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Rod Smith

Study: Gaming Industry is Easy Prey

2 June 2005

LAS VEGAS -- The gaming industry is more vulnerable to the taxing whims of state legislators than any other segment of the national economy, a white paper released Wednesday by the American Gaming Association said.

"Always short of money, lawmakers look eagerly for taxes they can safely raise, and gaming is an easy choice," said Christiansen Capital Advisors Chief Executive Officer Gene Christiansen, who prepared the report.

University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, however, said raising gaming industry taxes doesn't increase revenues, but simply transfers money from sales to gaming tax coffers and cools economic development and job creation at the same time.

"The people who are gambling are the same people who would be buying products in the stores. If gaming taxes work so well to raise new revenues, the state fiscal crises would never have happened," he said.

In addition, gaming taxes everywhere outside Nevada are regressive, hitting lower income taxpayers hardest, Thompson said.

"High taxes are not appropriate and they're not a justification for gambling; economic development is," he said. "But that depends on outside money coming in. And that can only happen in selected jurisdictions and areas with low taxes. Nevada is the model."

The gaming industry is particularly vulnerable because it has sold itself in many jurisdictions on the basis of helping state generate new revenues to solve their fiscal crises, he said.

Further, gaming taxes get lumped in with taxes on alcohol and tobacco, even though problem gamblers make up 1 percent of the population while alcoholics represent 8 percent, Thompson said.

Christiansen added that the gaming industry is particularly prone to overtaxation because of a widely held belief that casinos are extremely profitable.

"Everyone thinks casinos are magical money pumps, exempt from the economic laws that govern other activities and are able to pay whatever taxes are needed to make budgets balance, no matter how high," he said.

However, he noted in the white paper that many of the 350,000 gaming industry jobs and much of the $5 billion paid in gaming privilege taxes are being placed at risk because of increasing tax rates that discourage capital investments needed to maintain and increase industry revenue.

"In reality, casinos are no different from any other business,' he said. "They cost money to build and more money to operate, and capital won't flow unless it generates acceptable returns."

Eight of the 11 states with commercial casinos have increased their effective tax rates since 2002, he said, and taxes levied have been increasing much more rapidly than the businesses that have to pay them.

State-licensed casinos paid $4.2 billion in gaming taxes in 2004, up 9.4 percent or $394.1 million, from the $4.2 billion paid in 2003.

At the same time, state-licensed casino gaming revenues increased by $1.8 billion to $28.3 billion, or only 6.7 percent, in 2004, compared with $26.5 billion in 2003, according to the white paper.

"Capital investment and tax rates are inversely related. As tax rates rise, capital investment falls," Christiansen said.

More than $30 billion has been invested in major U.S. casinos or casino resorts since 1989, the white paper found.

Of that, $25.7 billion has been invested in Nevada where the effective tax rate is 8.4 percent, the lowest in the country.

"That represents 86 percent of all capital projects in the gaming sector during this period," Christiansen said.

New Jersey, with the second-lowest tax rate, attracted $1.5 billion in capital spending, or 5 percent of the total.

Conversely, Christiansen cited Illinois and New York as examples of how unreasonably high tax rates can stunt capital investment, which has led to less-than-expected levels of job creation and tax generation.

"Tax policies formulated to extract the last dollar from gaming operations effectively preclude investments of the kind that make up the bulk of MGM Mirage's portfolio," he said. vMGM Mirage, the world's largest gaming company, is focusing all its development efforts domestically on Nevada, New Jersey and the Gulf Coast area.

Gaming foe Tom Grey, executive director of the National Coalition Against Legalized Gambling, rebutted the association's arguments.

"It's a little disingenuous for the AGA to argue this isn't fair. All the states are doing is siphoning off some windfall profits, and the industry is squealing at the feeding trough it built for itself," he said.

Christiansen's white paper is the first in a series being issued to commemorate the association's 10th anniversary this month.

The goal of the series is to create a comprehensive, up-to-date resource for association members, regulators, policy-makers and the media, said association President Frank Fahrenkopf. The full Christiansen report is available on the group's Web site,