Proposed Tax Hike Hits Casino Shares
Harrah’s Entertainment Inc., Mandalay Resort Group, Argosy Gaming and other casino giants tumbled Monday after the Illinois General Assembly passed and sent to the governor a proposal to raise taxes on riverboat casinos.
A Standard & Poor’s index of gaming stocks slumped nearly 6%, the biggest one-day loss since it fell 15.6% on Sept. 17, when U.S. markets reopened after the terrorist attacks.
The proposed Illinois law would raise tax rates on riverboat casinos to as much as 50% starting July 1, according to the state Legislature’s Web site. The increase was higher than expected, and wouldn’t allow casinos to offset the rise in taxes by increasing the number of slot machines allowed, analysts said.
Gov. George Ryan previously has said he supports the bill.
“It’s unfortunate that Illinois’ Legislature sent such a signal to businesspeople around the country,” said Gary Thompson, a spokesman for Harrah’s, which owns two Illinois casinos. “No business can sustain that tax rate.”
The move also raised the potential that other states could boost casino taxes to help refill coffers depleted by economic weakness.
Argosy, which operates a number of riverboat casinos in the Midwest, including the Alton Belle Casino in Alton, Ill., plummeted $7.03, or 20%, to $27.37 on the New York Stock Exchange. Another big loser was riverboat operator Boyd Gaming, which fell $2.11, or 14%, to $12.50 on the NYSE.
Harrah’s shares dived $3.67, or 7.7%, to $43.98, and Mandalay slid $2.10, or 6.4%, to $30.50, both on the NYSE. Among other gaming companies, MGM Mirage dropped $2.46, or 6.5%, to $35.23 and Aztar Corp. lost $2.13, or 10%, to $18.55, also on the NYSE.
The proposed law would cut 2002 earnings for Harrah’s, Mandalay and Boyd Gaming by 3% to 8%, Credit Suisse First Boston analyst Brian Egger said in a report. Argosy’s 2002 earnings would be cut 14% and the measure would be “substantially” dilutive to another riverboat operator, Hollywood Casino Corp., Egger said. Hollywood’s shares dropped $2.53, or 19%, to $10.50 on the NYSE.
For casinos with gaming revenue of $25 million to $150 million, state taxes would be increased by 2.5 percentage points. The increase would be 10 percentage points for casinos with revenue of $150 million to $200 million. Casinos with gaming revenue of more than $200million would see the tax rate increase 15 points to 50%.
Harrah’s operates the Harrah’s Joliet Casino & Hotel in Joliet, Ill., and the Harrah’s Metropolis Casino in Metropolis, Ill. Mandalay operates the Grand Victoria Casino in Elgin, Ill.
Shares of Argosy and Boyd, which also have casinos in Indiana, suffered because investors are concerned the state may follow Illinois later this week and increase casino taxes, said Lawrence Klatzkin, an analyst at Jefferies & Co.
Some investors, however, argued that higher taxes will make new competition unlikely, ultimately boosting the value of existing Midwest franchises.
