Facts indicate Montana gaming tax rate about right
Pub Date: 2/1/2006
Setting tax rates on business is tricky.
Set them too high, and you reduce or eliminate the operating margins required to attract investment in that sector. Without investment, the business stagnates and will eventually exit the industry.
We saw that happen during the energy boom of the late 1970s and early 1980s.
At the time, the Montana Legislature felt demand for coal and oil were so high, and profit margins so substantial, that drillers and miners could absorb severance tax rates as steep as 30 percent, yet still achieve margins high enough to keep them drilling and mining.
When prices began sliding for these commodities, mining and oil exploration companies packed up their drag-lines and rigs and headed for lower tax jurisdictions like Wyoming and North Dakota. Coal and oil extraction came to an almost complete stop and barely continued even after tax rates were halved to 15 percent.
The situation regarding gaming businesses and tax rates is similar.
The last time gaming economics was studied in 2002, the Bureau of Business and Economic Research at the University of Montana found our licensees had operating margins of 8.5 percent, down from 13.8 percent in 1997.
These 1,700 family owned business were paying 15 percent almost $27,000 each in gaming gross revenue taxes (a sales tax) right off the top of gaming revenues before one penny was spent on operating expenses.
The Legislature has since wisely resisted calls from tax hawks who somehow believe it is good policy to tax these 1,700 small businesses, with their 25,000 workers, right out of business.
It is clear a tax increase some have suggested doubling the gaming tax would push many of these businesses into the red and countless others to break-even, prompting these owners to close their doors. For a graphic example, one need only look at the recent closing of Pennington s, Montana s second largest cigarette wholesaler and the loss of 40-plus jobs there in the wake of the massive tobacco tax increase.
A few years ago, when Illinois raised its gaming tax rates, employment in the industry fell and revenues declined, while across the border in Indiana a state that wisely left their tax rates alone employment in the business grew nicely while revenue and tax collection growth continued apace.
Since the late 1990s, gaming tax collections in Montana have been growing at rates from about 2 percent to 8 percent annually, even though the tax rate has not changed. The most recent quarter saw tax collections growing at just under a 6 percent annual clip.
What could be more ideal? Obviously the 15 percent gross revenue tax on gaming is a realistic rate that allows modest growth and attracts continued investment as machine replacement figures indicate without suffocating the businesses in the market.
As for those who mistakenly believe gaming is a highly lucrative business, just look at the number of firms in the market. It has been static for almost 10 years. When profits are high, new businesses enter the market. That is not happening in Montana.
Licensed businesses in this state face continuing challenges as on-premise liquor consumption continues to decline. In a few years, these businesses will have to deal with the potential disruption of a smoking ban.
This is not the time to tamper with a tax rate that continues to produce steady, reasonable revenue growth and now over $53 million a year.
Source: The Montana Tavern Times, Feb., 2006, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.