They say nothing is certain except death and taxes. Now, for Nevada casino owners and operators, even taxes are threatening to become uncertain. Not the fact of taxes, but the amount.
Nevada is a huge, open, beautiful state. We have plenty of room, plenty of sunshine and we’re known as America’s adventure place. We’re the distribution hub for the 11 western states – located in the exact right spot to be serviced by highway, air and rail – and we have no inventory tax for companies warehousing goods here. We have 300 days of sunshine a year and in addition to the attractive natural environment, we have a compelling business environment, with no corporate or personal income tax.
Much of the credit for Nevada’s business friendly environment can be attributed to gaming which is taxed at 6.75 percent and provides 48 percent of state tax revenue. For decades Nevada’s leaders have looked for ways to diversify its economy at every level, from local to statewide, repeatedly voicing concern about incubating its financial eggs in a solitary basket. Economic authorities across the state have successfully introduced a variety of different industries to Nevada. Steadily, these efforts have begun to bear fruit, infusing the state’s business communities with dynamic energy and equilibrium, and fortifying the overall economic base.
The drive to diversify grew increasingly urgent as other states began to legalize gaming and again, after the events of 9/11 showed how isolated we are.
“We’re already overly dependent on this one industry,” said Bill Bible, president, Nevada Resort Association (NRA). “If you were in the state after 9/11, you saw how something that happened 3,000 miles away put the damper on tourism here. The industry did rebuild, but the incident certainly demonstrated what happens when you rely on a single industry to provide the kind of significant financing for your state government that gaming does here.”
Traveling to Nevada requires traveling – the state’s tourism destinations are convenient to a mere handful of major markets. “Nevada is farther from the big markets than most other destination cities,” said Bible. “New York City is a destination market, drawing from the very crowded east coast corridor, Chicago is close to the Midwest and in our case, we are more isolated than any of our competitors for other markets. People have to go out of their way to come here – and the shortest drive markets are in California which is four or five hours from Northern Nevada and four or five hours from Southern Nevada.”
Eggs and Baskets
With the recent nationwide economic downturn, Nevada is facing its own budget shortfalls, some perennial, others causing what will hopefully represent short-term belt-tightening. The state revenue for the 2008/2009 biennium is approximately $530 million. Gov. Gibbons, looking for ways to avoid raising taxes, has asked each state agency to cut 5 percent from its budget. “I will not support new or increased taxes when we have proven that the state can successfully address the revenue shortfall through modest reductions in statewide spending and through the utilization of the state rainy day fund,” said Gov. Gibbons.
However, Nevada’s ongoing needs must be met. For example, education – which has struggled in our state for some time – constantly requires funding to build and staff new schools in rapidly growing communities, and to improve lackluster student performance statewide.
Now there are two proposals looking to find their way into law, both aimed at increasing monies across the state, both looking to increase taxes in one sector, andboth looking directly at the casino industry. They’re not proposed as short-term solutions, since neither would go into effect before 2010, they’re to increase monies and beef up Nevada’s budget.
Reading, Writing and Arithmetic
One of the proposals comes from the Nevada State Education Association (NSEA) – Nevada’s teacher’s union – which proposes a 3 percent tax increase, changing the state tax rate on casinos from 6.75 percent to 9.75 percent of monthly revenue.
The NSEA petition is aimed at finding funding for education. According to Lynn Warne, president NSEA, the increase of 3 percent on any casino that grosses over $1 million per month would generate approximately $250 million a year, to be earmarked exclusively for the education system in Nevada.
“Of these new funds, 40 percent would be allocated to improve student achievement, 40 percent would go to teacher salaries and benefits, and 20 percent would be incentive pay,” Warne said.
The second initiative – put forth by Kermit Waters, a Southern Nevada attorney – proposes a 13.45 point increase to 20.2 percent, a 200 percent increase in taxes for any casino with more than $1 million in revenue monthly.
Waters drafted two similar proposals, one of which calls for doing away with taxes on owner-occupied single family homes in Nevada. Both are meant to direct funds to four principal areas: roads, education, desalinization projects and alternative energy resources.
“Negligent proposals by unqualified interest groups threaten the delicate economic balance in our state,” said Bill Lerner, gaming analyst, Deutsche Bank. “The reason we have a zero corporate or personal income tax [in Nevada] is because the gaming industry essentially subsidizes those things for the citizenry and for other industries in the state. So when you start messing with the economics of the gaming industry, the projects in that industry don’t pencil out because of the impact of higher gaming taxes. The gaming industry won’t be able to subsidize what it has historically. It’s that simple.”
Waters doesn’t find it that simple. He believes casinos have gotten away without paying their fair share for too long. “Over the years they’ve continued to pay less and less. They used to pay 38 percent tax, then 28 percent,” he said, comparing Nevada’s casino taxes to other states that pay 30, 40 and 50 percent.
“Forty-eight percent of the state tax revenue comes from that 6.75 percent gaming tax – that’s multiples of any other state in competition with Nevada where gaming has been legalized, even those with big tax rates,” said Lerner. “In those other states, the percentage of the tax budget contributed by gaming is 4 percent to 7 percent, something in that range. We can’t just look at a percentage in a vacuum and say ‘well, you know, the rate’s low and we feel it should be higher.’ These initiatives are similar to the casino industry proposing a major overhaul to Nevada’s K-12 cirricula.”
Why Casinos?
The simple answer is: Because they have money. Other states with legalized gaming have much higher taxes on gaming revenue than Nevada, with the average in the U.S. at 20 percent. But, said Lerner, it’s important to realize that competition is unlimited in Nevada. “If you can raise the capital and you’re licensable, you can open a casino and actually compete. In most other states those gaming licenses are limited to a handful of casinos, so when you have a limited license environment by law, it means returns on invested capital are going to be higher, so those other jurisdictions can sustain a higher gaming tax.”
“[The NRA] has litigated against the NSEA proposal, and the court ruled and found that this particular initiative, in some aspects, violated Nevada state law and rewrote the disclosure language for them,” said Bible. “We said the disclosure language was inaccurate, so the court wrote disclosure language less like a public-relations-type campaign and also deleted the provisions that would have earmarked the money strictly for education.” In January the court struck out the language in Section 6 that earmarked the money for teachers’ salaries and incentive pay.
“I think you’re seeing taxation by poling,” said Bible. “People conduct polls. ‘We want to find money for X, who do you think should pay? Should we increase sales tax, or increase property taxes, or do you think we should increase casino taxes?’ And respondents say, ‘Well, increase casino taxes’ because they don’t see themselves affected. So that’s taxation by selective poling.”
There’s also concern that Nevada’s budget could end up like California’s with initiatives making up 90 percent of the budget and the legislature only able to control and allocate 10 percent of the budget, said James E. Rogers, chancellor, Nevada System of Higher Education. Not to mention banking our budget on one industry.
Gaming has traditionally thrived in Nevada because the state offers a stable and predictable regulatory environment, as well as a stable and predictable tax environment, said Bible, which has permitted the industry to grow more rapidly and profitably in Nevada than anywhere else in the world.
“We’ve invested substantial portions of money in Nevada gaming that has really built the infrastructure in Nevada, which is, to a large extent, the economic engine of Nevada,” said Bible.
Profitability
Proponents of increased gaming taxes argue the resort industry can certainly afford to pay more. Nevada’s nonrestricted gaming licensees reported a total gaming win of $1.09 billion for the month of December 2007. This amounts to a 3.06 percent increase compared to December 2006, when licesees reported a gaming win of $1.06 billion. For the fiscal year (July 1,2007 through December 31, 2007), gaming win has increased 1.73 percent.
Doing the Math
While residents would see some changes – higher prices at the neighborhood casino breakfast buffet or show, or slower service in the resort-destination environment, deeper financial impacts must also be considered.
According to Lerner, the NSEA proposal reduces Nevada gaming cash flow by an estimated 6 percent or more. “Earnings would be lowered by 17 percent. The Kermit Waters proposal would create a 27 percent reduction and about a 70 percent loss in operating profit.”
Casino operators have a fiduciary responsibility to their public and their shareholders, or, if privately held, to their equity holders to seek the highest return on investment possible. Currently Nevada casinos collective return on capital projects is around 10 percent. That amount would drop to 6 percent if Nevada approached the average of a 20 percent tax, and 1 percent to 2 percent net return on investment (ROI) in excess of cost of capital if the NSEA proposal passes. And under the Waters proposal there would actually be a negative ROI.
Another consideration is the convention and tourism side of the casino world. If either tax proposal became law, it’s likely casinos would have to raise convention prices and room rates, prices in restaurants and on many other facets of the gaming industry experience. Higher convention prices could drive away convention business. Costlier room rates and higher prices for destination-experience entertainment has the potential to erode the number of people willing to travel to Nevada.
Furthermore, if gaming taxes are raised, the potential result could be a loss of jobs across the industry board. “The employment base would drop something like 20 percent, because casinos couldn’t handle a significant increase in gaming tax, so they’d have to downsize,” said Bill Lerner. “What this could amount to is shorter stays and shorter spends per visit. So either way, even if we try to reduce [the impact of the taxes] through workforce reduction, which is a natural reaction to a massive new tax, it means an impact to service levels and a loss of workers with long-term experience. It’s just a short-sighted solution.”
Finding Finances
Some casino owners and operators have responded to the initiatives with one of their own: to institute a broad-based business tax and spread the tax burden further than the casinos’ shoulders. A broad-based business tax could curtail new businesses looking to locate in the state, or at least lead them to think twice if our business-friendly environment loses a little of its friendliness, so that the newly instituted business tax would have fewer new businesses to actually tax.
However, “It would not destroy our economy if we were one of the lowest state taxes rather than no state tax,” said Rogers. “Assume a car dealership in Nebraska pays 12 percent corporate income tax. If they moved that dealership to Nevada they pay none. By comparison if they paid 12 percent in Nebraska and we could still say ‘Come here and pay 6 percent in Nevada.’”
Given the state’s budget delinquencies, more taxes are imminent. The uncertainty lies in which industry or industries will fill the void.
