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State may give up millions to casinos

Planned tax rate is called too low

By Noah Bierman
Globe Staff / September 14, 2011

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As the state prepares to debate casino gambling today, critics say Massachusetts may be leaving millions of dollars in tax revenue on the table, money that could be used to keep property taxes down and pay for state services.

The proposed bill would give the state 25 cents of every dollar in casino gambling revenue, placing Massachusetts in the middle of the pack nationally. There has been little public debate over whether that figure is enough. Not one of the 154 amendments filed for today’s House debate addresses the tax rate.

But several states that have approved casinos in recent years have charged higher taxes and fees to developers, and that has some analysts questioning if Massachusetts is surrendering too much.

“At 25 percent, I don’t think the taxpayers are getting enough of the benefit,’’ said Jeff Hooke, a Washington investment banker who has studied the fees and tax rates extensively. “The state is giving a legal monopoly. . . . How many businesses get a legal monopoly?’’

Pennsylvania, where casinos began opening in 2007, takes 55 percent of every dollar spent on slot machines and 16 percent from black jack or other table games. Illinois has a graduated tax rate that runs as high as 50 percent and collected about 34 percent last year.

Gambling supporters say that the state has an interest in keeping tax rates low enough to protect profits for casino developers. They argue that overly high taxes and fees could limit casinos’ ability to finance facilities with hotels and other amenities that would employ more people. Many of the highest-taxing states lack hotels in their casinos.

A 25 percent rate, they say, will amount to hundreds of millions of dollars to fortify city and town budgets and bolster government services, from arts organizations to transportation projects to schools and fire departments.

The bill would also authorize one slot machine parlor, taxed at 49 percent. Casinos would pay the state an initial licensing fee of at least $85 million, while the slot parlor would pay a $25 million licensing fee. The bill has support from legislative leaders, as well as Governor Deval Patrick.

Since Patrick first proposed casinos four years ago, before the full effect of the economic downturn, the deal for casinos has gotten better. Proposed tax rates have dropped from 27 percent, and licensing fees have decreased from $200 million each.

Senator Stanley C. Rosenberg, an Amherst Democrat who has helped lead the casino debate, said the state does not want to chill the industry.

“You can kill the goose that lays the golden egg, and our job is to keep that goose healthy,’’ said Rosenberg.

“The tax structure aligns with what other states have successfully used to generate revenue while giving gaming operators the flexibility they need to create jobs and invest in their facilities,’’ said Kimberly Haberlin, a spokeswoman for Patrick’s economic development secretary, Gregory P. Bialecki.

Representative Joseph F. Wagner, a Chicopee Democrat who cochairs the Legislature’s Economic Development Committee, adds that “we don’t want to price ourselves’’ out of the market.

Proponents also point to competition with Connecticut, where casinos pay 25 percent of their slot revenues to the state, but are exempt from paying taxes on anything else because they are owned by Native American tribes.

“Twenty-five percent is a favorable gaming tax rate [for the developers], but I do think you have to think about what else is in the Northeast that they would have to compete against,’’ said Melissa Long, an analyst with Standard and Poors.

But Long, like others, said that “no one really knows what the right number is.’’

The American Gaming Association, an industry lobby, lists 22 states that license casinos, slot parlors, or video lottery rooms by 2010, not including Indian tribe casinos, which are regulated differently. Direct comparisons of states are difficult, given complicated tax structures used in some states, as well as differences in geography and regulations on which types of slots and table games can be played.

The proposed Massachusetts tax rate is low compared with several Northern states. But Nevada and New Jersey, where rates were set decades ago and gambling is now firmly embedded in the economy, have some of the lowest gambling tax rates in the country, between 6.75 percent and 9.25 percent.

On the other end of the spectrum, five states - Delaware, Maryland, New York, Rhode Island, and West Virginia - run so-called video lottery terminals, which look like slot machines, while still complying with state lottery laws. In that system, the state owns the machines and rents them to the operators, who must hand over as much as 73 percent of revenues.

Beyond taxing casinos annually, most states charge one-time licensing fees, sometimes in the hundreds of millions of dollars. Massachusetts would create a gambling commission that would have the option of raising the licensing fee in any of the three regions designated for a casino and for the slot parlor, depending on market conditions.

There is some evidence that high taxes or fees hamper development. In Indiana, a pair of race tracks filed for bankruptcy over the past two years, in large part because they had to pay $250 million in licensing fees when they added slot machines. The racetrack casinos remain open, but the operators have said they need the bankruptcy protection so they can restructure the large debt.

A study by the University of Nevada Las Vegas concluded that high tax states have relatively fewer casino-related jobs than states with lower taxes.

Bialecki said the state must look at casinos primarily for their ability to create jobs and long-term economic development.

Tax money has to be a secondary concern, he said, emphasizing the importance of debating the bill outside the pressures of budget season, when the need to plug short-term holes in spending could cloud discussion about economic development.

Two years ago, Ohio voters passed a constitutional amendment allowing casinos and establishing taxes of 33 percent and fees of $50 million.

But when Governor John R. Kasich, a Republican, took office this year, he called it a bad deal and renegotiated with developers, winning hundreds of millions of dollars more in fees for the state.

In Pennsylvania, former governor Ed Rendell, a Democrat, argued that his state’s high tax rate delivered $1.3 billion in property tax relief last year without hurting the quality of casinos, at least one of which is building a hotel.

“We’ve got economic development up the gazoo,’’ he said.

Hooke, the Washington banker, said states underestimate what their licenses are worth on the open market.

He has chronicled numerous instances in which developers have resold them at a profit of tens of millions of dollars or more.

He said the argument that taxes lead to fewer amenities is “a complete fiction, constantly repeated by the industry.’’

“The rate of return to the casino companies is pretty good,’’ he said. “Otherwise, they wouldn’t be building the facility in the first place.’’

Noah Bierman can be reached at Follow him on Twitter @noahbierman.