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December 22, 2014

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High tax rates won’t keep Wynn out of Pennsylvania

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After Pennsylvania lawmakers legalized slot machines in one of the nation’s most populous states in 2004, casino boss Steve Wynn said the Keystone State’s high tax rate on gambling would keep him from setting up shop there.

“If Pennsylvania decided to give the tourist industry in the state a shot in the arm to build nice destination resorts, I would love to be in Pennsylvania. But right now, it’s not where someone can justify a large investment,” Wynn told The Philadelphia Inquirer in 2005.

On Tuesday, however, Wynn Resorts announced an agreement to manage one of two major casinos scheduled to open in Philadelphia, which would become the largest metropolitan city in the nation with Las Vegas-style gambling.

In Nevada, Wynn and his fellow casino owners pay a tax of 6.75 percent on the money they win from gamblers.

The Philadelphia casino that Wynn will manage will pay at least 55 percent in taxes on its slot machine winnings and 16 percent on its winnings from table games.

Although the Pennsylvania tax on the state’s newly legalized table games is still more than twice what Nevada charges, it helps explain Wynn’s about-face, analysts say.

Most states tax all gambling revenue at the same rate. But industry lobbyists have argued that because table games generally have lower profit margins than slots — and because table games can lure wealthier visitors who appreciate the mystique of gambling tables and view slots as a low-rent activity — they should be taxed less as a result.

Casino operators successfully argued that Pennsylvania casinos needed table games — and the lower tax rate on them — to stay competitive and not hamper additional investment opportunities.

The result is the state has netted an operator known for developing some of the industry’s most desirable resorts.

The relatively low tax rate for table games may end up making tables a more profitable business than slots in Pennsylvania, says Joe Weinert, an industry consultant with Spectrum Gaming in New Jersey.

But here’s the kicker: Pennsylvania’s casinos operate some of the nation’s most profitable slot machines.

“A lot of executives look at high tax markets and pooh-pooh them, but then they change their minds after seeing how some of these places are turning over some serious cash,” Weinert says.

Las Vegas and Atlantic City have suffered the worst in the recession, but smaller East Coast gambling markets that limit competition by issuing or allowing a small number of casino licenses are proving that “there’s a lot of money to be made” in the industry, Weinert notes.

Wynn’s prior criticism notwithstanding, casino operators flocked to compete for one of just 14 casino licenses in Pennsylvania. The limited number of licenses was a crucial justification for the relatively high tax rate.

Limited competition is one reason why each of Pennsylvania’s nearly 25,000 slot machines, according to Spectrum Gaming, won an average of $295 per day. That compares with less than $100 per slot machine in Las Vegas, which will issue a casino license to anyone who passes a lengthy background check, builds in an approved casino zone and has a few million dollars for the expensive licensing and development process.

By contrast, Maryland and New York, where casinos are expected to pay taxes of more than 60 percent on gambling revenue, have authorized only a few slot machine sites.

Still, high tax rates in other states inevitably raise the question on the minds of many Nevadans: Can’t companies that pay higher tax rates elsewhere afford to pay higher taxes in Nevada?

It’s a touchy question that elicits a rapid-fire answer from the gaming industry: Tax us more and you will have less investment, which leads to fewer jobs, lower-rent joints and, as a result, less tourism and lower tax revenue in the long run. Without offering the nation’s lowest gaming tax rate, Nevada would not have cultivated the elaborate offerings and megaresorts for which the Las Vegas Strip is known, the casino companies contend.

They point out that in the states with the highest taxes on gambling, the best casinos rise only to the level of some of the bigger suburban casinos in Las Vegas. They aren’t as big or luxurious as the Strip’s top-tier properties.

The Strip needs to be the top tier because it has to be an international, mass-market attraction. The Strip must draw visitors from far and wide to compete with smaller casinos closer to home.

The Philadelphia Park racetrack, which built a “temporary” slot parlor into its grandstand, has an easier job: It is close to a bigger population center and has little immediate competition.

And it’s raking in money. Slot machines at the Philadelphia Park casino generated revenue of $446 million from February 2009 to January 2010, according to Spectrum Gaming. In the past year, each of the track’s slot machines won an average of $416 per day, among the nation’s highest rates. That compares with a daily average of $243 for the East Coast.

“I don’t care what kind of property you like to operate or what tax environment you want to operate in,” Weinert says. “You can’t ignore that kind of money.”

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