Nothing is Certain Except Death and More Taxes

State legislators are playing a kind of Russian roulette with gaming taxes, but the victims are casino workers, investors, owners, and patrons, who did not even know they were playing the game.

The rules of the tax game are simple: A state legislature first legalizes some form of casino gaming, starting with a reasonable tax rate. Licenses are issued and the lucky licensees pour in millions, or hundreds of millions, of dollars, buying land and building casinos. Only after the gaming establishments are up and operating does the legislature pull the trigger, raising taxes to the point where some casino owners have to go bankrupt.

Every state has been hurt by the economic downturn following the attack by Islamic terrorists on 9-11. It is much safer politically for legislators to raise taxes on casinos than on the personal income of voters, so it is not surprising that more state legislatures in 2002 increased taxes on legal gaming than at any other time in the nation's history.

The tax on Indiana riverboat casinos was raised from 20 percent to 35 percent. In return for the tax increase, riverboat casinos were given the right to operate without having to sail. Players were not so lucky. Slot machine winners now have Indiana state income tax withheld from any slot jackpot of $1,200 or more, whether they are residents of Indiana or not.

Restrictions on Atlantic City casinos were also eased, in return for higher taxes. The New Jersey Legislature's casino deregulation bill made 36 changes in the Casino Control Act, allowing casinos to sell beer in bottles on the casino floor, and permitting cocktail waitresses to ask players if they want an alcoholic beverage, instead of just coffee or soda. But the Legislature raised business taxes, to help offset the state's $6 billion budget deficit.

The Illinois Legislature has gone the farthest, increasing the top tax rate from 35 percent to a tax rate rarely seen in this country: 50 percent. Although taxes are on a sliding scale, the increase hits the most profitable casinos hard: Harrah's Metropolis Casino saw its overall tax rate jump 10 percent. Players were not spared. Illinois lawmakers also raised the casino admission tax from $2 to $3 per person.

States are not the only governments with the power to impose, and raise, taxes. The city of Atlantic City demanded an additional $15.4 million in taxes this year. The casinos hit back by discussing hiring an outside auditor to examine the city's finances.

Legislators wonder how much they should increase gaming taxes. The answer, unfortunately, is often found through a form of trial and error, with the errors resulting in lost investments and lost jobs. State legislatures will raise and reraise taxes until a significant portion of their licensed gaming industry goes broke. Only then will they know that they have hit the limit.

Colorado opened limited-stakes casinos in three small mountain towns in October 1991. By July 1992, the original 25 casinos had grown to 68. The Legislature raised taxes on casinos, and within five months, by December 1992, 21 casinos had closed their doors. The Legislature then lowered the tax rate.

Casinos' problems with ever-increasing taxes are a problem of attitude and history. The attitude of legislators is that it is always easy to impose or raise taxes on what is viewed as a vice, the so-called sin taxes: alcohol, tobacco, and gambling. Many lawmakers believe people should not be doing these things anyway. So, if government cannot stop these vices, it might as well make as much money as it can from them.

Historically, gambling is not only a morally suspect industry, it is also one that was completely outlawed. We are coming out of a period of complete prohibition, and it is up to the lawmakers of each state to decide whether, and how, they will legalize gambling. This, unfortunately, gives members of state legislatures the enormous power to experiment with social engineering.

The problem with lawmakers tinkering with society is that the experiments are usually not thought through and almost never work as expected. My favorite was the idea born in Iowa that riverboat casinos had to sail on four-hour cruises, to help compulsive gamblers. Pulling away from the dock did prevent betting on impulse. But what about the problem gambler who is stuck on a boat for four hours with nothing to do except continue gambling?

Legislators have not thought through the impact of continuously increasing casino taxes. The immediate impact, before a single additional tax dollar has been raised, is to create anxiety among operators and investors. Big businesses, like casinos, and their backers fear uncertainty as much as higher taxes. Harrah's cancelled plans to build a $40 million hotel in Metropolis, which would have created 175 jobs, when the Illinois Legislature increased the tax rate. Who knows whether the Legislature might raise the rate even further.

Legislators are often surprised when they find that increasing taxes drives some casinos out of business. When they raise the tax rate on other industries, businesses simply pass the increase in costs on to their customers. One Illinois legislator said that when taxes go up, casinos should simply lower the percentage payback on their slot machines.

But the casino industry is unique. Lyle Berman, who created Grand Casino Management Corp., notes that casinos may be the only business that cannot raise its prices. Slot machine win rates can be scaled back, until they hit limits created by competition or written into the law. But what does a casino do about blackjack, craps, and roulette?

A casino can cut back on service and comps, but it cannot directly pass on additional operating costs, including increased taxes, by raising the "price" of table games, without changing the rules of the game.

State legislatures are flirting with dangers even more serious than bankrupting casinos. Gambling was legalized not only to save money, but to fight organized crime.

Casinos, like other businesses, have competitors. It is not always possible to raise prices to reflect higher tax rates, without losing your customers.

Legal gambling, unlike most other businesses, also competes against criminal operators.

It would be ironic if a state introduced gambling to people who might otherwise not have visited a casino, only to then make the legal operations so unattractive that players turn to underground casinos to find a fair game.

Professor Rose can be reached at his website: www.GamblingAndTheLaw.com.