SEARCH NEWS:

 

Casinos Would Bear Brunt of New Taxes

LAS VEGAS -- Nevada's largest casinos will be the businesses hit the hardest if Gov. Kenny Guinn's current package of tax increases is passed by the Legislature, the governor's office says.

The biggest casino resorts on the Las Vegas Strip could pay as much as $1.9 million more in taxes apiece each year under the tax plan, according to recent public testimony given to a joint finance committee of the Legislature by Guinn's Deputy Chief of Staff Michael Hillerby.

That's assuming the casino in question generates around $385 million in non-gaming revenue per year -- a high threshhold figure that would likely only apply to a select few Strip properties such as MGM MIRAGE's Bellagio or perhaps even Park Place Entertainment Corp.'s combined Paris Las Vegas and Bally's Las Vegas casinos. Such casinos could pay an extra $961,217 in gross receipts taxes on that revenue.

The Governor's proposed .25 percent tax on gross receipts would apply to all Nevada businesses that generate more than $450,000 per year but would only be levied on casino revenue generated by non-gambling activities such as shopping and dining. Casinos in Nevada already are charged taxes on gambling revenues.

Using Hillerby's model, the largest Strip casinos also would pay an additional $685,623 in gaming taxes under a proposed .25 percentage point increase in casino taxes on gambling revenues, to 6.5 percent. And a 15-cent property tax increase plan would extract another $340,636, offset by a $107,496 decrease in business license taxes of $20 per full-time employee.

The governor's office hasn't yet crunched numbers on what the incremental tax bill could be for Nevada's entire casino industry.

The figures on individual casinos mark the first effort to more closely detail how the state's chief industry will fare under an estimated $1 billion tax plan aimed at plugging a widening budget deficit.

In total, the governor expects to raise nearly $100 million a year from property taxes and about $220 million from a gross receipts tax, including smaller categories such as an admissions and amusements tax and increases in liquor and cigarette taxes. Gaming tax increase figures aren't yet available.

The taxes would kick in at different times, with figures representing the first full year of levies that would start in April and extend to the last batch of taxes -- including gaming and gross receipts taxes -- effective July 1, 2005.

The tax hikes for individual casinos could fuel public support for the gross receipts tax, the plan's central and most controversial component.

"What it does underscore is that we get hit on every tax that comes out -- it's not just the gaming tax," said Mike Sloan, an executive with Mandalay Resort Group and a member of a tax committee appointed by the governor to help solve the state's tax problems.

"Even people like the (bankrupt Strip casino) Aladdin that are in gaming are still paying those taxes even though they don't make a profit," he said.

The tax figures don't account for proposed tax increases on alcohol and cigarettes, he said. Strip casinos are the state's largest purchasers of alcohol -- a commodity frequently given away to good customers -- and also buy cigarettes in great quantities, he said.

Casino interests support the gross receipts plan, arguing that other industries aren't contributing their fair share of taxes.

An extra $1.9 million is a drop in the bucket next to the immense revenue generated by Las Vegas' largest casinos. Bellagio -- considered one of the most profitable resorts on the Strip and its highest revenue-generator -- recorded about $971 million in revenue in 2002, for example. The Mirage and Treasure Island, also MGM MIRAGE properties, reported $603 million and $355 million in revenue last year, respectively.

Still, the tax bite will be worse than it looks for many casinos, industry watchers say. That's because the taxes are levied against total revenue, which is still high despite a dramatic decline in profits in recent years as casinos face intensifying competition and depressed consumer demand.

"(The tax rate appears) high because right now profit margins are low," said Bill Thompson, a professor of public administration and a gaming expert at the University of Nevada, Las Vegas.

A tax hit of $1.9 million translates into a tax rate of roughly 3 percent on profits for a large casino resort, assuming the property generates at least $350 million each in non-casino and casino revenue and expects to make a profit of at least 10 percent on that revenue, Thompson said.

In a bad year, a casino that only makes a profit of 2 percent would pay about 15 percent of that in taxes under the same model, he said. For casinos that make even less profit, the percentage of taxes paid could be even higher -- a daunting prospect that will have a disproportionate effect on Las Vegas' biggest properties, he said.

"In terms of business profits, 15 percent is a bit much," he said.

For the year ended June 30, 2001, Strip casinos generated profits of about 3.6 percent on revenue of $10.6 billion, according to the state Gaming Control Board. For fiscal year 2002, they generated a net loss of $245 million on revenue of $9.9 billion.

In states with taxes on business profits, tax rates range from about 5 to 7 percent, while California taxes businesses more than 8 percent on profits, Sloan said.

Casino interests say they are resigned to paying more in taxes because the new plan hits all businesses.

"It's a more fair approach if everybody pays," Sloan said.

Alan Feldman, a spokesman for MGM MIRAGE, said a gross receipts tax appears to be the only way non-gaming companies will swallow a bitter tax pill.

"The simple answer is that all of us in the gaming industry know that we have a responsibility to this community and we have to pay for our fair share to pay for that responsibility," Feldman said.

The tax figures coincide with a recent report generated by the University of Nevada, Reno for the Nevada Resort Association, the chief lobbying group for the state's casino industry. The report, co-authored by economics professor Bill Eadington, the director of UNR's Institute for the Study of Gambling and Commercial Gaming, argues that other businesses such as construction and retail trade have been more profitable than the gaming industry in recent years.

The casino business had historically been more profitable until 1999, when construction as well as wholesale and retail trade experienced rising profits, according to the report, which was unveiled last week and is expected to fuel the gaming industry's argument that other kinds of businesses contribute more in taxes.

The ratio of net income to total assets for gaming companies dropped from above 6 percent in 1998 to 4 percent in 1999, the report said. Profits in construction rose to 7 percent in 1999 and wholesale and retail trade was slightly above 4 percent. Manufacturing was slightly below 4 percent.

Mid-size casinos could see their total tax bills go up by about $387,000 apiece and Nevada's small properties could see an increase of more than $7,000, Hillerby said.

Average-sized properties generating roughly $87 million in non-gaming revenue would pay about $217,000 in gross receipts taxes, Hillerby said. They also would pay extra gaming taxes of about $142,000 and additional property taxes of $64,313, both offset by a business license tax decrease of $36,144.

Small properties would pay about $7,900 in gross receipts taxes on non-gaming revenue of about $3.6 million, he said. The incremental gaming tax would cost $136 and property taxes would cost an additional $2,900, offset by a $3,510 decrease in business license taxes.

The proposed gaming tax increase for the smallest casinos would yield less than the gross receipts tax because of the Gaming Control Board's three-tiered system for collecting monthly gaming taxes.

While the tax increase appears negligible for the smallest properties, mid- to large-size casinos will feel the greatest pinch, observers say.

Riviera Holdings Corp., which owns the Riviera casino in Las Vegas, falls somewhere in between.

"I think the governor is right -- we do need some kind of general business tax," Riviera's Chief Financial Officer Duane Krohn said.

Krohn said the Riviera and others will soon be faced with a simple choice: whether to let profits suffer or cut expenses that typically fall into one of two large categories -- marketing and payroll.

UNLV's Thompson has argued for a flat tax on business profits that would hit those companies -- including the state's casinos -- that can most afford it. Casinos in particular could pay either a flat gaming tax or a profit tax -- whichever is greater, he said.

A profit tax isn't likely in our lifetimes, Feldman said.

"We're asking other businesses to pay a quarter of one percent on their revenue and we're having this kind of a battle," he said. "The cows are way out of the barn on that."

Casinos haven't pushed for a profit tax because of the threat of a legal challenge by non-gaming businesses, Sloan said.

A similar proposal was defeated two years ago by the Las Vegas Chamber of Commerce, which has also spoken out against the gross receipts tax.

In addition to being less contentious than a profit tax, a gross receipts tax offers a more stable revenue stream for the state that isn't as subject to the peaks and valleys of commerce, Sloan said. Gross receipts taxes in other states also have translated into lower rates for businesses and therefore better survival rates, he said.

"We became convinced that businesses wouldn't sink" on the basis of a gross receipts tax, he said.

< Gaming News