Beware of potential for tax increases
by Steve Geller
March 1, 2009
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Gaming 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.
Steve Geller
served in the Florida
Legislature for 20 years, until term limits forced his retirement in 2008. A
former Minority (Democratic) Leader of
the Florida Senate, he served on committees that regulated gambling and was
president of the National Council of Legislators from Gaming States (NCLGS) for
more than 10 years. He now heads the Zoning and Land Use and Gaming Law
practice groups for Greenspoon Marder, P.A., a Florida law firm.
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