Analyst issues tax-hike warning

By Liz Benston (contact)

Friday, Aug. 23, 2002 | 10:46 a.m.

With statewide gambling revenues falling and Las Vegas Strip casinos faring even worse for the fiscal year ended June 30, the prospect of raising casino taxes in Nevada to offset a state budget shortfall is real, a Wall Street analyst said in an industry research note this week.

"We believe operators will have to continue to fight potentially higher gaming taxes as lawmakers scramble to plug budget gaps," said Jason Ader, a casino industry analyst for Bear, Stearns & Co.

Though the tax on gambling revenues may increase from the 6.25 percent rate, it will likely come in the form of a broad corporate tax on all Nevada businesses rather than a tax singling out casinos, he said.

Some casino stocks -- which have been viewed as a relatively safe haven amid a rocky financial climate -- fell this morning with the broader market. MGM MIRAGE shares have fallen about 3 percent since Wednesday, when Ader's report was released. Other stocks were mixed, with Mandalay Resort Group falling less than 2 percent and Park Place Entertainment Corp. rising about 2 percent during the period.

Ader also cautioned against higher taxes for casinos, which have become easy targets for cash-strapped states.

"(S)tates may increasingly recognize that such tax increases often adversely impact operators' business decisions relating to employment and capital investment, which are also integral to the state economy."

On a positive note, Ader said, lawmakers have often offset higher taxes with some benefit for casinos, such as allowing riverboat casinos in Indiana to be permanently docked.

That didn't happen in Illinois, which "sent a chill through the gaming industry" and sent stock prices tumbling when legislators in June raised the top-tier tax rate on casino revenues from 35 percent to 50 percent, he said.

Ader and other analysts have criticized the Illinois move as draconian, leaving operators with little means to offset the negative effect on their businesses.

In Nevada, casinos, businesses groups and lawmakers have weighed in on the tax debate as the deadline nears for a report by a tax panel aimed at solving the state's budget problems.

Casinos have argued for a broad business tax, arguing that non-gaming industries have benefited from the state's strong growth and must pay their fair share of taxes to fund a variety of services residents use. Opponents say the industry can afford a tax increase and is responsible for the greater need for services.

That report is due in November and will be reviewed during the 2003 legislative session. Wall Street has largely watched from the sidelines as that debate has unfolded.

Ader gave no indication of how a potential tax increase would effect casino companies' earnings, revenues or share prices.

The last time legislators increased taxes on gambling revenues was in 1989, when the top rate moved from 6 percent to 6.25 percent.