It's not just taverns that would be put at risk should gaming business operating parameters change radically or even significantly.
Ancillary businesses such as real estate companies, financial institutions, accounting firms, equipment and supply houses, machine leasing operations and manufacturing firms would also take a beating, say authorities in those industries.
Indeed, the small, family-owned businesses licensed to offer adult beverages and legal gaming in Montana spent $676 million in 2001 on goods for resale, business services such as accounting and security, machine rentals, utilities and other miscellaneous goods and services.
Those millions in turn are re-spent throughout the economy, creating jobs and payrolls in businesses that supply and service licensees.
One type of Montana supply business, gaming machine manufacturing and sales, is heavily dependent upon the health of Montana taverns, said Tim Carson, president of Summit Gaming in Billings.
One component of the Summit business is a high-tech research and development facility. There, graphic designers, computer programmers and others with specialized skills develop the game concepts and write the computer code that drives them.
A manufacturing and assembly operation, combined with administrative and sales offices, supports even more families.
At its peak, Carson says, Summit has employed up to 55 people with a payroll of $1.4 million.
Many of Montana's gaming machines are purchased and leased to licensed locations by "route operators." Carson says these vending businesses, which also employ hundreds of Montanans, are already facing unprecedented new equipment upgrade expenses.
All gaming businesses are particularly vulnerable to tax, fee and cost hikes because the prices for gaming entertainment are set in statute so operators can't simply adjust prices to consumers to offset the higher costs, as do most businesses, Carson noted.
In Montana, only 20 machines can be placed at any licensed location. Bets are limited to $2 and payouts to $800--very small-scale gaming in comparison to offerings in nearby states and provinces, and "peanuts" compared to true casino venues such as Las Vegas, Atlantic City and even Deadwood, So. Dak.
The cost squeeze Carson cites is evident in figures supplied by the Bureau of Business and Economic Research at the University of Montana, which shows that, in four years, pre-tax operating margins have declined from 13.8 percent to just 8.5 percent.
"Any cost increase, but especially a tax increase on gross revenues, will negatively impact all of our businesses," Carson said. "It affects manufacturers, suppliers, route operators, and all of the businesses that trade with licensed businesses including banks, real estate companies-- you name it."
"Any significant tax increase and I'm in trouble; we're all in trouble," he says. "If I have to cut back a lot, then I will struggle to justify keeping my company in Montana."
Jack Seitz, a Missoula real estate broker specializing in tavern, restaurant and gaming properties, agrees.
"If you push these businesses from black ink to red ink, they could quickly be worth nothing," he says.
And that would have an impact on the entire real estate market, especially commercial real estate, he says. "Empty buildings drive real estate values down and that drives property tax collections down."
Seitz has carefully examined the books of hundreds of licensed properties over the years. "If it weren't for gaming, there would be no bars to speak of now," he states.
He says increasing liquor liability insurance costs are cutting into profitability and liability itself is cutting into sales.
"You can't look at a tax rate as being too high or too low," Seitz says. "It's relative. You have to look at the effect of a tax on profitability. If these businesses are seeing 8.5 percent now, a significant gaming tax increase could cause the whole industry to collapse.
"Most (anti-gaming) activists have no idea what they're talking about," Seitz says. "The tavern and gaming associations need to keep working on educating the public. They (prohibitionists) pass all their misinformation on to their friends and it goes on and on. They need to know the whole picture.
"If you cut Bill Gates' profits 20 percent, he'll be okay. But you cut a Butte bar's profits 20 percent, they're out of business."
Seitz was in the bar business from 1972 to 1980 and has spent the last 23 years as a broker.
Troy Nearpass is President of Rocky Mountain Bank in Billings and has handled the mortgages for a significant number of licensed businesses including taverns, vendor route operators, manufacturers, suppliers and more.
Nearpass says any tax hike "would hurt the smaller guy with low margins. There would be some serious issues for that guy," he says, as well as the businesses that supply him. "There would be a ripple effect, that's for sure," he says.
And if businesses were to struggle to repay loans, that would be a "serious matter" for financial institutions, he says. State records indicate there are about 900 licensed establishments with mortgages at institutional lenders. There are an unknown number of others with private financing.
"The 15 percent gross revenue tax (levied on gaming) is a pretty good chunk right now. I don't know how you can keep hammering them," Nearpass wonders.
Those who would advocate new or higher taxes on liquor or gaming "need to see the big picture," Nearpass says. "These businesses already pay $74 million in taxes. If you double the gaming tax (and put operators out of business), what do you replace this revenue with? That would be tough.
"You can't tax your way out of a deficit by taxing business," he concludes.
Don Charleson also specializes in brokering licensed properties.
"Double the tax?" he asks. "Time for taps," he says.
The operating margins for licensed establishments found in the recent BBER study "are right on the money," Charleson says. "There's damned little margin."
He says he had one tavern listing for over a year because "no buyers were willing to talk," though the seller recently settled for simply selling the license to a large restaurant.
A doubling of the gaming tax "would tip a lot of them over because there are so many of them operating on very small margins now. You can see the end for a lot of these businesses without a tax increase," he observes.
Brad Brown is a Billings CPA with Weber Dobson & Jensen who studied at the University of Las Vegas where they teach accounting specific to gaming. He is the accountant for at least a dozen Billings licensees.
He says his most successful licensed operator client, if the gaming tax were doubled, would find "it wouldn't be worth the time and effort involved" to stay in business.
Brown also asserts net gaming tax revenue collection could decline, even if levied at a higher rate. "I guarantee you I would have a lot of gaming clients go out of business."
Would the neighborhood players simply migrate to the few remaining establishments?
"There is only a certain amount of revenue any machine can generate," Brown says. "And you can only have 20 machines and you can only operate them so many hours a day." If there is increased demand but far fewer machines, there could ultimately be significantly less money played and taxes collected, he says.
"I can honestly say I'd tell my customers, if they knew the gaming tax was going to double, to get as much equity as they could out of the business and get out. The banks would be cracking down on them because they couldn't make their mortgage payments like they should, the license values would go down and the banks would be left holding the lemon."
Brown agrees a tax hike on gaming would send effects rippling across the economy, beginning with a significant loss of jobs.
Ironically, he predicts the next major effect would be a decline in gaming revenue for state government.
"The state would be shooting itself in the foot. The state ought to be looking at ways of enhancing gaming revenues, not raising the tax."
Source: Extra,
a special supplement to The Montana Tavern Times, Oct., 2002,
published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.