Beware of potential for tax increases

by Steve Geller
March 1, 2009

Steve GellerGaming industry officials must work vigilantly to show legislators why raising rates is a bad idea

States throughout the country are experiencing unprecedented economic hard times. The terrible economy is decreasing revenues to governments; at the same time the demand for services is rising. At last count, 43 states had budget deficits. Unlike the federal government, states are generally not permitted to run deficits. States will try to trim the deficit by spending reserves, issuing bonds, delaying maintenance, etc. The remainder of the deficits must be closed by a combination of tax increases and spending cuts.

The voters in every state are convinced that they're paying too much in taxes, and politicians are reluctant to raise taxes or cut spending on popular programs. Politicians will look for easy answers when possible. One solution sure to arise in most states is to raise "sin taxes," or the taxes on alcohol, tobacco and gambling.

Although increasing tax rates on gambling may seem to be an easy way of raising money, it can be counterproductive. I will paraphrase Eugene Christiansen of Christiansen Capital Advisors: "A state can make money on slot machines at many different tax rates. The tax rate will determine the product. At 7 percent, you get the Wynn or the Bellagio. At 35 percent, you get very nice convention hotels. At 70 percent, you get slots at convenience stores."

Lower tax rates create more jobs and more investment in a community. The three major states with the lowest tax rates are Nevada, New Jersey, and Mississippi. They are also the three states with the highest number of commercial casino jobs in the country.

It is striking that Pennsylvania and New Jersey generate almost the exact same amount of taxes for their states, $472.8 million and $474.7 million, respectively. However, Pennsylvania, with an effective tax rate of 54 percent, generated 4,877 jobs, while New Jersey, with a tax rate of up to 10.5 percent, generated 41,672 jobs.

The correlations between tax rates and direct investment are also clear. According to raw data acquired from Christiansen, $25.6 billion dollars in direct investment was recently committed to non-tribal facilities in 10 states with gambling. Of this, more than $18 billion, or more than 70 percent, was in the three low tax states.

There is also a mistaken belief that gambling is so lucrative that the state can impose any tax rate, and raise more revenue each time they do so. By this standard, if the states raise the tax rates to 105 percent of adjusted gross income, they'd be rolling in money. In reality, the real tax revenue would be $0.

Most people are familiar with the experience of racinos in New York. They appear to have been a failure, despite the large population in the area. Even after being reduced, the tax rate remains the highest in the nation. Although there are VLT\s at eight locations, most of the revenue comes from one racetrack (Yonkers), and the number of jobs created and the amount of money invested have been quite small.

Florida is another example of a state with a high tax rate and low return. The independent Florida Office of Economic and Demographic Research suggested that the tax rate that would generate the most total economic benefit to Florida, including job creation, construction, and other investments, was 35 percent. Instead, after adding the 50 percent state tax rate, the $2 million charge per facility per year, local taxes and purses, the effective tax rate is approximately 62 to 65 percent. At that rate, only three of the seven licensed pari-mutuels have opened, and each is losing money.

Neither Florida nor New York is generating the revenue from racinos that their supporters predicted. I believe that both New York and Florida would generate more total tax dollars with a lower tax rate.

When states raise gambling taxes too high, other states or Indian tribes with lower tax rates can offer better facilities and spend more money on marketing, including giveaways. This results in a decrease, not an increase, in total state revenue for the states with high gambling taxes.

A final example is the lottery. It has been clearly shown that lottery ticket sales increase during rollovers, when the prize pool gets larger. Some politicians believe that states can reduce the percentage of payouts, take the unclaimed prize money and cut advertising budgets without adversely affecting the amount of total dollars generated for the state. Repeated meetings of the Committee on Lotteries of NCLGS have shown those beliefs to be in error.

Most Legislatures began their sessions between January and March of 2009, and will complete their work between May and July. It is important for representatives of all parts of the gaming industry to communicate early and often with their elected officials, and make sure that the elected officials understand that increasing tax rates can have negative effects on tax revenue, jobs and investment in their states.

All data herein was derived from the AGA Web site or from Christiansen Capital Advisors LLC.