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Rod Smith

Global Gaming Expo in Review: Casino Taxes Taken to Task

13 October 2004

Expo that the biggest problems their industry face are unpredictable tax rates and a political bias against their businesses.

MGM Mirage Chairman Terry Lanni said taxes are the issue that could kill the gaming industry, at least in specific states where legislators fail to understand the casino business.

Lanni, speaking to a standing-room only crowd of 1,500 at the keynote session of the expo, held at the Las Vegas Convention Center, said that because of such concerns, MGM Mirage has focused all of its domestic investment and development plans on just Nevada, New Jersey and Mississippi.

"They (all) have reasonable taxes and understand our industry," he said. "Our growth (and investment) is not going to be great in any other jurisdictions."

Harrah's Entertainment President Gary Loveman echoed this, saying his gravest concerns are tax increases and tax instability in many states, and the uniform tendency of politicians to blame casino companies for their community problems.

"A company like mine is called to invest hundreds of millions of dollars in long-term commitments and you can't responsibly do that if you don't know the environment and the taxes you'll have to live in," he said.

Harrah's Chief Financial Officer Chuck Atwood also told a session at G2E that his company's $9.4 billion acquisition of Caesars Entertainment is being driven largely by the increased concentration it will give the company in stable tax and regulatory environments.

Harrah's earns less than half of its cash flow in Nevada and New Jersey today, but will earn more than 60 percent of its cash flow in the two states after the merger is consummated.

Lanni and Loveman both said investors rely on them for a fair return on investments, and it is impossible to promise responsible margins when they can't predict the cost of doing business in specific jurisdictions.

Frank Fahrenkopf, president of the American Gaming Association, underscored the concerns, adding that unstable tax structures in many states are simply out of control.

"When Terry Lanni says because of it he's only looking at three jurisdictions, that's pretty significant," he said.

Experts at the expo cited Illinois' gaming tax as a prime example of bad public policy. For the first time, data document just how much high gaming taxes can damage a state's economy.

In the past four years, higher gaming taxes have cost Illinois 2,000 jobs and $50 million in payroll spending, and cost gaming companies $100 million in revenue, Harrah's Entertainment Vice President John Maddox said.

Illinois increased its top incremental gaming tax rate from what gaming officials considered a relatively reasonable 20 percent to 35 percent in 1999, to 50 percent in 2002 and to 70 percent in 2003.

Higher gaming tax rates have added to total costs, reduced earnings and led companies to cut employment, JP Morgan analyst Harry Curtis said. Constantly changing tax rates make it impossible for publicly traded companies to reliably project earnings, thereby discouraging investment, he added.

"When you think about the good, the bad and the ugly, you can't help but talk about Illinois, where increased tax rates took tax revenues on a glide path like a brick," Curtis said.

The last recession, combined with fiscal crises in many states, led more jurisdictions to legalize gambling and others to increase tax rates, said Eugene Christiansen, chief executive officer of Christiansen Capital Advisors.

The temptation was not hard to understand since state and local governments nationwide collect more than $27 billion a year from gambling revenue, he added.

But Curtis likened it to a runaway train.

"If you get a group of legislators together, it's like my young children. Their collective IQ shrinks to nothing," he said. "That's what happened in Illinois, and I don't know why."

Curtis said the policies are usually more a matter of political expediency for politicians who have no easy answers for constituents.

"Before 1990, gaming privilege tax rates (everywhere) were all single digit. The very low rates made it possible for enormous capital investments to be made and job creation to result," Christiansen said.

He said the goal in Illinois, which was in fiscal crisis when it raised gaming taxes, was to increase state gaming tax revenue by $200 million. In the end, the higher taxes only brought in an additional $84 billion.

Moreover, Curtis said when you account for the cost of retraining and unemployment compensation, the state actually lost money by raising gaming tax rates.

Maddox said the economic hit was specific to Illinois and its gaming industry. Other businesses in Illinois prospered. And neighboring jurisdictions with gaming, such as Indiana, Iowa and Missouri, experienced none of the downturn Illinois casinos endured.

By contrast, the gaming industry in New Jersey, where the gaming privilege tax has been kept at 8 percent, created twice as many jobs as projected when gaming was legalized in 1976, four times as much in payrolls and 20 times as much in capital investments, said Jeff Van Dorn, a New Jersey assemblyman.

Nevada and Mississippi are the only other major gaming states with single-digit tax rates, and they both enjoyed added capital expenditures as casinos cut investments and became the focus of new growth, he said.

Industry experts at G2E said established jurisdictions should be wary of increasing taxes sharply because the move could dry up capital expansion and economic development.

And public officials in newer jurisdictions need to be careful of the rates they set because competition for capital is stiff and the emerging megacompanies -- MGM Mirage when it buys Mandalay Resort Group and Harrah's when it buys Caesars Entertainment -- will be as comfortable with expansion overseas as they are in the United States.