Iowa high court strikes down law on casino tax

Mike Glover

Thursday, June 13, 2002 | 10 a.m.

DES MOINES, Iowa -- A split Iowa Supreme Court on Wednesday struck down a state law that taxes land-based casinos more heavily that floating riverboat gambling operations.

The decision could punch an $8 million hole in an already strapped state budget.

"The essence of the tax is that it treats racetrack slot machines differently than riverboat slot machines," the court said.

"Where the same activity is being taxed at significantly different rates, a mere difference in location is not sufficient to uphold the discriminatory tax."

Dissenters in the 4-3 decision argued that the Legislature ought to be free to structure a tax system as it sees fit.

"Riverboats are not the same as racetracks," wrote Justice Linda Neuman. "From an entertainment perspective, they speak to different cultural traditions -- river lore versus agriculture."

Under state law, riverboat casinos initially paid a tax of 20 percent on receipts over $3 million, since raised to 22 percent. Casinos located at racetracks are currently taxes at a 32 percent rate, and that is scheduled to increase to 36 percent.

The court ordered that both forms of gambling be taxed at 22 percent.

Dennis Prouty, head of the nonpartisan Legislative Fiscal Bureau, said the state collected $80 million in taxes from land-based casinos this year, and reducing that by 10 percent would cost the state $8 million.

Later in the day Prouty said a further review of the state's budget shows the impact could be as high as $32 million.

Ron Parker, a spokesman for Gov. Tom Vilsack, said aides were meeting Wednesday to try to assess the potential impact of the decision on the state's budget but conceded "it could be significant.

"We won't know anything for a while," Parker said.

Bob Brammer, a spokesman for the state attorney general's office, said the state's lawyers were examining the decision. He said one worry was that racetracks could go to court seeking refunds for taxes paid in past years.

During the last legislative session, the Racing Association of Central Iowa, which operates Prairie Meadows Racetrack and Casino at Altoona, and the Iowa Greyhound Association sought to block the tax increase for racetrack casinos.

The issue split the Legislature along geographic lines, with border lawmakers arguing for protection of the riverboat industry that has helped revitalize towns such as Davenport and Sioux City.

Other lawmakers warned the growing tax burden was likely to drive Prairie Meadows out of business.

The court said it's inherently unfair to treat the same function -- casino gambling -- differently because of where it takes place.

"The heart of the tax statute is in its disparate treatment of the main activity talking place at both riverboats and racetracks," the court said.

The court's decision hands the racetrack proponents a far bigger legal victory than they had sought from the Legislature.

"We are obviously elated with the court's decision," Thomas Flynn, attorney for Prairie Meadows, said.

Neuman had said there are many reasons why lawmakers could decide to tax floating casinos less than those at racetracks.

"Riverboats are mobile, racetracks are not," Neuman said. "If the economic climate turns unfavorable here, a riverboat merely unties its lines and sails elsewhere."

She said that could lead lawmakers to give the operations a tax break, and courts shouldn't substitute their judgment.

But the court said that a fundamental constitutional precept of taxation is that fairness must prevail, absent some reason for treating similar operations differently.

"Where the same activity is being taxed at significantly different rates, a mere difference in location is not sufficient to uphold the discriminatory tax," the court said.

The court also warned that should the tax on racetrack casinos grow to 36 percent, the profit margin would evaporate, frustrating state law designed to encourage the racing industry.

"The racetrack industry is responsible for employing hundreds of Iowans. It also supports the horse industry by distributing millions of dollars to purse supplements," the court said.

The court ruled there was no rational reason for taxing the operations differently, unless lawmakers were trying to drive the tracks out of business to aid the riverboat industry.

"We cannot justify this tax based on the fact that racetracks operate on land whereas riverboats operate on water," the court said.