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Best of Liz Benston
Liz Benston

States look to casinos for cash fix

3 December 2007

All across the country, states are allowing the slow expansion of gaming - and then trying to wring more money out of casinos - to make up for declining revenue. The teachers' effort in Nevada to raise the top gaming tax from 6.75 percent to 9.75 percent is just one example of how the citizenry views casinos as a cash cow - and almost makes the Nevada tax hit look like chump change.

The latest feeding frenzy is playing out in Maryland, where voters next year will decide whether to allow slot machines - and place a 67 percent gaming tax on them. The driving force behind that embrace of gaming: a $1.7 billion state budget deficit and little hesitancy by residents, now that times are tough, to lean on the gaming industry for help.

Gaming tax rates are relative, of course, to the state's casino environment: States that carefully dole out casino licenses to a few operators are able to extract much higher tax rates in exchange. It's the cost of being offered something close to a monopoly.

But casino representatives say Maryland is sabotaging its own revenue needs by proposing a rate that will yield smaller, less attractive casinos with fewer amenities and thus less taxable gambling revenue over the long haul.

"States are shifting from an economic development model to a tax and torture model," Eric Schippers, a spokesman for Penn National Gaming, said during the Global Gaming Conference in Las Vegas this month. The Pennsylvania company, which operates racetrack casinos across the country, owns a racetrack in Maryland that won't be allowed any slots. "Rather than a way to create jobs ... gaming becomes a means to an end," Schippers said.

Gaming companies say lower taxes yield more capital investment, which results in bigger, more attractive and successful properties, which in turn generate more tax revenue.

Legislators on the hunt for tax revenue point to Pennsylvania, where slot revenue is taxed at 55 percent. Pennsylvania properties are comparable to suburban Las Vegas casinos, with the state's most deluxe property yet opening in the Poconos with 2,500 slots and four restaurants at a cost of $412 million - cheap by Las Vegas standards.

Legislators who settle for lower tax rates are likely to endure criticism for caving in to gaming interests - a position that can be difficult to defend, said Michael Pollock, an Atlantic City-based gaming consultant who has argued on behalf of casino companies for lower tax rates. "It's become more difficult to come up with a more reasonable tax rate."

Researchers say there's little rhyme or reason to the highly political process of devising a gaming tax system, which is subject to opposing interests as legislators seek the greatest tax windfall possible and gaming companies - each with its own strategy and profit model - fight for lower rates.

What constitutes "reasonable" is up for debate in many states, including Nevada, where the state teachers union has proposed a ballot initiative to raise the gaming tax 3 percentage points based on the notion that Nevada's casinos, which have the nation's lowest gaming tax, can afford it.

"As more states come in at higher rates, it makes states with lower rates vulnerable" to incremental tax increases, Pollock said.

Eugene Christiansen, a New York investment consultant who has authored tax studies for gaming interests, says Nevada's 6.75 percent rate has helped fuel building projects on an epic scale. He calls Maryland's rate "bad economics."

"Anything north of 30 percent is depriving the industry access to capital, and gaming is a capital-intensive business," Christiansen said. "You make it impossible for properties to be adequately refreshed. This is not what you spend to keep the rooms clean" but the hundreds of millions spent on new attractions that make properties competitive, he said.

But that argument typically falls on deaf ears, he said, because legislators "want the money now."

"If you're a governor and the wheel starts squeaking loudly, you start looking for solutions," Christiansen said. "It's much harder to think in the long term about jobs and capital investment if you're trying to plug a budget gap this session."

The proposed tax increase in Nevada indicates the potential for gaming to be viewed as a fiscal resource, as it is in other states, rather than a purely economic growth engine, he said.

Jeffrey Hooke, a former Wall Street investment banker and tax watchdog who has authored pro bono studies for tax associations in several states, says the casino industry is overstating the relationship between tax rates and capital spending.

With the exception of Nevada and New Jersey, which don't limit casino licenses and have large clusters of properties fighting for customers, casinos are more akin to monopolistic cable television licensees than other types of businesses, said Hooke, an investment consultant based in McLean, Va.

Ideally, he said, states should impose heavily tiered tax rates or even separate rates based on location. Casinos with little competition and adjacent to urban centers can afford tax rates of more than 50 percent, while those in rural areas can't afford such rates, he says.

Hooke says Maryland's proposed 67 ¯percent tax rate is affordable, especially for those casinos among the five authorized statewide that will be located closest to the Baltimore-Washington area, a region of more than 8 ¯million people. Such a high tax rate is the price you would pay for something of a monopoly in a major urban area.

Industry experts, though, say such a high tax rate would allow for little more than small casinos rather than luxury destination resorts on a par with those in Atlantic City or Las Vegas.

Hooke has also lobbied states to charge licensing fees to justify government-imposed limits to competition.

In Pennsylvania, where operators have complained about the state's 55 percent tax rate, the government sold each gaming license for $50 million when licenses later changed hands for hundreds of millions of dollars in the private market.

Other states, such as Florida and Kansas, charge nominal, if any, license fees.

Hooke's testimony in Indiana, which recently legalized slots at racetracks, influenced the state's decision to charge $250 million for each gaming license - the largest fee ever imposed by a state.

"The state wised up" after giving away riverboat licenses more than a decade ago, he said. The two racetracks are within 40 miles of Indianapolis, a metropolitan area of nearly 2 million people.

High tax rates don't necessarily mean slot barns with few amenities, Hooke said.

"Outside of a few major metropolitan areas in the country, most of these places are drawing locals rather than tourists," he said. "You don't need a Bellagio or Mirage in Kansas City."

The owner of those Strip resorts, MGM Mirage, wants to build a 250-room hotel-casino akin to Henderson's Green Valley Ranch Station Casino near Wichita, the second-largest metropolitan area in Kansas.

A reasonable gaming tax rate of 28 ¯percent and the geographic separation of four proposed casinos in Kansas fueled the company's decision to apply for a casino license in that state with partners including the tribal owners of Connecticut's Foxwoods resort.

MGM Mirage, the biggest operator on the Strip, has said it will concentrate most of its resources in the three states - Nevada, New Jersey and Mississippi - with the lowest tax rates. But spokesman Alan Feldman says the company is still eager to explore potentially lucrative investments elsewhere, such as the gaming licenses up for grabs in Kansas, with partners.

Hooke and his detractors agree that legislators aren't eager to study the tax issue in any depth.

"They're heavily influenced by lobbyists, who essentially write the laws," Hooke said. "It's hard for legislators to think analytically."

Christiansen said the tax question, because there's no magic number or formula, "isn't an easy debate, even assuming that everyone knows what they're talking about."