California can't demand that Indian tribes share gambling revenue to reduce the state's deficit as the price of expanding their casinos, a federal appeals court ruled Tuesday.

Gov. Arnold Schwarzenegger's insistence that tribes turn over some of their proceeds to the state general fund amounts to a tax that federal law prohibits, the Ninth U.S. Circuit Court of Appeals in San Francisco said in a ruling with multimillion-dollar consequences.

For the Rincon Band of Luiseño Mission Indians, which is trying to negotiate an expansion of its casino in San Diego County, the case is "a question of economic survival," said Scott Crowell, a lawyer for the tribe. He said the Rincon Harrah's casino in northeast San Diego County is the tribe's chief source of income.

The dissenter from the 2-1 ruling, Judge Jay Bybee, predicted that 15 California tribes would cite the case as grounds for trying to repudiate revenue-sharing agreements they had previously signed.

"The result is going to be chaos as tribe after tribe seeks to reopen negotiations," Bybee said. He argued that the court majority had confused taxes, which the government unilaterally imposes, with revenue-sharing deals.

The 15 tribal contracts will generate about $370 million for the state this fiscal year, the state Finance Department said. In the case before the court, the Schwarzenegger administration was seeking $38 million of the $40 million annual profit projected from the Rincon Band's proposed addition of 900 slot machines to the 1,600 it already has at its casino.

Schwarzenegger will ask the full appeals court for a rehearing, spokesman Jeff Macedo said. He said the court was improperly "telling the state what it can and can't do."

If the ruling stands, the dispute will go to a mediator, who will have the last word if the two sides can't agree. In that event, Bybee said in his dissent, the tribe will get the added slot machines and the state will get nothing.

Federal law requires Indian tribes to negotiate agreements with their state to operate casinos. The law prohibits states from taxing tribes but allows a state and a tribe to agree to use casino revenue to help pay state regulatory costs, defray local governments' expenses and subsidize tribes that lack casinos.

The Rincon Band negotiated a 20-year contract with California in 1999. After the tribe proposed more slots in 2003, the Schwarzenegger administration demanded much of the added revenue for the general fund.

The Republican governor successfully sought the same concession from other tribes renegotiating their contracts, but the Rincon Band refused and went to court in 2004.

Upholding a federal judge's ruling, the appeals court said the state's demand is an attempt to impose a tax forbidden by federal law.

The law was designed to give states a voice in Indian gambling, but it was not intended to give them complete control "such that each state can put the opportunity to operate casinos up for sale to the tribe willing to pay the highest price," Judge Milan Smith said in the majority opinion.

The ruling can be read at sfgate.com/ZJNS.

E-mail Bob Egelko at begelko@sfchronicle.com.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/04/21/BA341D1OL9.DTL#ixzz0lkdSg5yh