Tax Facts are Surprising

26 May 2004

By David Waddell

There are many challenges that the Michigan gaming industry faces these days. Last year, the Michigan Lottery introduced video Keno and pull-tab games in Michigan bars and restaurants. This, coupled with the pending talk of Racinos at the various horse racing tracks, provides a new level of competition for Michigan's 20 existing casinos. Perhaps one of the more surprising current developments has been a recent legislative proposal to tax all of Michigan's casinos at a wagering tax rate of 36 percent, which is double the current rate imposed on the Detroit casinos. This proposal seems to be a knee-jerk effort to raise additional revenue. To me, the surprising aspect is the number of die hard tax-cutting Republicans who were so quick to jump on board with this proposal while ignoring that practical experience in other jurisdictions has demonstrated that increased taxes can result in a decline in government revenues.

The facts are that such explosive tax rate increases have been tried elsewhere, and have been miserable failures. In 2003, the most dramatic wagering tax increase occurred in the State of Illinois where the Legislature and governor implemented a top-tax rate of 70 percent. Illinois' wagering tax began with a reasonable 15 percent levy on adjusted gross receipts up to $25 million, but increased to 37.5 percent on receipts of $50 million and incrementally inflated to 70 percent for receipts over $250 million. Illinois' wagering tax had held steady at a flat 20 percent until 1998, when the state began to tap the industry for added revenues and implemented massive tax hikes, first in 2002 (50 percent), followed by the more recent one (70 percent) a year later.

The result of the Illinois' tax increase has had the reverse effect on state revenues from the gaming industry. Tom Swoik, Executive Director, Illinois Casino Gaming Association, provided testimony at the Illinois Gaming Control Board meeting on January 15, 2004, and stated, "… in 2002, the casino industry in Illinois employed nearly 11,000 people and paid almost $365 million in salaries and fringe benefits." Mr. Swoik informed the Board that, as a result of the state's wagering tax increase, "[i]n 2003, the casino industry laid off nearly 700 employees, and they are not filling close to 600 additional vacancies." Most shocking in Mr. Swoik's testimony was that the Adjusted Gross Receipts for the first six months of the current 2003-2004 fiscal year are down by over $88 million and admissions are down by over 18 percent.

In response to the negative impact on the industry, certain Illinois' legislators are currently drafting legislation to rollback the inflated tax rates to 1998 levels to make these casinos more competitive with the Indiana and Michigan markets. Rather than learning from this mistake, Michigan legislators are going down a path that will reverse positions with Illinois, leading to growth, development, and economic revitalization in the market, while this one becomes stagnant.

As the Illinois example demonstrates, gaming tax rates have a direct impact on the amount "held" by casinos which will deter gamblers from coming to Michigan casinos. With the growth nationwide of the availability of casinos, gamblers now have choices on where to spend their entertainment dollars. Increased taxes will likely reduce payouts, fewer marketing promotions and that will lead to a decline in attendance. Sophisticated customers know where they can get the best return on their dollar and take advantage of this knowledge.

After Proposal E passed in 1996, the Michigan Legislature acted cooperatively in a bi-partisan fashion to craft the Gaming Control and Revenue Act in a manner which would give the City of Detroit and the State of Michigan a fairly large share of revenues, while still providing the operators with the cash flow to make the capital investments and improvements to accomplish the goals of the voters to provide economic revitalization to the City of Detroit.

Too often the casinos in Michigan are viewed as something they are not. Two of the three Detroit casinos are principally owned by publicly traded companies meaning that you, or I, can own a piece of the casino simply by calling our stockbroker. Increased taxes on casinos are increased taxes on their shareholders. Even more disturbing is that, by upsetting the economic equation with higher taxes, Michigan may well experience the loss of direct jobs by people who are being given a real career opportunity in this growth industry, to say nothing of all the indirect jobs for members of the construction industry and other suppliers. There is no better illustration of the Republican principal that increased taxes do not mean increased government revenues. Hopefully, Michigan will learn from the experience in Illinois and elsewhere rather than learning the lesson the hard way.