Taxing the Industry: Finding a Delicate Balance

Thank you for inviting me to be with you today. With the exception of our customers, there is perhaps no audience more important to our business than the men and women who serve in our state legislatures across the country, specifically in gaming states. As policy-makers, you have the power to pass laws that can shape the future of our industry.

That’s why I am particularly grateful for the opportunity to speak to the members of NCLGS. Because what we’ve witnessed in the past few years has been a growing disconnect between hyperbole and reality as well as problems and solutions.

We know that of all the state legislators in our nation, you understand our industry better than anyone else. But we also recognize that before legislators can understand our business and recognize that many of our companies’ needs are no different than those of GE, IBM or Coca-Cola, we need to give you the tools to make informed choices, and we need you to share that information with your colleagues who are less familiar with our business. I’d like to begin providing you with some of those tools today.

As state legislators, you are, in many ways, our partners in a business enterprise. When casino gaming was legalized in your states, and our companies were licensed there, there was an implicit contract: We would be allowed to do business in your state in exchange for creating jobs, stimulating capital investment, and, above all, generating tax revenue for various state governmental services and purposes.

For the most part, I believe that our industry has lived up to our end of the bargain—and then some. In Mississippi, we’ve brought 30,000 sorely needed jobs. In Iowa, we’ve generated $106 million in grants for charitable causes. In Michigan, we’re contributing to a renaissance in downtown Detroit. There are success stories like these in every one of the 11 states where we, the commercial industry, do business.

But delivering on our promised benefits requires a delicate balance. While some factors, such as the general economy, are outside our control, others—such as the statutes and regulations under which our companies operate—are largely determined by legislators like yourselves. What we have experienced over the last few years is that the pressures of a struggling economy, coupled with the always highly charged public debate over gambling, caused a lot of legislators to forgot Economics 101, upsetting that delicate balance by enacting unfair and unreasonable tax rates. As 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.”

As many of you—if not all of you—are aware, last year the governor of Illinois pushed through an increase in that state’s top gross gaming marginal tax rate to 70 percent. Even before that increase, Illinois’ gross gaming tax rate of 50 percent was the highest for commercial casinos in the country, as was its 35 percent rate in the previous year.

But what the governor soon discovered is that there is such a thing as killing the golden goose, threatening the industry and state fiscal security in the process. This plan, which was originally intended to stimulate a sagging economy by dramatically increasing gaming tax collections, has had the exact opposite effect, lowering gaming revenues by 10 percent compared to the previous year, thus reducing tax revenue to the state, reducing casino employment by 5 percent, and sparking revenue increases of 11 percent across the river at casinos in neighboring St. Louis, Missouri, where lower entry fees attracted Illinois gamers.

In states considering gambling expansion, primarily racinos, the situation has also caused concern. The latest plans in Maryland and Pennsylvania have called for effective tax rate in the neighborhood of 60 percent. In New York, a law allowing slots at racetracks had an original effective tax rate over 80 percent.

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

Although it’s tempting for me to say our taxes should be as low as those paid by every other industry, we recognize that ours is a privileged industry, and states do have the right to tax our business at a higher rate than others.

But it’s important to remember that the tax rate you set determines the very nature of the industry in your state for the short term and long term. High tax rates suppress capital investment and other expenditures, limiting jobs as well as revenue, thus reducing the potential tax revenue for your state. While the industry can and will pay more under certain market conditions, such as limited licenses or proximity to large population areas, rates set too high will serve as a barrier to market entry. ECONOMICS 101

This view is supported by economic experts and others who follow this industry. For example, the 2002 annual report of the Missouri Gaming Commission cautioned against tax increases, saying they would discourage investment and future tax revenues for the state. A 1998 report by the Council of State Governments urged state officials to consider lower tax rates to encourage investment. Wall Street analysts have written extensively on this subject, saying that higher taxes deflate return on investment, making our companies’ shareholders less likely to support either new or improved operations.

With tax rates—or at least proposed tax rates—seemingly spiraling out of control, we recognize that it’s critical for us as an industry to do a better job explaining the business side of our industry to legislators like yourselves and, perhaps more importantly, to those legislators who don’t have a history of working with our industry.

One of the most common misperceptions is that we’re making too much money. Are we making money? Of course we are. No company stays in business long if it’s not. But are we making what people think we are? I highly doubt it.

A number of factors contribute to this misperception. By law, our gross gaming revenues are reported monthly—something no other business is required to do—reinforcing not only how much money we brought in but also a falsely high number, since the “gross” represents an amount before salaries, taxes and other significant expenses are paid. Another figure often misconstrued is the “handle,” an estimate of the total amount wagered back and forth between the player and the house. The “handle” number has no relevance to gross or net revenues. Reporters, members of Congress and others have mistakenly stated that we’re a half-trillion-dollar industry. Don’t I wish! Our glitzy facilities only further this impression.

Another common sentiment is that we’re somehow greedy. Last year, a staff member from the editorial page of The Washington Post called and asked us why Maryland track owners wouldn’t think $6 billion in gross revenue over 20 years was enough. Like other U.S. corporations, our casino companies primarily are publicly traded, which means they are responsible to directors and shareholders. Stakeholders in any business—whether it’s casinos or clothing, football or pharmaceuticals—demand and deserve a fair return on investment. The gaming industry is a business with tight margins that demand efficiency and tight, expert management.

Another factor contributing somewhat to the taxfest on casinos has been the persistent false negative perceptions about our industry. Despite a total lack of credible evidence, we continue to hear the voodoo economics and fabricated social-cost arguments from anti-gaming forces, along with claims that enormous taxes on our industry are justified because of these costs. Many legislators under pressure to avoid general tax increases and cuts in services often are receptive to these arguments—it becomes, in a way, an out for them. It reminds me of something Sen. Russell Long once said: “Don’t tax me, don’t tax thee, tax the man behind the tree.” You guessed it: The casino industry is the man behind the tree in too many state legislatures.

The fact is that the National Gambling Impact Study Commission and your own Public Sector Gaming Study 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, stable 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 the region in question.

One of the reasons I believe some lawmakers are so quick to saddle casinos with unfair tax rates is the belief that their constituents have an unfavorable impression of gaming. That couldn’t be further from the truth. The level of acceptability of casino gaming has grown as more Americans have come to view gaming as a mainstream entertainment activity and valuable contributor to the U.S. economy. In 2003, the AGA’s annual national public opinion survey conducted by noted pollsters Peter Hart and Frank Luntz showed that acceptability of casino gaming was at its highest level in years.

According to the survey, 85 percent of Americans view casino gaming as an acceptable activity for themselves or others, an increase from 79 percent in the previous year. The high acceptance levels could be seen across all age groups, among men and women, at all income levels, in every region of the United States and at all levels of religious participation. A breakdown of support by age revealed even stronger acceptance of casinos among adults ages 21 to 39. An overwhelming 91 percent of these Americans said casino gaming is acceptable for themselves or others, compared with 81 percent of Americans over age 50. Of course, this support by young adults is a sign of a potential strong future for our industry.

The results also showed that Americans have not been swayed by the anti-gaming rhetoric used to attack our industry. On top of the extremely favorable public approval numbers, more than half of Americans—54 percent—would favor the introduction of casino gaming into their area because of its economic benefits. And nearly two-thirds of respondents agreed that casinos bring widespread economic benefits to other industries and businesses within the region.    

Not only do Americans have a favorable impression of casinos, but those who live close to casinos can point to specific ways they have improved their quality of life—spurring tourism; creating job opportunities; funding improvements to roads, schools, hospitals and other projects; and improving the overall economy.

If poll results don’t provide adequate evidence for you, you have the most compelling case of all in Iowa, where citizens in 2002 had the opportunity to throw out all the casinos after eight years. Instead, all 11 counties voted overwhelming in favor of keeping their casinos, with margins of victory ranging from 63 percent to 81 percent. Why? Despite the dire pronouncements of gambling opponents about the long-term impact of casino gambling, Iowans recognized that none of those predictions had materialized. What they’ve seen is that casinos have created jobs, increased tourism, provided entertainment and generated more funding for charitable causes than any other industry in the state.

Beyond taxation issues and perception issues, there is another area where there has been a disconnect between problem and solution, and that is in the area of responsible gaming. Let’s be candid: States that have legalized gaming have an obligation to address disordered gambling since they are generating revenue from that activity. Those states that depend on gaming for state revenue should approach disordered gambling as a public health issue, just as they address alcohol and drug abuse. Despite this imperative, there exists a “patchwork” of laws, regulations and programs to promote responsible gaming, not only across the United States but worldwide in jurisdictions where legal gaming exists.

Two of the premier researchers in this field, Howard Shaffer and Richard LaBrie of Harvard Medical School’s Division on Addictions, examined responsible gaming regulations in all gaming jurisdictions and found no evident model or uniform approach—often considered the basis for effective public policy. While we understand the government’s need to do something to address this issue, Shaffer and LaBrie did reach some interesting conclusions that could be beneficial as you consider future responsible gaming legislation.

First, they emphasized that it is not yet clear whether gaming regulations increase, decrease, have no effect, or are independent of gambling-related problems. Further research is necessary to make that determination. In other words, before laws and regulations are put into effect, there should be, if possible, a scientific nexus established between the problem being addressed and the proposed solution.

Second, Shaffer and LaBrie found that the majority of existing responsible gaming regulations were targeted at the consequences of gambling as opposed to disordered gambling prevention. According to the widely accepted public health model, government and industry can be most effective when focusing on the larger population that hasn’t yet developed a problem. Once someone has a clinical disorder, he or she is not going to benefit significantly from the resources that our industry can provide. Therefore, they suggest that more emphasis should be placed on developing regulations that focus on disordered gambling prevention rather than the consequences of gambling. Prevention is a guiding principle behind the AGA’s new Code of Conduct for Responsible Gaming, which was adopted recently by our member companies and distributed to you today. We hope it will serve as a model as your state develops its own policies to address disordered gambling.

I think Winston Churchill was on target when he said, “There are two ways of securing cooperation in human action. You get cooperation by controls or you can get it by comprehension.” The obvious solution here is fostering a greater understanding of our business and how it works. If the existing partnership between our industry and your states is to continue to thrive, we need to work with you to emphasize the long-term implications of ill-conceived tax policy decisions, combat disinformation and implement science-based policies to address disordered gambling. Only then will our industry be able to fulfill our economic promise, and you, as state legislators, will be able to fulfill your obligation, commitment and duty to the citizens of your states who have entrusted you with their futures.