American Gaming, Lodging & Leisure Summit
Frank J. Fahrenkopf, Jr.
President and CEO, American Gaming Association
With the convening of the 106th Congress last week, it’s a perfect opportunity to recap the status of major federal legislative and regulatory issues facing the gaming industry. In the process, it is instructive to take a brief look back at 1998 and then peer cautiously into the crystal ball for the new session of Congress.
We are proud that not a single piece of anti—gaming legislation was enacted into law in 1998.
The same held true for final actions by federal regulatory agencies. However, we are very mindful that the 106th Congress poses its own set of challenges as the National Gambling Impact Study Commission issues its final report in June and anti—gaming forces on and off Capitol Hill plot their next moves.
I want to discuss a number of issues already on our “radar screen” as we work with AGA members, congressional allies, and other interest groups to prepare for the next congressional session. There is no doubt that new issues will emerge as the legislative year unfolds.
A. Bankruptcy Reform
While substantial progress was made, a House—Senate conference committee failed to reconcile competing House and Senate versions of bankruptcy reform bills that were passed by each body in the last Congress. Both versions would have made it more difficult for people to simply file bankruptcy court papers and erase their debts. The House bill would have introduced a “means test” for people filing for bankruptcy court protection from creditors.
Importantly for the gaming industry, an issue in the House was the bankruptcy treatment of gambling—related debts. Rep. Jerrold Nadler (D—N.Y.) unsuccessfully attempted to have a provision included in the House bill that would have barred creditor claims for debts “incurred in or adjacent to a gambling facility, or a debt which the creditor knew or should have known was intended to be used…for gambling purposes.” Fortunately, we persuaded House leaders that such debts should not be treated differently than debts generally. The Nadler Amendment was defeated both at the subcommittee level and by the full Judiciary Committee.
While the Nadler Amendment did not specifically bar ATMs from casinos, its author has often said that is his intent. Bankruptcy reform will be high on the congressional agenda this year. While the Nadler proposal went nowhere in 1998, he established the basis to raise it again when bankruptcy reform comes up in 1999.
B. “Cruises to Nowhere” (amendments to the Johnson Act)
On January 5, Rep. Frank Wolf (R—Va.) announced his intention to introduce legislation to amend the Johnson Act, the federal statute that generally bans the transportation of gambling devices across state lines. In addition to states where gaming is legal, the Act exempts certain maritime vessels and voyages from the ban. Rep. Wolf’s concern is an October 1998 federal court decision in South Carolina that held that a 1992 amendment to the Act allows gambling “cruises to nowhere” even from states where such gambling is prohibited. Under the decision, a state must, after 1992, opt out of that portion of the Johnson Act that permits gambling in international waters on certain maritime vessels operating from the state. The irony is that Rep. Wolf’s letter seeking support for the bill is couched in glowing rhetoric about states’ rights when it comes to gambling. We will review the language of the Wolf bill with industry legal counsel to be certain it does not have adverse consequences for AGA members. Generic pre—1992 state anti—gambling statutes do not qualify as an opt—out from the Johnson Act to block such cruises.
C. Immigration Controls
Tourism officials in Nevada and other states have raised strong concerns about the potentially negative impact on foreign visitors that would be caused by more onerous record keeping on foreign visitors. In 1996, Congress passed new immigration reform legislation. Section 110 of that law requires the INS to record the departure of every foreign visitor and match that information with arrival records. If fully implemented, these new procedures could create bottlenecks at land, sea and airport entry/exit points as well as simply make it more of a hassle for foreign visitors to come to the United States.
Last year, the Senate passed legislation that would have repealed the new requirements for land crossings and seaports, but leave it in place for airports. The compromise with the House was to delay the effective date for land crossings and seaports from September 30, 1998 until March 30, 2001. The requirement remains in effect for airport arrivals and departures.
Congress is expected to consider legislation this year to address what happens when the suspension of the effective date expires. The AGA is working with a business coalition called “Americans for Better Borders” to prevent intrusive immigration record—keeping from harming foreign tourism.
D. Indian Gaming
On September 28, 1998, Senate Indian Affairs Committee Chairman Ben Nighthorse Campbell (R—Colo.) introduced a new version of legislation on Indian gaming. While focused primarily on increasing the regulatory role of the National Indian Gaming Commission, it also would have changed the congressional findings and statements of purpose in the Indian Gaming Regulatory Act. A committee vote was scheduled for September 30, 1998, but failed to occur for lack of a quorum. Congress adjourned without taking any action on the bill. The National Governors’ Association opposed the measure.
In that same month, the Senate included in the Interior appropriations bill the Enzi—Sessions—Bryan amendment, which would have extended last year’s moratorium on new Indian gaming regulations for an additional year. The regulations would allow the Secretary of Interior to resolve compact disputes between tribes and states without state approval. Although governors strongly supported extending the moratorium, White House negotiators insisted on reducing the length of the moratorium to six months, which runs until April 1999. We expect that an effort will be made to extend the moratorium once again.
In 1998, the Senate overwhelmingly passed an amendment authored by Sens. Jon Kyl (R—Ariz.) and Richard Bryan (D—Nev.) that would have prohibited Internet gambling. Several similar bills were introduced in the House, where hearings were held at which AGA and other interested parties testified. However, the House Judiciary Committee did not vote on any of the individual Internet bills. The Kyl—Bryan amendment was not included in the unrelated appropriations bill to which it was attached.
Senate and House sponsors are once again expected to introduce and seek action on Internet gambling bills. As was successfully done last year, AGA will work to make certain that legislation does not interfere with gaming industry practices such as marketing over the Internet, race and sports book operations, and progressive slot machines. Last year, the Justice Department recommended that Congress not act on Internet gambling until the National Gambling Impact Study Commission issues its final report. AGA testified at a commission hearing on Internet gambling last month.
F. Money Laundering
The House passed the “Money Laundering Deterrence Act of 1998” last year, but AGA worked with congressional allies to block the Senate from taking up the measure in the final weeks of the session. The industry’s concern stemmed from a provision in the House bill that would have required the Secretary of the Treasury to impose “Know Your Customer” regulations on “financial institutions,” a term defined by federal money—laundering statutes to include casinos.
The potentially serious adverse impact on casino customer relations that would be caused by “Know Your Customer” requirements has since been confirmed by regulatory proposals affecting banks and other traditional financial institutions. In December 1998, the Federal Reserve Board published proposed “Know Your Customer” regulations for banks under its purview. Similar proposals are coming from the Comptroller of the Currency and the Office of Thrift Supervision for those they supervise. Thus, all federal depository institutions will be subject to some type of “Know Your Customer” regulation that will require depository institutions must do the following:
Verify the true identity of its customers;
Determine the source of funds for transactions involving the bank, including the types of instruments used and from where the funds were derived or generated;
Determine the customer’s normal/expected transactions at the bank;
Monitor the customer’s transactions to determine if they are consistent with his/her normal/expected transactions;
Identify customer transactions that are inconsistent with his/her normal/expected transactions; and
Determine if a transaction is unusual or suspicious in accordance with bank regulations and file reports with regulators as required.
Application of “Know Your Customer” requirements to these institutions could well lead the Treasury Department to propose similarly intrusive requirements for casinos. We continue to educate legislators and regulators about the fundamental differences between casinos and traditional financial institutions that make a “cookie cutter” approach to this subject inappropriate.
On a related matter, in May 1998 the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a proposed regulation to require casinos to report “suspicious activity” by customers involving transactions of $3,000 or more. The proposal stipulates that casinos must report transactions suspected of involving funds tied to illegal activity or used for illegal purposes; are intended to evade the requirements of the Bank Secrecy Act; that serve no apparent lawful purpose; and for which the casino knows of no legitimate explanation.
Nevada has required casinos to file similar reports since October 1997, but under a more reasonable legal standard than the federal proposal. Prior to this proposed regulation, FinCEN relied on the existing Currency Transaction Reports for Casinos (CTRCs). FinCEN closed the public comment period on the proposed regulation in September 1998 after holding hearings in four cities. The AGA was instrumental in arranging the attendance of industry witnesses at these hearings, in securing a hearing on the East Coast, and in filing its own detailed written comments on the proposal. The final rule will likely be issued by this summer.
G. Smoking Regulation
President Clinton made enactment of tough tobacco legislation a top priority in 1998, hoping to finance planned initiatives in the education and health areas with the imposition of a larger tobacco tax. Senate Commerce Committee Chairman John McCain (R—Ariz.) was designated the point person to produce a viable tobacco bill and he succeeded in reporting a bill from his committee. However, Congress failed to vote on a final bill and the state attorneys general ultimately reached a multibillion—dollar settlement with the tobacco industry.
AGA worked with Sen. McCain to preserve an exemption for casinos from the bill’s indoor smoking prohibition. However, this would not have preempted more restrictive state and local laws or prevented individual casinos from having their own smoking policies. AGA will be on the alert to smoking initiatives in the 106th Congress, with the aim of countering the efforts of those members who continue to oppose any exemptions to federal smoking prohibitions. Finally, AGA will continue to monitor the on—going study by the Occupational Safety and Health Administration (OSHA) of the cost and potential health benefits of ventilation engineering controls for environmental tobacco smoke (ETS) in the hospitality sector.
H. Sweepstakes Marketing
Bills were introduced in the Senate and House toward the end of last year’s session to regulate marketing by mail of subscription sweepstakes, such as the Publishers Clearinghouse contest. The wording of the legislation could have been interpreted as applying to the marketing of all games of chance through the mails. To avoid any adverse interpretation, AGA staff will continue to work with the bills’ sponsors to clarify the scope of the legislation.
I. Tax — Employee Meals
The AGA worked closely with congressional allies from gaming states to add a provision to the tax reform package enacted last July that is designed to make it much easier for gaming companies and employees to qualify for favorable tax treatment of employer—provided meals. This legislative action came as the IRS threatened to impose tax withholding for the value of meals following the Boyd decision by the U.S. Tax Court in September 1997.
On August 4, 1998, following enactment of the favorable tax provision, the IRS nonetheless issued proposed guidelines on employee meals that misinterpret the legislative intent behind the provision. The guidelines also seek to impose burdensome record keeping and legal requirements on casino hotels and other hospitality industry employers who provide meals to employees for business reasons. The AGA filed a detailed written response to the IRS proposal and generated a congressional letter co—signed by 30 Senators and Representatives, including the four party leaders (two each from the Senate and the House). Following these developments, the IRS postponed the original deadline of October 30, 1998, for final action on the guidelines.
On December 3, 1998, AGA member company tax executives, AGA staff and outside counsel met with senior IRS officials to discuss the industry’s strong objections to the IRS draft guidelines. We are presently finalizing a counter proposal to be transmitted to the IRS in the near future for its consideration. Final IRS action on the issue is likely by spring of this year.
J. Tax — Wagering Loss Offset and Other Revenue Raisers
Last April, AGA organized a coalition of other gaming interests to successfully oppose a proposal by then—senator Dan Coats (R—Ind.) to use repeal of the wagering loss deduction/offset to finance an enhanced education tax credit. Following an extensive education effort by the gaming coalition, and assistance from key Senate allies, Senator Coats withdrew his amendment before a Senate vote that he publicly acknowledged would have gone against the amendment.
While the AGA—led gaming coalition helped defeat the Coats Amendment, and Sen. Coats did not run for re—election, one of our top priorities must continue to be vigilant monitoring as Congress continually looks for new revenue sources to fund popular tax breaks. With Congress likely to consider a variety of revenue—losing proposals in 1999 and 2000, the odds are that someone, somewhere, at some time will at least consider repeal of the wagering deduction/offset as a revenue source. We will again be prepared to do battle, as we have done successfully in each of the last several years when this revenue option has been considered. Other possible revenue—raising proposals include extending federal income tax withholding to certain slot, bingo or keno winnings. Congress has rejected previous Treasury Department proposals to expand the scope of withholding although we expect the president’s imminent budget plan to once again propose greater withholding on bingo and keno winnings.
K. Tax — Systematic Reform
In recent years, some congressional tax policy—makers, led by House Ways and Means Committee Chairman Bill Archer (R—Texas), have called for “fundamental tax reform” by which they mean replacing the existing individual and corporate income taxes with some version of a “flat income tax”, a national sales tax, or a consumption tax. While enactment of any sweeping reform is highly unlikely for several years at best, as reform proposals advance we must begin now to assess how they impact gaming. For example, one of the prior bills to institute a national sales tax included a gross receipt tax on gaming revenue. The AGA Tax and Finance Task Force will take up this issue in more detail at its March meeting.
L. National Gambling Impact Study Commission
Fallout from the release of the National Gambling Impact Study Commission’s final report is likely to be the greatest challenge we face during this, the 106th Congress. This past year took the commission to Atlantic City, Biloxi, New Orleans, Las Vegas and other cities, where commissioners heard testimony from employees, public officials, local organizations, clergy, academics, researchers and others documenting the positive economic and social impact of gaming in their communities.
As the focus now shifts to preparation of the final report, we expect commissioners to say almost unanimously that casino companies have provided important economic and social benefits in the communities where they operate. That is not to say that there won’t be harsh words for the industry as a whole. We expect there to be a consensus — and would agree with that assessment — that additional funding is needed for research and treatment into disordered gambling. We hope that the final report reflects the significant achievements to date of the casino entertainment industry in addressing this problem.
Our concern continues to lie with James Dobson, the commissioner who also serves as president of Focus on the Family, a politically influential Christian conservative organization vehemently opposed to gaming. Despite 19 months of testimony from countless witnesses documenting the benefits of gaming, Dobson’s position remains unchanged from day one. It’s a position that, unjustifiably, fails to acknowledge any benefits of gaming whatsoever. I assume you have all seen his latest diatribe, a letter sent this month to his more than 2 million Focus on the Family “constituents,” as well as the national media.
Fortunately, we believe that other members of the commission have kept an open mind throughout the proceedings and, in the end, will issue a balanced and fair assessment of gaming. Regardless, we expect anti—gaming activists in and out of Congress to latch on to only the negative aspects of this final report and continue beating their own drum, calling for additional congressional hearings and legislation into the next millennium. I can assure you the AGA will continue to staunchly defend the interests of our member companies and their millions of employees, customers and investors against any efforts to unfairly tax or limit our industry.