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Passing the tax burden

29 September 2008

LAS VEGAS, Nevada -- The casino industry and the general business community have long disagreed on how to subsidize Nevada's multibillion-dollar biennial budget.

Gaming leaders, whose casinos provide almost half of the state's general fund revenues, want nongaming businesses to share the burden, either through an increase in the modified business tax or the implementation of a gross receipts tax.

The business community has resisted those requests. Some advocate additional reductions in the state budget. Others support increases in taxes associated with the resort industry's nongaming areas, such as hotel rooms. Some resort operators are willing to accept percentage increases in the hotel room tax, as long as that money is part of the overall solution.

Meanwhile, the Las Vegas Chamber of Commerce is looking hard at both the Public Employees Retirement System and the Public Employees Benefits Program. The organization believes cost-cutting measures in both state-supported programs could return several hundred million dollars into the budget's general fund.

Tensions among all parties could rise early next year.

Legislators will convene in Carson City to approve the 2010-11 state budget. The session follows a year where revenue shortfalls have caused roughly $1.2 billion in reductions ordered by the governor to the existing $6.8 billion, two-year budget.

Less than two months before the Nov. 4 election, when the Legislature's Democrat-Republican makeup could shift, many cooks are offering their own recipes for the budget pie.

"From our perspective, the solution to the state's problems is not a singular idea," Boyd Gaming Corp. Chief Executive Officer Keith Smith said. "Reasonable people can disagree on solutions."

Kara Kelley, president and CEO of the Las Vegas Chamber of Commerce, believes gaming and business can craft a compromise ahead of the legislative session.

"You're never going to get unanimous agreement," Kelley said. "It's impossible to get our 7,000 members to agree if the sky is blue today. It's just not going to happen."

Station Casinos Executive Vice President Scott Nielson said both gaming and businesses agree on one key point -- government needs to be more efficient with its spending.

Whether it's revenue enhancements or additional cuts, finding answers that all parties can agree on is proving difficult.

Still, gaming industry executives and business leaders said they don't want the 2009 session to replicate 2003, when gaming and business feuded openly over how to fix the state budget.

"Those of us who were on the ground every day in 2003 and were involved in the process remember what a contentious and difficult session it was," Kelley said. "From that perspective, we hope 2009 will be easier."

MGM Mirage Chairman and CEO Terry Lanni remembers 2003 all too well. Following the legislative session, MGM Mirage resigned its membership in the Las Vegas Chamber of Commerce and other business development groups. Lanni was disappointed chamber leaders didn't support a statewide tax on gross business receipts.

With the 2009 session looming, Lanni is hopeful there won't be a deep division between gaming and other business sectors when it comes to fixing the state budget. He said MGM Mirage and the chamber have similar goals.

"We take the same position that they do, that small businesses, the mom and pop operations, have to be protected," Lanni said. "But what that threshold would be is left open to some discussion."

For more than a year, he has advocated an increase in the modified business tax, coupled with an increase in the hotel room tax and additional budget cuts.

Under Lanni's proposal, the modified business tax would increase six-tenths of 1 percent with an exclusion for small businesses. He thought that increase could produce an additional $240 million. Lanni suggested room taxes be increased by 2 percentage points with the money going to the general fund. Also, 1 percentage point of the current room taxes would be diverted to the state budget. In total, his plan would create $600 million in new revenue.

"Increasing an existing tax is usually much more easy to pass and would be much more acceptable to a broader range of people than creating a new tax," Lanni said. "The tax is already there and is a little easier to deal with."

Smith said Boyd gaming supports Lanni's proposal. Nielson said Station Casinos agrees that it makes sense to have a broader tax base.

Outside of gaming, the proposal has gathered little support.

Kelley, who has worked for the 7,000-member chamber since 1995 and became president in January 2002, said there is little discussion about increasing taxes, especially among the legislative leaders with whom she has spoken. Also, Gov. Jim Gibbons has clung to his 2006 campaign pledge not to raise taxes.

Kelley said the general business community doesn't seem to be looking at gaming for more money. The casino industry has experienced seven straight months of declining revenues, which are off 6.6 percent statewide through July when compared to the first seven months of 2007.

"In any community, the health of its largest industry speaks to the health of the rest of the economy," Kelley said. "It's a symbiotic relationship. The largest industry needs smaller business folks to be healthy because that's where the most jobs are created. There are very few issues where we aren't aligned with gaming."

Last year, Lanni took his broad-based business tax idea to the Nevada Development Authority, one of the organizations MGM Mirage abandoned in 2003. He was the keynote speaker at the annual membership luncheon. His proposal was met with muted response.

"Retailers, bankers, auto dealers; they have kids that go to school here," Lanni said. "Shouldn't they be part of the solution rather than part of the problem? We have to work together to bring everyone to the table."

However, he does think there are small pockets of support. Lanni was told after his development authority speech that some in the business community are willing to participate while others don't want to pay for anything.

"I don't think (the business community) speaks with a singular voice anymore than the gaming industry does," Lanni said. "When recovery comes, it's not going to be a light switch. It's going to trickle in slowly."

Lanni also believes the timing is right for substantial change to how the state budget is funded. He called the current national and local economic downturn, "a perfect storm" to enact change. In talks with Wall Street, MGM Mirage executives have expressed the belief the economy is going to get worse before it gets better.

"We're dealing with a tough economy and people have greater needs," Lanni said. "In one sense, we can take advantage of this aspect and get together to find a compromise that makes sense and is responsible. It will need to include some revenue enhancements, higher taxes whether we like it or not, with some existing taxes. We also have to deal with the issue of controlling costs. I'm sure there are some budget cuts that can still be made."

Kelley said the chamber is drafting its legislative plans, much of which will focus on reforming the public employees retirement and benefit programs. She hopes to have support from gaming. Chamber representatives have informally shared some of the concepts with casino industry representatives.

"For the better part of this year, we've been talking to our partners in gaming and other major industry leaders about our ideas," Kelley said. "It's conceptual, but we're getting some positive feedback. What we need to do is finish our work, to come up with some more concrete proposals and be able to say this is our platform on government reform and this is what needs to take place."

Not all of the leadership in the gaming industry, however, reads from the same script. Different casino companies have offered their own solutions for the budget problems. The ideas have led to some heated exchanges inside casino board rooms.

"I don't know if there is a split among gaming," Kelley said. "They are competitors, and it is very difficult to get competitors on the same page about a variety of issues."

Las Vegas Sands Corp. has long proposed diverting room taxes, marked for the operation of the Las Vegas Convention and Visitors Authority, back to the general fund and greatly reducing the tourism organization's influence. Two ballot initiatives that would have asked voters to approve such a plan were rejected this month by the Nevada Supreme Court on a signature-gathering technicality.

Other gaming companies have not been on board with the quest by Las Vegas Sands.

"That was not something we support," Lanni said. "If it's something that makes sense for the community or the state, we would work together on it. We, as a company, are very supportive of the LVCVA."

Boyd Gaming's Smith, who serves as the vice chairman of the convention authority's board of directors, doesn't believe taking money away from tourism in the industry's time of need makes good fiscal sense for the state.

"I think our legislative leaders understand the importance of the LVCVA," Smith said. "We're opposed to increasing the tax on our visitors to Las Vegas. That's just not the right approach at this time. There's not a question we need additional funding for education. But I would suggest that others also need to share the burden."

Three other gaming companies, however, broke ranks with MGM Mirage and Boyd Gaming.

When the state's teacher union began circulating petitions earlier this year to qualify a ballot initiative that could have raised the state's gaming tax by three percentage points, representatives from Harrah's Entertainment, Wynn Resorts and Station Casinos, negotiated a settlement.

Under the agreement, the companies agreed to support an advisory ballot question that increases hotel room taxes to 13 percent. The money would go into the general fund earmarked for education in the first year and toward increased teacher salaries the following year.

Harrah's Senior Vice President Jan Jones admitted the plan doesn't solve all the education funding problems facing the state, but said it is a compromise for the short term.

"We've always supported a broad-based business tax as a piece of the solution," Jones said. "We still don't have the money to run important services in Nevada. Because of the governor, we don't think tax increases are going to be part of the solution. That's why we did the advisory question. It was the only way to get any money to education."

Nielson said Station Casinos stands behind proposals to broaden the tax base. He said the compromise with the teachers union was just an initial step in the process.

Kelley said the chamber has not taken a stand on the room tax increase.

"Early on, we took a stand against the teachers union petition," Kelley said. "If the gaming industry wants to get together and say they want the room tax raised, that's between them and the Legislature."

MGM Mirage's divorce from the chamber in 2003 garnered headlines because the company is the Strip's largest casino operator. Since its 2005 buyout of the Mandalay Resort Group, MGM Mirage controls 10 Strip resorts covering roughly 44 percent of the famous boulevard's available hotel rooms.

"From an operations standpoint, it was not as significant as many perceived it was," Kelley said.

Station Casinos also quit its membership in the chamber in 2003 when company executives discovered some of its vendors were openly lobbying against any new business taxes.

Many Strip and downtown casinos, their corporate parents and several gaming equipment manufacturers, are active members of the chamber. But neither MGM Mirage nor Station Casinos has rejoined the business organization.

"It's never crossed my mind (to go back to the chamber)," Lanni said. "We don't hold any animosity toward them as individuals or as an entity. We just had differing points of view in 2003."

Nielson said Station Casinos has dealings with chamber representatives, but has no plans of rejoining.

"We're not antagonistic," Nielson said. "We communicate and work together on certain issues."

Other casino operators, such as Harrah's and Boyd Gaming, remain active members of the chamber even though there sometimes is disagreement about issues involving taxation and the casino industry.

Jones and incoming chamber Chairman Steve Hill, who works in the construction industry, serve together on the Spending and Government Efficiency Commission which is tasked by the governor to find ways to cut state government costs.

"We always believe it's better to be at the table and try and come up with solutions rather than walking away," Jones said. "I haven't found Steve to be unreasonable and I have not found the chamber to be unreasonable to any kind of responsible tax reforms."

This story first appeared in the Business Press.

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