Casino Enterprise Management

Casino Tax Policy: Identifying the issues that will determine the optimal rate

By Michael Pollock

Spectrum Gaming Group‘s peer-reviewed white paper on gaming tax policy notes in its opening paragraphs: “The legalization of casino gambling is arguably one of the most critical public policy decisions that state lawmakers will make during their tenure. Such legislation authorizes an entirely new industry that offers a wide range of potential impacts. While lawmakers will pay close attention to many facets of the proposed legislation – from the number of casinos to their locations and licensing requirements – few lawmakers pay close attention to what is arguably the most essential aspect of gaming legislation: the tax rate on gross gaming revenue.

“The tax rate on gaming is the most vital public policy decision that legislators will make, as it offers implications in a variety of areas, including:

• Level and type of capital investment
• Employment
• Tourism enhancement
• Demographic and geographic appeal of a casino

“The tax rate will help determine the type of business model that casino operators will pursue, yet it is rarely given the proper level of scrutiny. If anything, decisions related to the tax rate are often based on political considerations. In some cases, the importance of the rate as an engine that will guide long-term policy is simply misunderstood.”

For nearly a decade, Spectrum professionals – due to their background as government officials, as journalists and as operators – have been helping public officials and private operators gain that critical understanding.

Spectrum has worked with the public and private sectors to analyze and craft tax policies to help ensure that casino revenue taxes are designed to best advance public policy. This means policies that encourage capital investment, employment, tourism growth and other policy goals. At the same time, our approach helps states look at gaming through a wide lens by analyzing impacts on all forms of revenue, from employee spending to corporate taxation. Our work has been used in states ranging from New Jersey to Massachusetts to help guide existing and developing tax policies. In November 2010, we presented a peer-reviewed white paper, “Casino Tax Policy: Identifying the Issues that Will Determine the Optimal Rate,” at the National Tax Association 103rd Annual Conference on Taxation, held in Chicago. Thomas A. Garrett, assistant vice president of the Federal Reserve Bank of St. Louis, reviewed the report and led a discussion on its findings.

In 2003, Spectrum produced a report that helped educate New Jersey officials as to the potential ramifications of a proposed tax increase on gross gaming revenue for casinos in Atlantic City. Due in large measure to the findings in that report, state officials reconsidered that proposal in light of some potential unforeseen consequences.

Five years later, Spectrum produced a comprehensive report for the governor of Massachusetts (available here) that helped officials there understand the overall revenue implications of their proposed tax policy.

We have worked in various states and nations, from Indiana to Korea, on similar projects.

Our analyses are prized, in large measure, because of their objectivity and credibility. For example, our Massachusetts report was praised in editorials by the competing Boston major newspapers (which rarely agree on anything):

    “The administration ought to revive the proposal to reflect the findings in the independent analysis conducted by Spectrum Gaming.”

        - Boston Herald editorial, August 8, 2008

    “[The Spectrum study] provides each side with plenty of objective analysis to consider. ... The Spectrum study makes the essential point ... The study makes a powerful case ... The report issues another important warning ... The report's authors know all the angles played by casino developers.”

        - Boston Globe editorial, August 15, 2008

To view the entire white paper, download the PDF below. For more information, visit www.spectrumgaming.com.