4:35 pm Sep. 27, 2012
The gambling interests spending millions of dollars to influence elected officials ahead of the expected legalization of casinos in New York want several things.
One, obviously, is a favorable hearing when they submit their bids for a license. Another is an adjustment to New York's current, very high tax rate on gambling.
"They have spoken to me about it, saying we have to have it changed," said Westchester Democrat Gary Pretlow, chair of the Assembly's racing and wagering committee, referring to gambling industry representatives. "And I’ve always said, 'it will be discussed in the near future."
Governor Andrew Cuomo's proposal to license casinos set in motion the long process of legalization. The proposal has already been passed once by the state legislature, which must approve the new law twice. The second vote is due next session, to be followed by a voter referendum as early as November, after which the bidding will begin. The bids will evaluated by a yet-to-be-formed commission of some sort.
Lots of gambling operators purportedly want in, from the state’s smaller-time racino operators to the Steve Wynns and Sheldon Adelsons of the world.
“It’s not like pursuing a gaming opportunity in Toledo or pursuing a gaming opportunity in Tucson,” said Richard (Skip) Bronson, Wynn’s former right hand man and now the chairman of U.S. Digital Gaming.
But if New York State is an intriguing proposition to the gambling industry because of its market size and cache, it's also a complicated one, thanks to the extraordinary costs involved, beginning with the current tax rate on gambling of nearly 70 percent, according to the calculations of the gambling lobby, and closer to 60 percent, according to other calculations.
Industry experts predict that, either way, if the tax rate isn't lowered for table games, the biggest casino operators simply won't play here.
“The 70 percent tax rate is really exorbitant,” said William Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada.
“Nobody would install table games at 70 percent,” said Alan Woinski, the president of Gaming USA Corp., a publisher of industry newsletters and a gambling consultant.
Father Richard McGowan, a professor of finance at Boston College with no apparent bias in favor of the gambling industry, agrees.
Asked at what tax rate a gambling company might be willing to invest substantial capital dollars in New York State, he said, “I would probably say anything outside the city 33 to 35 percent at most they’re going to get."
In New York City, the primest territory of them all, McGowan said the state might be able to convince a gambling company to pay a 40 percent rate: “And I think they’d really be pushing the envelope on that."
The tax rate for video lottery terminals (basically, digital slot machines) was established by the legislature, part of the overall package that legalized slot machines in 2001.
There's nothing in the proposed constitutional amendment that deals with the tax rate, but James Featherstonhaugh, a gaming lobbyist, racino owner and head of the New York Gaming Association, says, "I think it would be very hard to get second passage from the legislature" until those details are sorted out.
The reason the state can get away with taxing slot machines at such a high rate compared to what full casinos can bear, the experts say, is that table games operated by humans are much more expensive to operate than machines.
So, for example, when Delaware and Pennsylvania went from mere slot-machine states (like New York) to states with table games, they acknowledged that reality by lowering the tax rate for table games accordingly, according to Michael Pollock, managing director of Spectrum Gaming Group, in his 2010 article, “Casino tax policy: Identifying the issues that will determine the optimal rate.”
“You only make about $1,500 per day per table,” said Woinski. “For example, a craps table ... you figure three shifts a day. You have to pay these people. Then you have to pay taxes. How much is possibly left over? It’s a lot more lucrative to put a slot machine in there.”
Jeff Gural, the owner of racinos at Tioga Downs and Vernon Downs, put it this way: "A slot machine is a machine. All you need is somebody to empty the money out at the end of the night, assuming it doesn’t break, and you need somebody in the morning to wipe the screen. With table games, you’ve got a dealer, a pit boss."
Gural, said he would like to win one of those seven gambling franchises. But not at the going rate.
"I’d just lose a fortune," he said.
So, too, presumably, would the shareholders of the publicly traded companies that comprise so many of the big-name gambling companies Cuomo would like to attract.
“Shareholders in a company like [Las Vegas Sands] or Wynn are used to projects where they’re going to get a 30, 40 percent return,” said Woinski. “You go into something with a 60, 70 percent tax rate, there’s no way that’s going to happen.”
“My view is that they should definitely consider lowering the rate substantially if they want to get good proposals for casino projects,” said Doug Walker, a professor of economics at the College of Charleston, in an email. “However, if they don't care about building destination resort-type casinos, and only want slot parlors, then maybe a lower tax rate isn't as critical.”
All of which sets up potential sticky political task for Cuomo, who would have to explain the necessity of giving lower tax rates to businesses that many politicians, including Michael Bloomberg, have said impose what amounts to a massive regressive tax on their customers.
One possible solution, says Pretlow, is to compute the average returns for the different games that would be legalized in New York State, and come up with a blended tax rate of some sort.
"What would probably happen, and this has not been discussed yet, is how we blend all the games, come to some conclusion as to how many people are going to play various games and what the overall income is going to be," he said.
“Before anything else, the newly elected legislature will have to pass gaming legislation again and then the public will need to vote on it via referendum in a year,” said Matthew Wing, a spokesman for Cuomo. “Any discussion of what will happen after that is premature at this point.”