Official: Tax hike wouldn’t reduce value of license

Wednesday, April 16, 2003 | 11:35 a.m.

The expected auction of a casino license in Illinois will still attract a great deal of interest from the casino industry nationwide even if a proposed gaming tax increase in that state goes into effect, a government staffer said.

Last Wednesday, Illinois Gov. Rod Blagojevich proposed to boost casino revenue taxes that are already the nation's highest following a hike last year. The new plan would levy an additional 20 percent "windfall tax" on revenue of more than $250 million per year, raising the tax rate on that incremental revenue from 50 percent to 70 percent for the state's biggest casinos.

The plan also would raise the tiered tax rate for the rest of the state's riverboat casinos. Casinos would be taxed as follows:

Boats with gaming revenue up to $25 million per year already are taxed at 15 percent. But other tiers are now lower than is proposed, with revenue between $25 million and $50 million now taxed at 22.5 percent. Revenue from $50 million to $75 million is taxed at 27.5 percent. Revenue from $75 million to $100 million is taxed at 32.5 percent. Revenue between $100 million and $150 million is taxed at 37.5 percent. Revenue between $150 million and $200 million is taxed at 45 percent and revenue of more than $200 million is taxed at 50 percent.

The new proposal would also raise the Illinois casino admissions tax to $5 from $3.

Illinois now allows nine riverboat casinos, with a 10th casino license authorized years ago tied up in bankruptcy court. State regulators expect to begin the process of auctioning off the license over the next year or so. Blagojevich said last week that the state expects to reap at least $350 million from the sale of the license.

"We believe that there will be a great deal of interest in that license," said Tom Schafer, a spokesman for the Governor. "There has been for some time and we think that will continue."

Some of the nation's largest casino companies have expressed interest in the buying the license, including Las Vegas operators MGM MIRAGE, Park Place Entertainment Corp. and Harrah's Entertainment Inc. Donald Trump is eyeing the opportunity and the Chicago Sun-Times reported Mandalay Resort Group is also interested in the license.

The license could open the door to a permanent casino in the Chicago area.

Three major casinos are in Detroit, another Midwest metropolis that has authorized casinos in recent years. MGM MIRAGE executives credit the company's MGM Grand Detroit for pulling in what is probably the company's highest return on investment.

The limited number of available licenses has created a virtual monopoly for casino operators in Illinois, allowing them to reap spectacular profits, Blagojevich said last week.

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

The state's gambling boats won more than $1.8 billion from gamblers last year, a 2.7 percent increase from the previous year, according to a recent annual report released by the Illinois Gaming Board. State taxes on that revenue grew 24.2 percent during that period, to $555.7 million.

Casino operators and analysts blasted the tax plan, saying it would make the 10th license essentially "worthless" and hurt business in the state.

Still, major casino operators have stopped short of saying they wouldn't bid on the license should the tax plan pass.

"It's clearly an attractive market," said Park Place Entertainment Corp. spokesman Robert Stewart. Park Place had been critical of the manner in which the license was to be awarded even before gaming taxes increased last year. That increase and the recent tax proposal have raised further concerns about doing business in Illinois, Stewart said.

"It's hard for us to make an evaluation until all those issues are final," he said.

New Jersey casino mogul Trump said Monday he has been consistently bullish on the Chicago area, where he is building a residential, retail and office complex. Through his publicly traded Trump Hotels & Casino Resorts Inc., Trump also owns the nearby Trump Casino Hotel Lake Michigan in Gary, Ind.

"We are very high on the market," Trump said. "But that is a very high tax rate."

MGM MIRAGE and Harrah's Entertainment Inc. had similar responses last week.

Boyd Gaming Corp. has never expressed an interest in the license, even before last year's tax increase, spokesman Rob Stillwell said. Representatives with Mandalay Resort Group could not be reached by press time.

Industry supporters say the plan faces stiff opposition and is unlikely to pass.

"It's really a trial balloon," said casino industry analyst Joe Greff of Fulcrum Global Partners. Lawmakers also support different ways to generate more tax revenue without cutting into casino profits so drastically, such as increasing the number of slot machines each boat is allowed, he said.

The 70 percent tax rate would likely only affect four riverboat casinos operated separately by Mandalay Resort Group, Harrah's, Penn National Gaming Inc. and Argosy Gaming Co., analysts say. Mandalay's 50 percent-owned Grand Victoria casino in Elgin yielded about $406 million in gambling revenue last year, while Harrah's Joliet yielded about $315 million in revenue.

Incremental tax increases planned for the rest of the state's gambling boats could also reverberate throughout the state, hurting employees and suppliers, Greff said. "If you hurt the profitability of the operators, you hurt the stakeholders involved in the casinos. The operators just can't absorb these profit hits," he said.

Some analysts estimate that additional taxes could cost from about $55 million to more than $60 million against Mandalay's Grand Victoria's expected $400 million or so in revenue in 2004. The increases could cost from about $45 million to $50 million for Harrah's, whose Joliet and Metropolis casinos are expected to yield about $300 million next year. On an earnings per share basis, the tax hikes could shave more than 20 cents each from analysts' 2004 profit estimates, now averaged at $3.27 for Mandalay and $2.66 for Harrah's, analysts say.

Increased taxes for Boyd's Par-A-Dice casino in East Peoria could cut 4 cents to 13 cents from Boyd's $1.43 earnings per share estimate, some analysts add.

Operators have been able to offset some of last year's tax increase by reducing labor expenses, cutting back on marketing and dropping restaurant hours, Deutsche Bank analyst Marc Falcone said.

"While we believe there is some room to trim costs, there probably is not that much 'fat' that can be trimmed near-term without significantly impacting the guest experience," Falcone wrote in a research note to investors last week.

With the state facing its largest-ever budget deficit of $5 billion, the governor has little choice, Shafer said.

"There's no easy answer to that," he said. "The governor has spending priorities such as safety, education and health care ... and has already identified cost cuts of $1.5 billion at the state government level."

Blagojevich was elected last year on the promise that he wouldn't increase sales taxes or income taxes, Shafer said.

"There was no discussion that 'We don't think you should increase taxes on gambling boats that raise the largest amount of money, ' " he said.

The casino license could be up for grabs within the next 15 months, he said.

Emerald Casinos Inc. held the state's 10th casino license for a closed riverboat in East Dubuque, Ill., and aimed to shift it to a new casino in the Chicago suburb of Rosemont. But Illinois regulators denied the request, saying Emerald owners lied to them and citing concerns over alleged links between company shareholders and organized crime figures.

The Illinois Gaming Board intervened after reported negotiations by Emerald to sell the license to MGM MIRAGE, calling for an open bidding process that will be monitored by the board.