governments fit into this puzzle.)

Mark Trahant is a writer, speaker and Twitter poet. He is a member of the Shoshone-Bannock Tribes and lives in Fort Hall, Idaho. Trahant’s new book, “The Last Great Battle of the Indian Wars,” is the story of Sen. Henry Jackson and Forrest Gerard.

Related Stories:
Mark Trahant: More than 10 million US jobs lost in last decade (6/14)
Mark Trahant: Indian Country stuck in permanent recession (6/6)
Mark Trahant: 2012 elections important for Indian Country (5/23)
Mark Trahant: Republicans divided over Medicare reforms (5/16)
Mark Trahant: Tribes should prepare for the worst on budgets (5/9)
Mark Trahant: Debt limit debate matters to Indian Country (5/2)
Mark Trahant: Rising gas prices hit Indian Country hardest (4/25)
Mark Trahant: Some tall tales about taxes in United States (4/18)
Mark Trahant: Bringing stories of abuse in Alaska in the light (4/12)
Mark Trahant: GOP proposal for Medicaid affects Indian Country (4/4)
Mark Trahant: Termination returns in the health reform debate (3/28)
Mark Trahant: Investing in young people before we all go broke (3/22)
Mark Trahant: Tragedy in Japan puts Yucca Mountain in scrutiny (3/14)
Mark Trahant: Policy will costs thousands of Indian Country jobs (3/7)
Mark Trahant: Tribes tested by budget cuts to Indian programs (2/28)
Mark Trahant: Tribes need a Plan B in case of federal shutdown (2/22)
Mark Trahant: Budget for Indian programs mostly a lost cause (2/15)
Mark Trahant: The Indian Health Service and state budget shortage (2/7)
Mark Trahant: Protecting the budget for Indian Country programs (1/31)
Mark Trahant: The sky doesn't have to fall on Indian health budget (1/24)
Mark Trahant: Real fight over health care reform all about funding (1/17)
Mark Trahant: Finding a way to a more civil discourse in America (1/10)
Mark Trahant: Indian health care a GOP target in the new Congress (1/3)
Mark Trahant: A new standard for the federal-tribal relationship (12/20)
Mark Trahant: Asking President Obama about Indian health care (12/13)