The Tax Man Cometh

When I sat down to write an editorial for this, the April 15 issue of Global Gaming Business, it only seemed appropriate to focus on one thing that’s on everyone’s minds right now: taxes. While it is a topic individual Americans focus on intently every year at this time, it’s an issue that’s top of mind for all of us in the gaming industry, more so today than ever before.

As we all know, many states are facing growing budget deficits that stand to balloon even further in the next few years. To address this problem, they are turning to tax increases on existing gaming operations or an expansion of gaming to generate new revenue.

The tendency for states to view gaming as a potential solution to their economic woes is nothing new. The most recent period of significant gaming expansion actually came during the economic recession of the early 1990s, when riverboat and Indian casinos were introduced across the country.

The logic behind gaming taxes is simple. In addition to standard federal corporate income tax, each state levies on the local gaming industry a direct gaming tax based on gross revenues that is then used to finance state initiatives and programs. I am proud of how the taxes from our industry have helped benefit states and local communities across the country, providing the funds necessary for new school and library construction, transportation and infrastructure improvements, and historic preservation.

However, there is such a thing as killing the golden goose, which is unfortunately beginning to happen in several states, threatening the industry and state fiscal security in the process. If entered into too hastily and without proper forethought, these new tax proposals could prove to be all-out destructive. Plans intended to stimulate a sagging state economy could instead have the opposite effect of actually suppressing capital investment and other expenditures, jeopardizing jobs and, in the end, reducing rather than increasing tax revenue.

One need only look at the current state of the industry in Illinois for evidence of how an unreasonable tax increase on the gaming industry can inadvertently cause more harm than good. With its gaming industry already the highest-taxed in the nation, the Illinois legislature last summer approved a new gaming tax structure that required the industry to return a whopping 50 percent of gross revenue over $200 million.

Rather than benefiting the state with an influx of cash, the proposal sent shockwaves through the local industry and forced major corporations to withdraw or scale back planned investment projects in the state. In addition, the increases have served as a disincentive for casino operations in the state to expand.

Faced with declining cash flow and angry stockholders, casino operators in the state have had little choice but to increase prices and, in some cases, cut employment opportunities.  Illinois casinos have lost a significant portion of their market share in the region as lower taxes and fewer limits on the number of slots allowed on each property have allowed casinos in neighboring states to spend more money on marketing, expansion and retention programs than their Illinois counterparts, leaving Illinois at a competitive disadvantage. Clearly, these are not the economic benefits the state legislature promised or hoped for. Still, other states such as Indiana followed suit, raising gaming taxes from 20 percent to as high as 35 percent of gross revenue, and even more are considering it.

The current situation in Maryland offers another cautionary tale for those states looking to solve their economic problems through inflated gaming tax revenue. After running on the promise that his proposal to allow slot machines at the state’s several racetrack casinos would fix the state’s current budget crisis, Gov. Robert Ehrlich’s initial program failed to win the support of state racetrack operators due to the extremely high taxes and licensing fees proposed.

Faced with the prospect of exorbitantly high taxes on revenues from the slots, industry stockholders determined the environment would not be economically viable and withdrew its support of the plan. Ehrlich reduced the proposed taxes in a readjusted version of his proposal, but the state’s pursuit of gambling expansion is currently in limbo as the state legislature has taken over and vows to rework the plan once again. A similar situation has emerged in New York, where the state actually approved an initiative to introduce slots, but the proposed tax rate was so high that no businesses took the state up on its offer. With the strategy exhibited in these localities, both the state and the industry stand to lose, and they stand to lose big.  
 
Thankfully, some states are beginning to see the error of their ways. The Illinois State Chamber of Commerce has recognized the dire situation in the state and has thrown its support behind “A Better Deal for Illinois.” The proposed program, developed by the state’s casino industry, calls for an amendment to the Illinois Riverboat Gambling Act that would remove limits on gaming positions at existing casinos and phase out the 50 percent tax increase imposed last year. According to a study of the proposal by the University of Illinois, implementation of the program would result in $365 million more in state and local taxes than was earned in tax revenues last year. The analysis also found the proposal would inject an additional $2.2 billion into the Illinois economy and create close to 50,000 new jobs. The proposal seems to offer the myriad economic benefits that the legislature’s plan failed to deliver. It would go a long way to reverse the damage inflicted by the unreasonable tax increase imposed last year.

The lesson from Illinois, Maryland and other states is that we must convey to our state legislators and their constituents that the better the business climate, the more successful they will be in raising tax revenue and creating jobs. Unfairly high taxes will not get the job done. If the economic benefits of gaming are to be realized across the nation, the business climate must be made to encourage investment and foster growth.