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Best of Liz Benston

Gaming Guru

Liz Benston

Tax Hike Fears Worry Gaming Industry

4 February 2004

As state legislators make more zealous attempts to raise needed tax revenue, the casino industry is facing a deepening threat of higher state gaming taxes along with the newer, more intimidating prospect of state-owned casinos, a panel of gaming experts told a group of casino insiders and investors at a conference in Las Vegas Tuesday.

Spurred by political expediency and egged on by gambling opponents, lawmakers are increasingly calling for states to run casinos and generate higher taxes from them, Frank Fahrenkopf, chief executive of the American Gaming Association, said at the industry-sponsored American Gaming Summit.

"Government ownership of any private enterprise is a bad idea," Fahrenkopf said, referring to recent proposals forwarded in Illinois, Maryland and Kansas.

Maryland's governor last week proposed two state-owned "slot barns" in addition to legalizing slot machines at existing race tracks. Kansas' governor has proposed state-owned casinos as an alternative to traditionally licensed casinos. Race track owner Penn National Gaming Inc. -- also a member of the American Gaming Association -- has entered a bid for a casino license in Illinois that calls for the company to finance, develop and run a casino for the state.

"Governors and state legislatures are still facing serious budget deficits" and are looking to casinos as tax generators, Fahrenkopf said.

But state-owned casino schemes remove necessary checks and balances and create conflicts of interest between government regulators and companies that aim to maximize profits for shareholders, he said.

In some cases, such plans are receiving support from casino foes that view the plans as a way to kill the business potential of slot machines, he said.

Anti-gambling forces also are using the specter of gambling addiction to increase the regulation and taxation of casinos, just as other groups threaten to increase regulation and taxation of the fast food industry under the guise of "obesity prevention," he said.

In Illinois, a move last year to increase taxes on the state's most profitable casinos to 70 percent has backfired as the state has generated less money than it hoped for after casinos laid off workers and cut service, he said.

The result "has left the governor looking for additional forms of revenue," though last week Gov. Rod Blagojevich indicated he was receptive to adding additional forms of gambling that could help the industry, he said.

Blagojevich has called the casino cutbacks a retaliatory move and had viewed the tax increase as fair compensation for lucrative casino licenses in the state.

Other states have proposed graduated tax rates on gambling that peak at more than 80 percent, Fahrenkopf said.

Another disturbing trend for the commercial casino industry is "tax-shifting" -- a strategy that involves paying for the benefit of lowering taxes in one category by taxing a new category, said Grover Norquist, president of Americans for Tax Reform, a conservative, anti-tax group based in Washington D.C.

Texas, for example, is considering reducing its property taxes by taxing services and by raising taxes on cigarettes, among other proposals. Debates in such states can pit groups that aim to lower taxes on their industries against one another, he Norquist said.

The prospects for higher taxes on a variety of industries will likely dissipate as the economy improves, however, he said.

Governors with aspirations of federal office -- including those in Texas, Colorado, Florida, Massachusetts and New York -- "know not to raise taxes," he added.

Ordinary citizens are still loathe to approve new taxes, regardless if they are directly affected by the increases, he said.

"Even 'sin taxes' don't do well" at the ballot box, he said.

That's partly because of the surge in Americans who now own stocks through 401(k) plans and mutual funds -- investments that could be negatively affected by higher taxes, he said.