Politicians See Gaming Taxes as Easy Money

Two recent tax-related events show that politicians are clueless about how casinos operate and that they view taxes on casinos as easy money. It seems like anytime politicians see money flowing from one place to another, they want to divert a percentage of that flow to their own coffers--especially when they have budget problems.

First, about three months ago, the newly elected governor of my state of New Jersey proposed a tax on casino comps. Contrary to what some people believed, this was not a tax that would was going to be paid directly out of gamblers' pockets. The state was not going to ask gamblers to file returns listing the number of free buffets they received and pay a percentage of the value of those meals. This tax would have been paid by the casinos in addition to the other taxes they already pay. MGM-Mirage immediately said that the tax made the Atlantic City environment less desirable than others and they would not develop any more properties in the area should the tax be invoked. Fortunately, this tax appears to be a dead issue and, based on comments at a recent gaming convention held in Atlantic City, the governor is going to take a more pro-casino stance and relax some of the stringent rules still imposed on New Jersey's casinos.

Second, the Illinois state legislature voted to increase its tax on casino revenue to up to 50%. This move caused almost every casino stock to drop. Of course, companies with boats in Illinois were hit the hardest, but other stocks dropped because investors were afraid that other states may try the same thing.

Now, when a company has increased expenses, one thing it can do to cover those expenses is to increase its revenue. How does a casino increase its revenue?

One way would be to increase the amount of play it gets. There are three ways a casino can increase the amount of play it gets. It can encourage people to bet more and it can encourage people to play longer. Both of these tactics can create a public relations nightmare. The third way is to get more people to play. But the legislature did not include a provision to increase the number of machines and table games a casino can have.

How else can a casino increase revenue? Other businesses can increase the prices of their products. A casino does this by lowering paybacks on the machines and adopting less player-friendly rules on the table games. Slot machine paybacks can be lowered and few slot players will ever know the difference. Video poker and table games are different. Increasing the hold on those games can't be hidden. Because video poker and table games players can compare paybacks and rules for their games, they can do comparison shopping to find a place to play. The price is the product for those games.

Lowering paybacks and using more house-favorable rules are the sort of things that make more people decide to skip going to the nearby casinos and save their money for trips to Las Vegas or Tunica instead. I know of many people in the Chicago area who visit Las Vegas regularly and rarely go to the Chicago-area casinos.

Another tactic a casino can use to deal with increased taxes is to decrease other expenses. It can cut back on people, like cocktail waitresses, dealers, and slot floor personnel. The casino can also cut back on promotions and comps. Again, all of these moves will serve to drive players to casinos in other jurisdictions.

The Illinois legislature could have adopted the compromise that the casinos worked out with them, but instead it chose a much greater increase. Tax revenues will increase, but not by as much as they think because players will stay away because of the poor games and the decreases in services and comps. In addition, some of the additional tax revenue will end up going back to workers who lose their jobs because of the tax increase.

Of course, every business opposes tax increases. But I think legislators have to realize that casinos are not like every business. It's not easy for them to increase the price of the product they sell or pass on increased costs to the consumer. Legislators may be able to tinker with state lotteries to divert more money to the state and less to prizes, but increased taxes on casinos is not the easy money that they think it is.

Update: Since I first wrote this rant, legislators in the state of Indiana have indicated that they may follow Illinois' lead an increase gaming taxes. In addition, casinos in Illinois have indicated that they may remove all participation games (Wheel of Fortune, Jeopardy, for example) because they are no longer profitable due to the increase in tax.