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The Long View on Taxes

High tax rates are counterproductive when looking to increase tax revenue. Frank J. Fahrenkopf, Jr., President and CEO, American Gaming Association

The Long View on Taxes

As the story goes, after meeting with his circle of economic advisers, during which no consensus could be reached on the prospects for the economy, President Harry Truman was asked by
the press about the outcome of the gathering. He replied, “I wish I could find a one-handed
economist.”

Much the same could be said about the economic forecasts we are getting lately from Wall Street, the financial markets and the deep thinkers in the academic community. Although we are finding agreement that the economy has weakened, when it comes to specifics-especially as it relates to the advent of a recession-agreement is less likely.

In our business, for example, we do know that revenues have been fluctuating in several significant gaming markets over the past several months. This has been attributed to a number of factors, including the performance of the economy, but the downturn has also been blamed on harsh winter weather, as well as increasing regional competition. Consensus is hard to find even within our own circles.

Bottom-line is that something is up, and federal and state governments are looking for a fix. Those of us who have been through these rough patches in the past know that with a downturn in the economy comes a search by policy makers for ways to address the budget deficits that result with a fall in tax revenues from affected businesses. The commercial casino gaming industry is often at the top of the list for consideration as a place to find funds to turn red ink into black.

The justifications behind raising gaming taxes are simple. There is a misconception that our industry is exempt from the economic challenges that hit other sectors. Therefore, as a perceived “cash cow,” casinos are thought to be less vulnerable to the pain of increased taxation than are other businesses. Furthermore, since commercial casinos were accepted into many communities for the benefits tax revenues would bring, ratcheting up the tax burden is often judged to be part of the bargain.

These justifications are simple indeed-simple and wrong. First, if entered into too hastily and without proper forethought, these new taxes could prove to be all-out destructive. Plans intended to stimulate a sagging economy could instead have the opposite effect. Economics 101 tells us that high tax rates suppress capital investment and other expenditures, limiting jobs as well as revenue, thus reducing tax collections. This pertains to the commercial casino gaming industry as it would any industry, and it is supported by economic experts and others who follow our industry. Eugene Christiansen of Christiansen Capital Advisers LLC produced a white paper-The Impacts of Gaming Taxation in the United States-that bears this out.

The author makes compelling arguments for embracing policies that promote adequate but “growth-friendly” gaming tax rates. On the subject of capital investment, Christiansen points out that of the $53 billion that was invested in major U.S. casinos/resorts and racinos from 1989 to 2005 (the period of his study), approximately half of that investment came in the states where effective gaming tax rates are lowest-Nevada and New Jersey. He also found that low tax rates make it more feasible for gaming companies to build full-service entertainment gaming resorts, which diversify markets, thereby promoting the creation of well-paying jobs. Perhaps the most interesting of Christiansen’s findings is that low gaming tax rates do not necessarily lead to small tax collections. The direction taken by Nevada and New Jersey resulted in “…tax receipts totaling $1.3 billion in 2004-nearly one third of all state gaming privilege tax receipts…” Importantly, Christensen determined that this commitment to lower taxation ensures a reliable revenue source for years.

Christiansen’s study is now a few years old, and tax rates certainly are not the sole reason for investment in these two states, but the paper’s lessons are as prescient as ever. When policy makers choose to impose lower tax rates, they are taking the long view that this will foster growth and a full-employment economy… as opposed to trading jobs for immediate government revenues.

Back to Truman and his need for one-handed economists. There are no crystal balls that can tell us the future. But what we do know is that a healthy gaming industry is important to the national economy. Commercial casinos reside in 12 states and some type of casino gaming exists in 37; the industry directly employs more than 366,000 people (an estimated 1 million people if indirect employment is included); commercial casinos pay wages that exceed $13 billion; and the industry generated $32.4 billion in gross revenue during 2006. It makes sense to nurture this sector, especially given the billions of dollars in capital expansion either already under way or planned for the immediate future.

The list of projects extends across the country from the post-Katrina development on the Gulf Coast, to Detroit where an estimated $500 million in expansion projects is under way, to the $800 million initial phase of the 126-acre Sands Bethworks Casino Resort complex that is bringing much-needed economic development to the city of Bethlehem, Pennsylvania, which will benefit from 2,000 jobs generated by the project. In Atlantic City, a capital investment boom of between $10 billion and $12 billion is planned?with some construction already under way. In total, proposed capital projects for Las Vegas will top $35 billion between now and 2010.

And the prospects for the continued expansion of commercial casino gaming are strong. The governor of Massachusetts is currently working with the state legislature on his proposal to locate three commercial casino entertainment complexes there. Kentucky recently elected a governor who has expressed support for bringing casinos to his state, and in Maryland the state legislature approved a proposal that calls for a state referendum on gaming, with polls indicating voters favor this direction.

Not many other industries are committed to this level of investment and development, and given the economic uncertainties, there are unlikely to be others stepping forward to do so in the foreseeable future. The capital investment that the commercial casino gaming industry has committed to, and that still is to come, must be encouraged and-as noted-nurtured. There is no better encouragement or nurturing than that offered by reasonable economic policies, and there are no better incentives within those policies than a reasonable and stable tax structure. This is very elementary economics. Create a hospitable environment for growth, and they will build.

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