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Rod Smith

Local Economy: Casinos See Tax-Cap Trap

3 April 2006

NEVADA -- Clark County casino companies' taxable property values are rising at a record clip, outpacing anything ever seen in Nevada. However, the companies' tax assessments are rising faster than the taxes they owe, thanks to a year-old law designed to cap commercial and residential real estate taxes.

Experts and insiders say the law capping the taxes could cause long-term problems for the gaming industry.

The taxable value of Las Vegas-based casino companies rose 28.2 percent in the past year, data from the Clark County tax assessor's office show. County officials and local tax experts said the assessment increases are unprecedented.

"There's been no period in history when assessments have gone up so rapidly for gaming or residential," said Jeremy Aguero, a partner in Las Vegas financial consulting company Applied Analysis.

By comparison, the taxable value of the casino companies increased just 6 percent in the 2005 fiscal year, and they were flat for the two years following the Sept. 11, 2001, terrorist attacks.

Residential assessments in the county also jumped by an estimated 35 percent this year, he said.

The portfolio, or composite value, of the casino companies, which climbed to a record $26.4 billion this year from $20.6 billion in 2005-06, are based on the market value of the property and the value of improvements, said Rocky Steele, assistant director of the assessor's office.

The assessment increases reflect both property appreciation and new construction, although the county's assessment data do not break those areas down.

Income-generating properties are adjusted for their average earnings over three-year periods. Average earnings dropped dramatically for casino operators following the 2001 attacks and the travel industry's tailspin.

Rising assessments confirm perceptions that Strip real estate is among the hottest in the world, with prices rising fast. The rise in assessments doesn't mean, however, that gaming companies' tax bills are increasing as quickly as their assessments.

The state Legislature last year capped property tax increases for casino operators and other companies at 8 percent. Therefore, the businesses' tax liabilities increased by only about one-third their taxable value.

"They have seen substantial savings from what would have been (owed in the absence of the 8 percent cap)," Aguero said.

Property tax increases for homeowners were capped too, although at 3 percent. Therefore, homeowners' tax bills increased by an even smaller proportion while their assessed values rose more rapidly on average.

Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas, said the effort to cap real estate taxes created an imbalance between revenues collected and the need for expenditures to cover the cost of education, infrastructure and basic services.

"The key issue is (whether) raising the total tax bill is consistent with revenue needs," he said.

The 8 percent tax cap on gaming property doesn't cover new construction. Therefore, casino companies, which have $12 billion in improvements and new resorts under way on the Strip, face higher tax levels. Some casino companies may, over time, end up paying higher tax rates than others.

The divergent tax rates may cause long-term problems for commercial property owners, especially since casino companies foot more than half the county's real-estate tax bill, Aguero said.

Nevertheless, Aguero said, the different tax rates were part of a deliberate policy; the Legislature thought a catch-up period was necessary to balance residential and corporate tax responsibilities.

However, Steele said it's unfair to compare commercial assessments, which include a hefty amount in improvements, and residential properties, which generally include much less in improvements.

Aguero said if the diverging tax burdens become inequitable between commercial taxpayers and casino operators, the Legislature will be able to step in and alter the rates.

"(Assembly Bill) 489 saved everybody money. If a large inequity evolves over time, the Legislature will go in and look at it," he said. "The problem is the conflict between an initial intended consequence and an unintended consequence."

Steele said there were 20 assessment appeals from hotel-casinos for 2006-07, compared with 13 last year.

"If the income doesn't justify the replacement value, we will reduce (the assessment) as required by statute," he said.

Seven of the recent appeals, however, came from Harrah's Entertainment, which last year bought Caesars Entertainment and its five Strip properties. Harrah's Entertainment already owned Harrah's and Rio.

Steele said all seven Harrah's appeals recently were withdrawn.

Harrah's Entertainment spokesman David Strow said the company filed the appeals to protect its rights should its most recent merger due-diligence review suggest the assessments were too high.

"We did an analysis of recent sales and felt there were values to justify the assessments and we withdrew our appeals," he said.

Strow, however, noted that overall tax revenues collected from casinos are rising by more than just the increases in real estate taxes, since casinos also pay gaming taxes.

"Other taxes, such as gaming tax revenues, are rising at a much faster rate so we are paying rapidly increasing taxes to the state," he said.

Other properties appealed their assessments and recently won cuts from the county: Golden Gate, JW Marriott, Mandalay Bay and Tuscany in Las Vegas; Colorado Belle and River Palms in Laughlin; Hyatt Regency Lake Las Vegas and Ritz-Carlton in Henderson; and Primm Valley Resort and Whiskey Pete's in Primm.

Some tax law experts say it may have been unconstitutional to create two classes of taxpayers with different obligations.

Steve Johnson, a tax law professor at the Boyd School of Law, said the law would likely be struck down if it were challenged in court. The Nevada Constitution includes a provision that taxes must be imposed uniformly with limited exceptions that don't apply in this case, he said.

Arguments that the tax discrepancy is temporary are spurious, he said, because the law includes no sunset provision. Nevertheless, the Legislature could opt to change its policy.

Practically, he said, it's unlikely either that the Legislature will soon change the law or that the law will soon be challenged legally. Either would be politically unpalatable, he said.

Furthermore, he added, no one affected has challenged the new law in court because no one wanted to fight his own tax breaks.

Schwer said the economy's winnowing and shifting will keep tax policy on the state's agenda. One day, he suggested, the policy of split rolls and real estate tax caps will have to be reviewed.

Ten priciest properties 2006/07

Hotel-casino Taxable value

Bellagio $1.9 billion

Mandalay Bay 1.8 billion

Mirage 1.6 billion

MGM Grand 1.5 billion

Caesars Palace 1.5 billion

The Venetian 1.5 billion

Wynn Las Vegas 1.5 billion

Paris Las Vegas 840 million

Aladdin 768 million

Rio 669 million

SOURCE: Clark County Assessor

Ten Largest taxpayers, Clark County 2005/2006

Rank 2005/06 Rank 2004/05 Taxpayer Taxable value

1 1 MGM Mirage $9.3 billion

2 9 Harrah's Entertainment 4.0 billion

3 NA General Growth Properties 3.5 billion

4 4 Nevada Power Co. 1.9 billion

5 7 Boyd Gaming Corp. 1.4 billion

6 6 The Venetian 1.4 billion

7 8 Station Casinos 1.3 billion

8 10 Wynn Las Vegas 1.2 billion

9 12 Pulte Homes 1.1 billion

10 20 Focus Property Group 802 million

SOURCE: Clark County Assessor