Illinois plan to up casino taxes lowers license value

Friday, April 11, 2003 | 11:06 a.m.

A plan to raise Illinois tax revenue by further increasing the nation's highest casino taxes would significantly diminish the value of a 10th available riverboat casino license in that state, representatives of MGM MIRAGE and Harrah's Entertainment Inc. said Thursday.

Gov. Rod Blagojevich on Wednesday introduced a proposal to increase the state's tax on casino revenue from 50 percent to 70 percent on incremental revenue above $250 million per year -- a plan industry supporters say is unlikely to pass. The proposal also would boost existing rate schedules for all casinos by an undetermined percentage and increase a per-person boarding tax to $5 from $3.

Both MGM MIRAGE and Harrah's have previously expressed interest in bidding on the casino license, which hasn't yet been offered up for bid because of debt problems tied to the previous holder of the license. Still, the companies Thursday stopped short of saying they wouldn't bid on the license should the tax plan pass.

"This proposal does raise some challenging issues about our ability to successfully do business in the state," MGM MIRAGE spokeswoman Yvette Monet said.

"Yet, just as we have in years past, we will continue to weigh our options there."

Harrah's also hasn't determined its next move, company spokesman Gary Thompson said.

"If you're a casino operator and you have a choice of operating a casino somewhere where you can operate under a 20 percent tax or a 70 percent tax, where are you going to spend your money?" he said.

Park Place Entertainment Corp. and Mandalay Resort Group of Las Vegas, along with casino mogul Donald Trump, are also interested in the license, the Chicago Sun-Times reported this week.

Wall Street analysts blasted the tax plan, calling it "misguided" and the result of "bad advice" taken by the Democratic governor.

The proposal would render the remaining casino license essentially "worthless," making it highly unlikely that any company would bid on it, they said.

Illinois casinos, with revenue exceeding $2 billion last year, have benefited from state licenses that grant them monopoly control of the market, the governor says.

"It's time for them to ante up," he said in his 2004 budget address.

The expected sale of the license could raise $350 million for the state, he said. Analysts had pegged the value of that license from $600 million to $650 million before the state's tax hike last summer that raised the top tax rate from 35 to 50 percent. The hike set a record for casino taxes and especially upset the industry because it didn't grant the industry any concessions in return.

Nevada -- which doesn't limit the number of casino licenses granted -- has a 6.25 percent tax on gross gambling revenues.

The 20 percent "windfall" surcharge on revenues of more than $250 million would raise an estimated $48 million for the state, the governor said. Tax hikes for all of the state's casinos would raise about $115 million. And the admissions tax increase would generate about $38 million for a total of about $200 million in additional taxes, he said.

Industry lobbyists are supporting competing legislation that would reduce the gaming tax increase enacted last year and repeal rules allowing no more than 1,200 slot machines per boat. Analysts say that proposal could generate about $300 million in new tax revenue.

Some experts think that the counter-proposal also is unlikely given the governor's position that his budget won't propose an expansion of gambling.

The proposal creates uncertainty for Las Vegas-based casino operators already in Illinois, including Harrah's, Mandalay and Boyd Gaming Corp. -- at least until the legislative session ends next month, analysts say.

Stocks were nicked Wednesday as analysts forecasted lower earnings for companies under the tax scenario. Harrah's shares fell more than 3 percent, Boyd dropped more than 6 percent and Mandalay declined more than 2 percent. Investors cut slot maker International Game Technology -- which has installed linked jackpot games in Illinois -- by about 1 percent.

Harrah's owns casinos in Joliet and Metropolis, Boyd operates the Par-A-Dice casino in East Peoria and Mandalay has a 50 percent stake in the Grand Victoria in Elgin.

Last year's tax increase contributed to a 4.7 percent decline in revenue, a 24 percent decline in operating income and a 20 percent drop in cash flow at Harrah's Chicago-area properties in the fourth quarter compared to a year earlier, the company said.

The company's 12 owned properties in the Midwest and South generated $503 million in total revenues in the fourth quarter.

"We would tend to think that such a bold proposal from a rookie governor would be a low probability event and would generate as much, if not more, backlash from the industry as did a similar proposal by Governor McGreevey in New Jersey in February," Lehman Brothers analyst Joyce Minor wrote in a research note to investors Thursday.

The New Jersey governor in February proposed increasing casino taxes from 8 to 10 percent as well as taxing casino complementaries to gamblers at 7 percent, angering the entrenched casino industry in that state.

McGreevey appears to be backing off from his position, saying he would remove another provision of the plan that would add video slot machines at the state's racetracks that could compete with the state's major resorts, Minor said.

Thompson said Harrah's is "optimistic" that the Illinois proposal won't pass.

"It's not something that makes sense for the state," he said. "It will result in further deterioration of revenues."

Some experts say the outcome is too difficult to handicap. Illinois has a weaker casino lobby than Nevada and New Jersey and, like many other states, faces a gaping budget deficit that is causing lawmakers to consider options besides unpopular general tax hikes and budget cuts.

"Given what an inhospitable business environment Illinois proved to be last year, we believe that gaming stocks that could be impacted by this proposal will not be able to rest easy until the Illinois session ends on May 23," UBS Warburg analyst Robin Farley wrote in a note to investors Thursday. "It may not be useful to assign probabilities to Illinois state politics."