Comparing gaming taxes
Pub Date: 1/1/2003
Source: The Montana Tavern Times, Mar., 2005, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.
Working a square peg into a round hole is more plausible than an apples-to-apples comparison of gambling tax schemes in the United States.
A review of 43 states that have some form of legalized gambling found 43 different systems for legalized gambling and the concurrent tax structures.
Some states have big-time commercial casinos, like Nevada and New Jersey'; some, like Nebraska and Wyoming, have just horse racing'; others, like Washington and Idaho, have Indian casinos on reservations'; and still others have unique combinations of everything. In Oregon, the government actually owns the business, the games and the machines.
Montana has the most limited games of those states with video gambling, offering only keno and poker. South Dakota and Oregon have video Blackjack, along with video keno and poker.
The general tax system of states is different, too. For example, property taxes vary widely from state to state. Considering that Montana s property tax is relatively high, and Oregon does not have a property tax, Montana gaming businesses are already being taxed more than Oregon, even before Montana s 15 percent gross revenue tax is applied.
So a straight state-by-state comparison of gaming tax rates is virtually impossible and worse, is misleading. Unfortunately, those advocating higher taxes in Montana claim falsely the state s gaming tax rate is among the lowest in the country when making their case. In reality, Mississippi has an 8 percent state tax rate, Nevada has a 6.75 percent rate and New Jersey's is 8 percent.
The latest legislative proposal, Senate Bill 348 by Sen. Ken Toole (D-Helena), sought to double the tax rate to 30 percent for state operators with six or more machines. It failed in the Senate Tax Committee 9-2. That measure is an even more punitive proposal than his earlier bill (SB 179) that set his proposed 100 percent tax-hike threshold at 11 machines or more.
When all factors are considered, Montana s gaming tax structure seems to work for Montana. It makes money for the state and local governments as designed (over $50 million last year and $3 million more than the year before), and allows for hard-working small business owners to earn a living, though for many that is getting more difficult as each year passes. To claim that Montana s tax structure is somehow broken is simply not true.
Graduated Tax Not for Montana
What seems apparent is the unfairness of a graduated tax structure in a state like Montana that has such limited gambling in the first place, allowing only a maximum of 20 machines per licensed establishment.
Every state that has a graduated tax rate also offers wide-open gambling that includes slots, reel video games, and table games. Wide-open gambling produces the revenue and margins necessary to justify a graduated tax rate that seeks to tax high-earning casinos the most.
But Montana s highest grossing operations pale in comparison to even the lower-grossing casinos in these states. For example, Colorado s lowest tax tier in its graduated tax structure is for businesses grossing less than $2 million. Their tax? Only .25 percent just one-quarter of one percent. No Montana gaming establishment grosses $2 million in a year on gambling, so all would fall into Colorado's lowest tax tier.
Montana's gaming businesses, should tax rates double as proposed, would suffer the grievous distinction of having a hard-hitting graduated tax that effectively doubles the taxes on the majority of establishments, without being allowed to have the games and scale to cover it.
As reported in the February Montana Tavern Times ("Businesses With 11+ Machines Poor Tax Target"), many gaming operations in the state are having a difficult time making any money as it is.
The misconception out there is that a gaming operation makes money hand over fist, said Brad Brown in that article. Brown is a Billings certified public accountant who has several gaming operators as clients. That is not the case. You ve got operators now who are actually holding less revenue (than five years ago).
Escalating business expenses, and the resulting erosion of net margins, have forced operators to tightly streamline their operations in the past few years.
People think that the guy with 20 machines makes twice as much as the guy with 10 machines, said Grant Lincoln in last month s Tavern Times. Lincoln is president of Century Gaming, one of Montana s largest route operators. We have as many guys struggling at 20 as we do with 10.
So what s life like in other states? Here s a peek at some neighboring states and their gambling environments and taxes (see table).
Colorado
Colorado gambling is comprised of 44 casinos, all in the Black Hawk, Cripple Creek, and Central City areas. In addition to video poker and keno, Colorado allows video Blackjack, as well as slot machines and table games. This wide-open gambling, of course, is much different than in Montana.
Colorado's tax rate is graduated with those operators making less than $2 million being taxed at only .25 percent. All of Montana's gaming establishments would fall into this category. The Colorado rate doesn't reach 16 percent until operators earn over $10 million in gross revenues.
Nevada
Operators in the country's largest gaming venue get the better of two worlds. Nevada operators enjoy the widest selection of gambling in the United States, and pay the lowest tax in the country.
The 250 or so casinos pay a graduated tax tied to gross revenues that reaches a maximum of 6.25 percent.
And still, the state received over $775 million in gaming tax revenue last year.
Oregon
Oregon s gambling environment is completely different than Montana s. Oregon s state government actually owns and runs the machines, and therefore doesn t even have what can be considered a tax.
Over 2,000 video lottery operators in Oregon pay the state a licensing fee of $135 per machine. That s all they pay. The administering agency, the Oregon Lottery, has the responsibility to develop, produce and market its games, pay its winners, cover its expenses, and turn the remaining net profit over to the state.
So all gross gaming revenues go to the state, which then pays out the retailers commissions and administrative expenses. What remains is what the state calls its profit. Promotions, if any, are left to the state. The state is also responsible for purchasing and maintaining the machines.
Oregon s gambling is also much more open than is Montana s. Besides video poker and keno the only games allowed in Montana Oregon allows video Blackjack, bingo and reel games
South Dakota
Though South Dakota s gaming tax is 50 percent, the gaming, business and tax environment is so different that no direct comparison with Montana is valid.
A primary difference is that Montana operators can pay up to $300,000 in some areas for a liquor license (which is needed in Montana to offer gambling), while South Dakota businesses can operate video machines with a purchase of a simple $250 malt beverage license, comparable to a non-quota beer and wine license in Montana.
So, many operators in Montana are carrying an exponentially greater debt load just to start up in business.
In addition, South Dakota operators pay only a $1,000 annual licensing fee (even less for those with fewer than 10 machines), while Montana operators pay a per-machine permit fee of $220-$240 annually, which would total between $4,400 and $4,800 for 20 machines.
Another major difference is the competitive environments of the two states. The South Dakota Lottery Commission operates, oversees and regulates the system much like the Montana Lottery operates this state's lottery system from a central computer, and payouts from their older machines are generally lower.
The Montana gaming business is much more competitive, since operators have much larger investments and have higher payouts based on the newer models and makes of machines in their mix. And many gaming operators must promote heavily to earn customers business, by offering free goods, prizes, and other giveaways.
South Dakota severely restricts advertising and promotion of gaming, according to Larry Mann, a lobbyist for the South Dakota Association of Video Lottery Establishments. South Dakota gaming establishments can t offer giveaways of any kind. It s illegal, even, to offer a complimentary beverage to players. South Dakota operators, then, avoid the heavy promotional costs Montana operators are absorbing.
In addition, many Montana businesses have invested heavily in facility improvements, from more attractive lighting to new carpets and bathrooms, to attract potential customers. And Montana businesses continually upgrade their machines, at a cost of about $10,000 or more per unit, to the latest and best in order to attain a competitive edge.
A typical South Dakota venue is "a bank of unattended machines along one wall in an unimproved portion of the bar," said one expert observer familiar with the South Dakota market. "In Montana, a successful, higher volume location is much more than that. Often separate gaming facilities here include hundreds of thousands of dollars in improvements and all are staffed continuously for competitive service.
"The result of the ridiculous South Dakota tax increases has been a complete shutdown of capital purchases from machine manufacturers. Many of the games still in operation in South Dakota today are from the original 1989 shipment, still running the original programs. There is considerable resistance to any capital improvements, other than the minimum required by equipment failure and parts unavailability.
"The resulting market is one that looks like it is run by the government and was caused by the outrageous tax," he said.
In fact, most machines in the South Dakota market are 1980s and 1990s vintage VLC models obsolete by Montana standards.
Finally, South Dakota offers a wider range of games and a larger payout. South Dakota has video Blackjack, a game that is illegal in Montana. South Dakota offers $1,000 maximum payouts'; Montana has $800 max payouts. South Dakota, then, has a more attractive and more revenue-friendly gaming environment than does Montana.
The bottom line? It's about the bottom line. With their high operating costs, such as liquor licenses, promotions, and heavy capital investments, Montana businesses averaged a net margin of about 8.5 percent in 2001, according to the University of Montana study.
That figure is down 38 percent from 1997. And operators say the margin has continually shrunk since then (see last issue's "Tax Target" story).
South Dakota - Deadwood
Deadwood offers South Dakota's only wide-open gambling, with all forms of video poker and keno, slots, and table games.
Despite the obvious economic advantages of offering such a diverse array of games, the 38 casinos operating in the Deadwood gaming district pay only an 8 percent tax.
Tax Policy Considerations
Montana legislators can't look at gaming taxes in a vacuum. Gaming tax policy needs to be developed with many considerations in mind, including the effect of tax hikes on already thin bottom lines.
As one Montana gaming operator said, "If it ain't broke, don't fix it."