Keynote Address at the New York Gaming Summit

Thank you for inviting me to speak to you today.

Many states here in the Northeast—and, indeed, across the country—are facing difficult choices. With the economy struggling, governors and state legislators must decide between cutting government services at a time when those services are needed most or increasing taxes across the board on businesses, which tends to inhibit capital investment and economic expansion.

The last time the U.S. economy was struggling, back in the early 1990s, six states came up with an alternative: Instead of cutting services or raising taxes, they turned to riverboat gaming as a new source of revenue. It was an easy choice for a number of reasons. 1) It is environmentally clean; 2) It is capital intensive; 3) It produces jobs and economic expansion; and 4) Perhaps most importantly, because it is a privilege and not a right to have a gambling license, you can tax the industry at rates higher than most other businesses.

In every case, the expectations of governors and state legislators in the riverboat gaming states were met and exceeded. Last year alone, casinos in these six states had gross revenue of more than $10.8 billion, paid more than $2.5 billion in direct gaming taxes and provided jobs for more than 93,000 people. This remarkable economic success came regardless of whether a state adopted an open market or monopoly strategy. But now that success faces challenges never envisioned just over 10 years ago.

Winston Churchill once said, “The idea that [government] can tax itself into prosperity is one of the cruelest delusions which has ever befuddled the human mind.” And yet, that delusion is playing out in many states today as they face record budget deficits.

As most of you are aware, about a week ago, Illinois Gov. Rod Blagojevich proposed an increase in that state’s top gross gaming tax rate to 70 percent. Illinois already has the highest gross gaming tax rate in the country on commercial casinos, at 50 percent. The almost universal reaction to this proposal was disbelief. One analyst called it “outrageous” and “stunning.” Another called the volatile business climate in Illinois “inhospitable.” Others thought it was “suffocating” and even “punitive.”

While Illinois’ tax proposal is the most shocking, it certainly isn’t the only one. Casino tax increases also have been proposed this year in Missouri, New Jersey and Nevada, albeit at far lower rates. In Iowa, where a state Supreme Court decision last year lowered the tax rate on racinos to the same rate as casinos, the governor has floated the possibility of an overall gaming tax increase. Last year, Indiana increased its tax rate to 35 percent, but at least gave the industry the concession of open boarding.

In states considering gambling expansion, the situation has been even worse. Here in New York, a law allowing slots at racetracks called for 60 percent of revenue going to the state and 15 percent to the lotteries for operational expenses, with the remaining 25 percent split 50-50 between the tracks and horse owners. An initial plan in Maryland, which called for 64 percent of proceeds to go to the state, about 8 percent to the horse industry and 3 percent to jurisdictions hosting the tracks, left only 25 percent for track owners, who also were required to pay a one-time $350 million licensing fee. A subsequent plan, which passed the state Senate but died in the House, called for operators to turn over 55 percent of their income and pay a reduced licensing fee. The most recent proposal for racinos in Pennsylvania calls for 35 percent of gross gaming revenue to go to the state, 25 percent to be divided among purses, breeders and owners, as well as various industry pension and benefit plans, and 40 percent to go to the track owners, who also must pay annual licensing fees of $9 million.

For the most part, the tax rates in these proposals are higher than effective tax rates in states with existing racino operations. The effective tax rates paid in Delaware, West Virginia and Rhode Island are between 50 percent and 55 percent.

Of course, these direct gaming taxes are on top of normal business taxes paid by corporations, including property taxes, payroll taxes and federal income tax.

WHAT’S WRONG WITH IT?

Although it’s tempting, I’m not going to stand up here and say our taxes should be as low as those paid by every other industry. 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.

The recent wave of casino growth in the U.S. revolutionized how casinos are taxed. In most riverboat states, the object was to extract as much revenue as prudent from gaming operators, up to that limit in which such extraction becomes a barrier to market entry. Simply put, government wanted more of the profit in exchange for the right to operate a casino. The industry can and will pay more under certain conditions; under monopoly conditions, of course, states can extract maximum fees. This is particularly true of prospective operators who perceive high profit potential in the marketplace.

States have used the large sums of tax revenue generated by casinos to finance important programs in the states and towns where we do business. For good reason, we are proud of how the taxes from our industry have helped benefit our communities across the country. From 1998 through 2002, the commercial casino industry paid $16.6 billion in direct gaming taxes alone to state and local governments, providing the funds necessary for new school and library construction, transportation and infrastructure improvements, and historic preservation, among many, many other projects.

But there is such a thing as killing the golden goose, which unfortunately is beginning to happen in some of these states, threatening the industry and state fiscal security in the process. 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.

While some of our elected officials don’t seem to understand the basic concepts covered in Economics 101, plenty of experts have weighed in on this subject. A report by Michael Pollock commissioned by the Atlantic City Regional Chamber of Commerce projected that more than 12,000 casino and non-casino employees could lose their jobs, investment in the city would come to a halt, and the state would realize less casino tax revenue if a current state tax increase proposal were to pass. The 2002 annual report of the Missouri Gaming Commission cautioned against tax increases, saying they would discourage investment. A 1998 report by the Council of State Governments urged state officials to consider lower tax rates to encourage investment. And the analysts who follow this industry have emphasized the impact of higher tax rates, which deflate return on investment, making our companies’ shareholders less likely to support either new or improved operations. Marc Falcone of Deutsche Bank and Harry Curtis of JP Morgan went so far as to suggest that the value of Illinois’ 10th license, which a year ago was still valued at $600 million, could today be worth absolutely nothing because of the tax increase already imposed, coupled with the proposed increase.

Last year’s tax increase in Illinois, which saw the top rate rise from 35 percent to 50 percent of gross revenue, should have provided ample warning to government officials of how an unreasonable tax increase on the gaming industry can inadvertently cause more harm than good. According to Deutsche Bank, the gross gaming tax increases implemented in July 2002 resulted in lost jobs, lower overall revenues and a significant decline in potential capital investment in the state. In the six-month period following the tax increase, gaming revenues in Illinois declined 2.1 percent, to $1.02 billion. This was the first sustained period of decline in the history of the Illinois market and came despite the addition of significant capital investments. Clearly, these are not the economic benefits the state legislature promised or hoped for.

The industry in Illinois has offered an alternative that would actually deliver positive economic results. According to a University of Illinois analysis, the industry proposal, which would roll back last year’s tax increase and increase the number of gaming positions, would result in $365 million more in state and local taxes than was earned 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 industry plan, which is supported by the Illinois Chamber of Commerce, would go a long way to reverse the damage inflicted by the unreasonable tax increase imposed last year.

WHY IS THIS HAPPENING?

With tax rates—or at least proposed tax rates—seemingly spiraling out of control, it’s reasonable for us to ask why. There are a number of plausible explanations: a sputtering economy; huge budget deficits; a belief that our companies are too profitable; a recognition that our companies continue to be steady, reliable source of income; or negative perceptions about our industry. Add to these the commonly held view that a tax increase on casinos is politically safer than other tax increases, and you’ve got the makings of a veritable casino taxfest! It reminds me of something Sen. Russell Long once said: “Don’t tax me, don’t tax thee, tax the man behind the tree.” In this case, the casino industry is the man behind the tree.

While all these factors likely played a role in recent state initiatives to expand casino gambling with excessively high tax rates or increase taxes on existing operations, it is the pressure from a slow economy that has really ignited these efforts. With few exceptions, gaming tax rates had remained relatively stable throughout the boom economy of the 1990s.

As I mentioned earlier, some states that added casino gaming during the 1990s viewed the industry primarily as a source of revenue. This attitude also has contributed to the higher tax rates we are seeing today. These states set gross gaming tax rates far higher than Nevada, Mississippi and New Jersey, where the focus was more on creating jobs, promoting economic development and tourism, stimulating capital investment, and improving the overall economy. While nearly every state is under pressure to generate new revenue in order to address budget deficits, states that established casinos primarily to serve as revenue generators are more likely to turn to the industry during tough economic times.

WHAT CAN WE DO ABOUT IT?

More important than the question “Why?” is the question “What can we do about it?”

As many of you know, the AGA does not get involved in state policy decisions. Our focus is on the national level, addressing federal legislative and regulatory issues affecting our industry. However, because state debates concerning expansion and taxes affect our industry on a broader level, we do have a role to play as an information resource. Since the beginning of the year, I have appeared as a witness at public hearings in Massachusetts and Rhode Island, and will appear next week in Pennsylvania, to set the record straight on issues relating to casino gambling.

Particularly in those states with current debates over expansion, we need to be vocal, countering the voodoo economics and fabricated social-cost arguments coming from anti-gaming forces. This notion that enormous taxes on our industry are justified because of enormous social costs must be challenged. The more legislators understand about our industry, the better we will fare when it comes time for policy decisions.

We also need to do a better job of providing a basic education on the fundamental economics of our business. About a month ago, we received a call from a member of the editorial page staff of The Washington Post asking why Maryland track owners wouldn’t think $6 billion in revenue over 20 years was enough. The perception that we’re making money hand over fist is reinforced by our monthly revenue reports—something no other business is required to do—not to mention our glitzy facilities. We must emphasize the fact that most casino companies are publicly traded, which means they are responsible to regulators, directors and shareholders. Stakeholders in any business have a right to expect a fair return on investment.

Lastly, we need to re-emphasize conclusions from the National Gambling Impact Study Commission’s final report. The commission clearly and unequivocally found that “destination type resorts,” as opposed to “convenience-type gaming,” offer major economic advantages and benefits. When states decide to impose high gaming tax rates, they typically get facilities with fewer amenities. It is the states with the lower tax rates that are able to attract operators willing to make the investment in destination resorts, which employ more people, promote tourism and generate an economic ripple effect throughout our communities.

I think Winston Churchill had it right when he called taxes “a grave discouragement to enterprise and thrift.” If the economic benefits of gaming are to be realized across the nation, our industry needs to continue educating, overcoming myths and stereotypes, and emphasizing the long-term implications of ill-conceived tax policy decisions.