Gambling on Tax Hikes

From Nevada to New Jersey, cash-strapped governments are looking to hit the jackpot by raising taxes on the gambling industry, which in some states could be a bad bet.

The $27-billion industry is an easy mark for politicians because casinos and their customers, not the entire electorate, shoulder tax-hike costs. “Of all taxes to complain about, the last one on the list is probably a tax on casinos,” said Bill Ahern, director of communications at the Tax Foundation in Washington.

But gaming officials and industry analysts warn that making the burden too heavy could backfire. They point to Illinois, which in May raised the rate for its top gaming tax bracket by 40% -- and where some casino companies are cutting back on investments and planning to reduce operating hours.

The gaming tax trend “is not encouraging,” said William Schmitt, an analyst with CIBC World Markets in New York.

In fact, Schmitt and other Wall Street analysts are lowering their annual earnings estimates for some big casino companies by 1 cent to 10 cents a share.

“Even when it’s small, a gaming tax increase in Nevada is a huge deal,” said Patricia Wright, a gaming industry analyst with Fitch Ratings, a corporate credit-rating company. In Nevada, where lawmakers are debating an increase, “gambling is the lifeblood of the economy.”

Until 1978, when the first casino in Atlantic City, N.J., opened, only Nevada could hope to balance its budget on the back of gambling. Since then, legal gambling has spread to 15 states, which allow commercial casinos or “racinos” -- horse and dog tracks with video poker and slot machines -- or both. (In California, the Constitution prohibits Nevada- and New Jersey-type casino gaming; there are more than 102 card clubs in the state that offer a limited number of table games and are prohibited from operating slot machines.)

Last year, non-Indian casinos and racinos paid state and local taxes totaling more than $4.6 billion, according to the American Gaming Assn. and state gaming officials.

Nevada, which doesn’t have an income tax, got the most in gaming tax revenue, $719 million in fiscal 2002, followed by Illinois at $666 million.

In Nevada, the gaming tax was last raised in 1989 -- and a budget crunch created by rapid population growth has prompted the Legislature to consider doing it again.

The Nevada gaming industry’s tax burden is higher than any other industry in the state and accounted for about one-third of the state’s budget last year, according to the Nevada Gaming Control Board. When hotel room, entertainment and other taxes are factored in, the industry pays 1 out of every 2 tax dollars in the state, said Alan Feldman, spokesman for MGM Mirage, Nevada’s largest single taxpayer.

Still, casino owners and others don’t oppose a proposal to increase the gaming tax to 6.75%. from 6.25%. One reason: It would still be the lowest such tax in the nation, adding no more than about $7 million to the state tax bill for a big concern such as Harrah’s Entertainment Inc.

More important, the bill the Legislature was considering late Monday would broaden the tax base -- either by creating new payroll taxes or other new business taxes -- lessening Nevada’s reliance on the gaming industry and addressing a longtime complaint of casino executives.

“We are willing to pay more,” Terry Lanni, chief executive of MGM Mirage, said in a Las Vegas Chamber of Commerce speech this year. “All we ask is that others accept their responsibility to participate in providing needed services and infrastructure for our citizens.”

Lanni noted that MGM Mirage paid $202 million in state taxes during the 2002 fiscal year, compared with the financial services industries’ $2.4 million. After subtracting $45 million of the MGM Mirage tax bill reallocated by the state to local governments, the casino company filled 8% of Nevada’s general fund.

For Illinois Gov. Rod Blagojevich, who faced a $5-billion budget deficit when he took office in January, raising the gaming tax rate to 70% from 50% for annual revenue over $250 million was a matter of making the numbers work, said Abby Ottenhoff, the governor’s press secretary.

“The governor had made a commitment to not raise general taxes as a way to get the state out of its budget quagmire,” Ottenhoff said. “The gaming industry is one of the most profitable businesses in the state and will continue to be profitable. But it will also help the state to close its budget gap.”

Frank Farhenkopf Jr., chief executive of the American Gaming Assn. warns that the new Illinois rate will suppress new investment and cost jobs.

Already, four Illinois casinos have signaled plans to reduce operating hours, citing the need to cut operating costs in light of the rate increase that went into effect July 1; some analysts say the real aim is to keep annual revenue below the $250-million limit. State game regulators may fight back by dictating that casinos stay open 24 hours a day.

Many states have boosted gaming levies.

“We have seldom seen this number and extent of such tax actions within such a short time frame,” said Wright, the Fitch analyst.

Last weekend, Pennsylvania’s House of Representatives voted to add slot machines to nine racetracks. Pennsylvania’s inspiration, analysts say, is Delaware, where the taxes paid by three racinos funded 8% of the state’s budget.

This month, the Legislature in New Jersey -- where the levy on gross gaming revenue is 8% -- created new taxes for Atlantic City casinos, including a 7.25% tax on net income and a 4.25% tax on the complimentary rooms and meals casinos provide their high rollers. The tax on comps, expected to raise $26 million, was especially significant for Atlantic City, where the casinos are known for their liberal handing out of perks.

“This is like Wal-Mart holding a 2-for-1 sale and charging sales tax for the full retail price of the second item,” said analyst Schmitt.

He estimates the New Jersey tax increases will knock 6 cents a share from Harrah’s annual earnings and 4 cents a share from the profit of Park Place Entertainment Corp., the nation’s largest casino operator.

Elsewhere, Missouri gaming executives expect the Legislature to consider a tax boost at a special session in September. One proposal would raise the gaming revenue tax to 22% from 20% and would increase fees.

Some states are taking a different tack: Last week, Indiana allowed casinos to extend their daily operating hours by three, to 24 hours, in a move that gaming officials expect will generate $10 million to $20 million in extra gambling tax revenue annually.

As the debate over higher gaming taxes mounted in statehouses coast to coast this year, Farhenkopf, head of the American Gaming Assn.,, took pains to make it clear that the industry didn’t expect taxes on the gambling sector to be as low as on other businesses in the nation.

“We all recognize that ours is a privileged and regulated industry, and states do have the right to tax our business at a higher rate than others,” Farhenkopf said.

“But there is such a thing as killing the golden goose, which unfortunately is beginning to happen in some of these states.”