gaming management
law
GAMING POLICY
MODELS, PART IV: TAXATION
OF GAMBLING REVENUE
By Glenn Light and Karl Rutledge
I
mmoral, destructive and prohibited. These are just a few of the
words previously associated with the word “gambling” by
government officials. Today, however, if one mentions gambling to
a legislator in most states, you are more likely to be met with
responses like revenue, taxation or balancing the budget.
Indeed, some of the most compelling issues presented by
proponents of legalized gambling involve economics. Legalized
gambling allows states to generate new revenues without raising
taxes and/or implementing major budget cuts. More importantly,
legalized gambling can be introduced at a time when the public is
unwilling to accept new tax measures. As Gov. Ann Richards of
Texas once noted,“It’s a question of money. Either we get it from a
lottery or we’ll get it from a huge tax bill.” 1
Gambling advocates also argue that the legalization of
gambling will generate new funds for public treasuries that can
be spent on numerous worthy causes and also create jobs and
general economic growth in the community. Moreover,
proponents often stress that gambling taxes associated with
legalized gambling are politically more acceptable than other
forms of taxation because the gamblers themselves pay them
voluntarily.
However, like the other topics that have been covered in our
series, there are many aspects that must be taken into
consideration when introducing taxation structures besides how
the jurisdiction plans to spend its potential newfound wealth.
This article will address a few of the most important issues.
To begin, when setting a tax structure, even for gambling, a
jurisdiction must realize that all industries have demand curves
for their products. Typically, the more costly the product is, the
less demand there is for the product.2 As a consequence, the
more a jurisdiction taxes gambling, the lower the demand will
likely be. A jurisdiction must be careful, therefore, not to tax
gambling so heavily that patrons resort to illegal gambling or
travel to other jurisdictions to gamble. Similarly, a jurisdiction
must be careful not to deter legitimate casino operators from
investing their limited capital into its market.
A jurisdiction’s tax policy should also be consistent with the
purposes for which it legalizes gambling. As mentioned above,
given today’s budgetary shortfalls, the purpose of legalizing
gaming is likely to maximize tax revenues. Accordingly, a
jurisdiction should choose a rate that maximizes the highest
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return without deterring players and casino operators, which
would ultimately be counterproductive to the maximization of
tax revenue.3 For example, let’s assume a jurisdiction is
contemplating the introduction of one of three tax rates: 6
percent, 10 percent or 20 percent. According to Anthony Cabot
in Casino Gaming: Policy, Economics and Regulation, “If the
government charges 6 percent, the casino industry can generate
$100 in revenue; if it charges 10 percent, the industry generates
$70; and if it charges 20 percent, the industry generates $30.
Here, both the 6 percent and 20 percent rates generate $6 in tax,
and the 10 percent rate generates $7. From a tax maximization
perspective, the preferred rate is 10 percent.” 4 In contrast, the 6
percent rate would be introduced if the jurisdiction’s secondary
goal was to increase employment and, indirectly, taxes; or the 20
percent rate if the jurisdiction wishes to discourage gambling.5
By way of an example, Pennsylvania, which has only nine
casinos, topped the nation with about $1.1 billion in tax revenue
from casinos in 2009. This take outpaced even Nevada, which
collected $831 million from its 260 casinos.6 The incongruity can
be attributed to the 55 percent tax rate in Pennsylvania
compared to the 8 percent that Nevada takes from its casinos.
Pennsylvania Gaming Control Board spokesman Richard
McGarvey said Pennsylvania’s high revenue is not surprising:
“Our tax is so high because the intention of the gaming law was
to bring in tax money.” 7 Indeed, Pennsylvania’s 55 percent tax
rate on slot machine proceeds is among the highest in the
nation, below New York’s 65 percent and West Virginia’s 57
percent.
However, this is not to suggest that all jurisdictions should
simply raise their tax levels. If Nevada imposed a 55 percent tax
rate, its market would certainly diminish. As a consequence, the
rate at which a government can effectively tax the gambling
industry also depends on the type of market in which the
industry will exist. For example, in a monopoly, the jurisdiction
can often impose higher taxes upon operators than in other
markets. The reason for this is twofold. First, the lack of
competition allows the operators to pass the cost of taxation
directly to the consumer. Indeed, monopoly operators often
provide few games at higher odds favorable to the house or
institute other costs, such as charging for parking, to maximize
profits. Second, operators in monopolistic markets typically have
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gaming management
law
higher margins and can thus afford to pay the higher taxes.
In comparison, operators in a competitive market typically
push the tax burden entirely onto patrons. This results in higher
prices and lower demand. Specifically, as the tax rate increases,
the number of games decreases while the prices that patrons
pay increase. Accordingly, too high a tax rate in a competitive
market will effectively reduce the demand for gambling in that
jurisdiction. Therefore, to be effective, a government’s tax policy
should be consistent with the purposes for which it legalized
gaming. In other words, the tax should not have any unintended
effects on competition or government goals.
Yet another consideration when setting a tax regime is that
the taxes should be adequate. Adequacy means that the amount
of the tax meets government expectations in legalizing casinos
and that there is a balance between the need to generate more
funds to meet an expanding government budget and the need
for stability in periods of decline.8 In the best of worlds, tax
revenues increase to meet new government needs in times of
economic growth but remain steady when the economy
experiences a downturn. One technique for achieving this
balance is to incorporate a stable tax, such as property tax, which
has relatively little variation based upon economic decline or
growth, with a more volatile tax that depends more heavily upon
economic conditions, such as gross gaming revenue tax.9 The
former allows the government to recover the costs of regulating
the industry while the latter allows the jurisdiction to capitalize
on additional revenues when the industry is burgeoning.
The notion of reliability also should be considered when
devising a tax regime. Specifically, jurisdictions often plan ahead
for anticipated sums of revenue from reliable levies that have
shown themselves to provide stable yields year after year. If a
jurisdiction is not careful, however, it may miscalculate estimated
tax yields, giving rise to the occasional fiscal crises.10 For instance,
gambling once was thought of as being recession proof. Yet the
current financial crisis has proven this to be incorrect, and
gaming jurisdictions have experienced large revenue declines. As
a consequence, jurisdictions that have recently legalized
gambling or are exploring the possibility of legalizing gambling
need to have realistic expectations regarding estimated tax
yields. Otherwise the jurisdiction is simply setting itself up for a
budgetary shortfall.
Another basic concept for a jurisdiction’s reflection is that
taxes should be simple and easy to understand. In other words,
“taxes should be intelligible to the taxpayer.” 11 For instance, if a
tax system confuses the taxpayer, then it is more likely to result
in inaccurate tax reporting, disputes, litigation and the loss of
taxpayer acceptance. Complex tax systems also may allow some
taxpayers to evade the intention of the law by using unintended
loopholes to reduce their tax liability.12 An illustration of an
extremely simple tax is a flat fee structure. Here, the amount due
and when it is due are easy to determine. An example of a
complex tax system, on the other hand, is charging a percentage
fee on net revenue.13 Here, the complexity stems from the need
to define gross revenue as well as appropriate deductions from
it. Accordingly, in instituting a tax system the jurisdiction must
strive to make its system manageable, thereby reducing the
possibilities for confusion, disputes and unintended loopholes.
In light of the above, when a jurisdiction first looks to tax its
emerging gaming industry, it will usually start by taxing the
casinos only (as opposed to the patrons, etc.). The reason for this
is that casinos handle the majority of the money and are the
easiest to tax, as they are subject to the jurisdiction’s close
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Casino Enterprise Management
regulatory scrutiny. Typical examples of taxes that a jurisdiction
may levy against casinos include excise taxes imposed for the
privilege of operating gaming establishments, gross revenue
taxes, net revenue taxes, property taxes and unit taxes, the latter
being based upon, for example, each gaming table or gaming
device located within the casino.
To conclude, tax rates are often thrown around without
context. For example, a 30 to 40 percent tax rate is music to
everyone’s ears when it comes time to balance the budget, but
while some gaming jurisdictions may be able to support that
high of a tax rate, others cannot. More importantly, the
underlying policy goals may not be met with such a high tax
either. Each jurisdiction, therefore, needs to look closely at its
own policies, intentions and gaming market in order to decide
the correct tax regime to complement it. Simply imposing a high
tax rate in the hope of maximized profits may deter casinos and
players from a jurisdiction and ultimately be counterproductive
to its goals as well as the success of its gaming operations.
1 Thompson, William N., “Legalized Gambling,” pg. 43, Santa Barbara, California: ABC-CLIO (1994) citing to
Gaming and Wagering Business September - October 1991.
2 International Gaming Institute, Univ. of Nevada, Las Vegas, William F. Harrah College of Hotel
Administration, “The Gaming Industry: Introduction and Perspectives,” pg. 97, John Wiley & Sons Inc.
(1996).
3 Cabot, Anthony N., “Casino Gaming: Policy, Economics and Regulation,” pg. 444, Las Vegas, Nevada: UNLV
International Gaming Institute (1996).
4 Id.
5 Id.
6 “Pa. gambling tax income outpaces Nevada,” Ventura Country Star (July 26, 2010).
7 Id.
8 Supra note 3, at 448.
9 Id.
10 Supra note 1, at 43.
11 Groves, Harold M., “Financing Government,” pg. 16, New York: Holt, Rinehart, and Winston Inc. (6th Ed.
1964).
12 Supra note 3, at 442.
13 Id.
GLENN LIGHT
Glenn Light is an associate in the Gaming Practice
Group at the Las Vegas offices of Lewis and Roca.He
focuses his practice on casinos,restricted gaming
locations,horse racing,Internet gaming,sweepstakes
and contests.He can be reached at [email protected].
KARL RUTLEDGE
Karl Rutledge is an associate in the Gaming Practice
Group at the Las Vegas offices of Lewis and Roca.Prior
to joining the firm,he was a judicial law clerk to the
Honorable James A.Rice of the Montana Supreme
Court.He can be reached at [email protected].
OCTOBER 2010
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