La Conner, located in northwest Washington state, is a town divided -- between those who have to pay the local government taxes, and those who don't. 

The bizarre situation stems from a court ruling over the status of the town's tribal lands, and specifically a community known as Shelter Bay. Located between the town itself and the Swinomish Tribe’s reservation, Shelter Bay contains nearly 1,000 homes either owned or leased by non-Indians, on land owned by the U.S. government and held in trust for the tribe.

But the San Francisco-based 9th Circuit Court of Appeals has ruled that the local government may not collect property taxes from people who own homes or businesses built on tribal trust land, even if they’re not Native Americans. 

In La Conner, this ruling has stripped 940 Shelter Bay parcels from the tax rolls, along with $1.8 million in tax revenue -- in turn, shifting the tax burden to the remaining property owners. 

“We tried to be good neighbors for years and years,” lifelong La Conner resident Larry McCormick said. “To me, this is a slap in the face.”

Indeed, it's also a slap in the wallet. Many La Conner residents have seen their property taxes go up 25 percent. The tax shift was made necessary because two-thirds of the families that use the schools, library and fire department are now tax-exempt. 

The city’s mayor, Ramon Hayes, won’t criticize the federal ruling, but he is desperately seeking federal aid and other measures to fill the looming budget hole.

“We want tax relief for our citizens, we want quality and sustainable education for our students and we want equity throughout the system,” Hayes said.

The small La Conner School District faces the biggest challenge. There are only 750 students, and the properties removed from the school’s tax base provided $800,000 a year. Now, 500 kids are getting a public education, but their parents’ property taxes are not going to support it. 

Superintendent Tim Bruce is unable to plan for next year. He’s got teacher positions to fill and a $20 million bond to build a new middle school, approved by voters before the federal ruling, to pay back. 

“We have never failed a tax levy,” said Bruce. “With the tax shift, I’m starting to hear from some people that they may not be able to afford to vote ‘yes,’ because they can’t afford it.”

The Swinomish Tribe has pledged to give the schools $400,000 for this year only, and there’s been no commitment to support the schools in the future. 

This doesn't mean Shelter Bay residents are off the tax hook entirely. The tribe is now the taxing authority and has already raised property taxes on Shelter Bay residents. Many homeowners are angry because they have no say on tribal leadership or how their tax money is spent.

“I don’t owe them taxes in which I have no representation because I’m an American citizen and I’m being taxed without my constitutional rights,” said Shelter Bay resident Jan Henrie. 

But others are more willing to pay the tribe despite the lack of transparency and accountability. “That’s not fair, but we haven’t been fair to the Native Americans forever,” said Shelter Bay resident Judy Booth. “They’ve gotten the bad end of the deal forever.”

Swinomish tribal leaders declined requests from Fox News for an interview.

Down Interstate 5 in Washington state, Snohomish County is dealing with the same issue. 

The 9th Circuit Court ruling cost the county $106 million in property taxes. Additionally, the county treasurer decided to reimburse 1,200 taxpayers a total of $5 million for property taxes paid the last three years. 

Among those receiving a refund were retail giants Walmart and Home Depot. Each leases tribal trust land for a store in an outlet mall. Now, all those property owners are paying taxes to the Tulalip Tribe. The tax shift has been less painful in Snohomish County, because it’s been spread out among many more taxpayers than in La Conner.

According to the U.S. Census Bureau, 424,000 non-Indians live on tribal trust land. Neither the Bureau of Indian Affairs nor the Census Bureau could comment on how many are currently paying property taxes to local governments.

Dan Springer joined Fox News Channel (FNC) in August 2001 as a Seattle-based correspondent.