In the gaming industry we have been treated to the spectacle of high-tax-rate jurisdictions outperforming those with far lower rates.



As we bounce along at or near the bottom of a down economy the view affords no shortage of fresh perspectives. One that is growing increasingly clear is that the doctrine of low tax rates as the key to good economic health has proven to have a few holes. We already know that keeping marginal rates as low as possible for the wealthy is no guarantee of overall economic health if average household incomes fall in real terms. And in gaming we have been treated to the spectacle of high-tax-rate jurisdictions outperforming those with far lower rates.

No two markets have suffered more in this recession than Las Vegas and Atlantic City, where operators pay rates of 6.75 percent and 9.25 percent, respectively. Atlantic City has been damaged by the growth of gaming in neighboring Pennsylvania, where operators pay a gross gaming revenue tax of 55 percent. Yonkers, which pays up to 58 percent of revenue to the state of New York, has also inflicted plenty of harm. Atlantic City will be further impacted by Maryland, where four companies have agreed to build facilities that will pay to the state a rate of 67 percent.

As for Las Vegas one could argue that its low tax rate has contributed to the problem of oversupply and overinvestment. Eight billion dollar-plus projects pencil out a lot easier at 6.75 percent. Even the Gulf Coast of Mississippi’s overall rate of 12 percent may have curbed a good share of the excess development that we have seen in Las Vegas.

Don’t worry, I understand the obvious. Low tax rates make markets like Las Vegas and Atlantic City possible in the first place. They are essential for any market that desires to make itself into a destination. But the flip side of the hawkish rate-tax argument hasn’t panned out in this recession. The golden goose hasn’t been killed by exponentially higher rates; it is waddling around in perfectly good health, while low-tax-rate neighbors stumble.

The tax hawks neglected to factor a simple business rule into their thinking: location, location, location. Economically challenged customers still want to gamble every now and then, but they will settle for a short drive to the local slot house over a more costly trip to Vegas or Atlantic City. New markets such as New York and Pennsylvania added fresh supply to markets with huge populations. They were going to absorb their share of demand, even in good times. In tough times they have become an irresistible value proposition for many.

Another factor in the success of high-tax-rate jurisdictions is the incredible resourcefulness of the gaming industry itself. Architects, designers and builders have gotten quite good at creating appealing venues in the toughest of circumstances. All of the learning that the industry has absorbed over the last 20 years in terms of understanding what is and is not possible in high-tax-rate environments and legacy venues such as racetracks and abandoned industrial zones has been put to good use. Regional venues don’t have the amenities of a megaresort, but neither do they lack for quality entertainment and F&B options.

None of this means the newer, high-tax-rate jurisdictions are in the clear, of course. With the chasing effect that is taking place in the Northeast it’s hard to see how the status quo will be sustainable. Pennsylvania, a most strategic-minded new jurisdiction if ever there was one, is already anticipating the need to free up capital at the operator level for future battles with neighboring states. Table games legislation there contemplates a top rate of 21 percent of revenue, with one bill calling for a rate of 12 percent. Neighboring West Virginia, by way of comparison, has the highest table games tax rate in the country at 37 percent. At 12 percent, Pennsylvania operators will be able to add amenities and maximize revenue; the higher the rate, the lower revenues will be.

One could also see how a state like New York will have to evolve if neighboring Massachusetts legalizes gaming and, as appears likely, Pennsylvania adds table games. High tax rates do close the door to certain competitive responses, and New York will have to cross that bridge sooner than it would like. Meantime, there is still plenty of room for Aqueduct and even Belmont Park to soak up local demand with another 10,000 VLTs with 50-plus percent going to the state. If ever there was a place where “location, location, location” applies, it’s New York City.