Gambling Tax Hikes Ultimately Counter-Productive Says Fitch

by Mike Godfrey, Tax-News.com, Washington

19 June 2003

Plans to raise gambling tax in several revenue-hungry states in the US could ultimately be counterproductive, as casinos scale down operations to lower their overheads, in turn reducing the revenue flow into state coffers, according to a report by Fitch Ratings.

The most notable example of this, Fitch suggested, is in Illinois, where the state legislature has voted for a sharp hike in gambling tax for the second consecutive year. New measures include a top rate of tax at 70%, up from 50%, on firms with over $250 million in revenue.

"While the Governor of Illinois believes the tax increase will generate $200 million in annual tax revenues for the state, and the sale of the tenth license will draw another $350 million, Fitch believes that the higher tax could effectively shrink the tax base, and reduce the value of the tenth license below $100 million," the ratings agency observed, continuing: "Of note, after enacting a severe gaming tax increase less than a year ago (moving the tax bracket up 50% from 35% on revenues of more than $200 million), Illinois watched its revenues, market share, jobs and potential capital investment erode."

"All told, the proposed and approved tax plans nationwide will have an adverse effect on the cash flows and credit measure of all operators under Fitch coverage, particularly those with exposure to Illinois and New Jersey," the report explained, adding that: "Companies least affected are those in stable regulatory environments, such as Las Vegas (i.e. MGM MIRAGE and Station Casinos) and those that are geographically diversified, such as Harrah's Entertainment, Park Place Entertainment, and Boyd Gaming. Conversely, Ameristar Casinos and Trump Holdings suffer fairly significant credit deterioration due to a lack of diversity and heavy exposure to Illinois and Atlantic City, respectively."

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