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Best of Howard Stutz

Gaming Guru

Howard Stutz
 

Ideas traded in tax debate

18 January 2008

LAS VEGAS, Nevada -- Business leaders whose companies support the casino industry heard impassioned reasons Thursday morning why two different initiatives to raise the state's gaming tax would be bad for their bottom lines.

They also heard why a suggestion by Las Vegas Sands Corp. to privatize the Las Vegas Convention Center and diminish the influence of the Las Vegas Convention and Visitors Authority was not a workable concept.

What wasn't discussed, however, was a proposal from two casino company leaders for Nevada to adopt a broad-based business tax as a solution to the state's current economic woes. The idea could also affect the businesses balance sheets.

Members of the Nevada Tourism Alliance were told this wasn't the last time they would hear about tax proposals and budget enhancement suggestions during 2008.

Former Gov. Bob Miller, a co-chairman of the alliance who moderated the discussion at the MGM Grand Conference Center, said a broad-based business tax could be part of any plan for solving the state's budget crisis. Nevada is facing a $500 million-plus budget shortfall and Gov. Jim Gibbons has asked state agencies to make cutbacks.

Miller, who was governor from 1989 to 1999, criticized Gibbons for his pledge not to raise taxes. He suggested the entire state budget process needs review.

"I think there needs to be a full reconsideration of all our expenses in the state," Miller said after moderating a discussion with Deutsche Bank gaming analyst Bill Lerner and convention authority CEO Rossi Ralenkotter. "The expenses are then pared to only what is necessary and then we need a reconsideration to show whether or if we have adequate revenue sources. When you do that, everything needs to be on the table."

Miller said whatever is necessary to meet the state's needs should be considered.

"You can't start with a statement of no new taxes and have an open dialogue," he said.

MGM Mirage Chairman Terry Lanni, who has called for the adoption of a broad-based business tax, had been a scheduled speaker, but was unable to attend. Miller wasn't sure how the alliance members would have reacted to Lanni's message.

"We're not speaking for a single suggestion at this point because people are still thinking through what makes the most sense," Miller said.

Lerner said that no matter what the final budget solution includes, raising the gaming tax was a bad idea and could backfire. Using a PowerPoint presentation, Lerner spelled out both a proposal by the state teachers union to raise the gaming tax from its current 6.75 to 9.75, and an initiative by Las Vegas attorney Kermit Waters that would increase the tax to 20.2 percent.

"These are negligent proposals by unqualified interest groups and I strongly believe they threaten the health and economic balance in our state," Lerner said.

The teachers' proposal amounts to a 44 percent increase to the tax rate. Although it is estimated that the plan would raise $420 million in proceeds, the result would reduce casinos' cash flow by 6 percent, potentially affecting any new development and reinvestment in the state, he said.

The Waters proposal equates to a 200 percent increase in the gaming tax. Although it would bring in $1.9 billion, the result would reduce a gaming company's cash flow by more than 27 percent, he said.

Currently, $30 billion in development is being undertaken on the Strip, which would add 41,000 hotel rooms by 2012. The projects are being built based on Nevada having a stable gaming tax environment.

"Casino operators have a fiduciary responsibility to their investors to seek the highest return on investment," Lerner said. "Many of these projects wouldn't pencil out (work financially) if a significant tax increase occurs. The $30 billion development pipeline on the Strip corridor under either of these scenarios is probably better off in a traditional savings account. Put it in the bank."

Ralenkotter told attendees the hotel room tax, which averages out to 9 percent, is expected to climb as new projects are built. He said 47 percent of the room tax funds the convention authority while 53 percent is returned to Clark County for the school district and transportation needs. The actual room tax collected in fiscal year 2007 was $397.7 million. It is projected to increase to $456.3 million in 2009 and $571.8 million in 2012.

He said the business model the convention authority has used for almost 50 years continues to reap rewards. A record 39.3 million visitors came to Las Vegas in 2007.

"We market the destination," Ralenkotter said. "It's a business model that has worked and continues to work."