Proposal to raise slot fees gains steam, despite casino resistance

By Liz Benston

Saturday, Jan. 8, 2011 | 2 a.m.

A long-running legislative proposal to increase slot machine fees is gaining steam as Nevada deals with a budget deficit of billions of dollars and a gubernatorial mandate to avoid increasing taxes.

Predictably, some casino interests oppose the fee increases, calling them taxes by another name and a shortsighted cash grab that doesn’t fix the underlying problem of a tax system overly reliant on a single industry.

The issue is raising a philosophical debate about whether those who regulate the state’s chief industry should be entirely funded by fees borne by the companies they oversee.

Would funding the budget entirely with fees make the industry’s watchdog more dependent on the fortunes of the gaming industry and thus, hurt its independence?

Will it guarantee robust funds for a regulatory function crucial to the state, assuring that regulators stay ahead of the industry’s growth and complexity?

Some say the plan could improve the state’s regulatory system, although others fear the opposite. Meanwhile, the clock is ticking on a plan to fix the budget.

Today, less than 40 percent of the operating budget for the state Gaming Control Board comes from fees regulators charge the industry for key tasks such as background investigations for casino licenses and vetting software for slot machines and other games of chance. The rest comes from the state’s general fund. A legislative proposal to raise the price of operating a slot machine by thousands of dollars, or hundreds of thousands, for casinos and other businesses would entirely fund the regulatory agencies with industry fees.

At the Legislature’s request, the Control Board last year came up with alternatives to raise an additional $29 million in annual fees to cover the agency’s operations in fiscal year 2012 and beyond.

One proposal would increase slot fees for casinos from $250 per machine per year to $410 and a separate quarterly fee per machine from $20 to $160. Other plans include graduated, per-machine fee increases based on the number of slots in operation and the addition of new, flat fees for operating slots.

In its analysis, the Control Board said the slot fee increases were workable because they would bring Nevada’s slot fees more in line with other states. Those proposed slot fees could be lowered, though, if the board also tacked on a couple of new ones, such as quarterly and annual fees for each poker table in operation and a processing fee for slots shipped out of state “commensurate with the time spent by board staff to inspect and track the shipments.”

Unspoken in the analysis was the reality that taxes are often passed on to consumers by higher prices. That could be done, as it long has been in the ordinary course of business, by replacing slots with “higher hold” machines that keep a greater percentage of wagers over time.

For Nevada’s largest casino operator and employer, MGM Resorts International, the fee discussion is indicative of a big-picture problem: a lopsided and ailing system that leans on gaming when times are tough instead of leveling the tax burden more broadly on the business community.

“The industry we’ve seen these last couple of years isn’t a cash machine that’s impervious to economic changes,” MGM Resorts spokesman Alan Feldman said. “All these tax increases are going to be coming off the bottom line, which means less money for reinvestment.”

That’s bad for an industry facing stiffer competition from other entertainment options in the downturn, he said.

The industry pays the cost of regulation — along with the biggest chunk of services offered by the state — with taxes on gambling revenue, he added.

Legislators involved in the proposal couldn’t be reached for comment.

The Control Board collected $631 million in gaming revenue taxes in fiscal year 2010, down 4 percent from the previous fiscal year. Combined with other taxes and fees, assessments on gaming account for about half of the state’s general fund.

Control Board Chairman Mark Lipparelli declined to comment on the legislative proposal. The agency will hold public workshops to collect and forward feedback to the Legislature but won’t take a position on the plan, he said.

Former Control Board member Randall Sayre, replaced this year by an appointee of Gov. Brian Sandoval, doesn’t like it, though.

Fully funding the board through fees removes any incentive for government to become more efficient and productive, he said.

“I think it’s a problematic road to go down where the agency has the ability to assess fees to meet budgetary needs,” Sayre said.

There’s a false perception that the board issues fines to get money rather than to punish lawbreakers and deter bad behavior, he said. Sayre spearheaded the regulatory crackdown on illegal drugs and prostitution at casino nightclubs the past couple of years, which recently resulted in a $650,000 fine against the Hard Rock Hotel for not stopping the sale of drugs to customers, among other infractions.

Increasing slot fees will make an already expensive industry even more difficult for newcomers to penetrate, decreasing investment and competition, he added.

Bill Eadington, director of UNR’s Institute for the Study of Gambling and Commercial Gaming, said there’s logic to having the board fund its entire budget from fees — although increasing slot fees may not be the way to go.

Removing its operating budget from the vagaries of state financing and ongoing competition for limited funds “might be a good thing if you take the position that regulators have a critical, apolitical role as the protectors of the underlying integrity of the industry,” Eadington said.

“The gaming industry is still by far the most important industry from a fiscal and economic perspective — and it’s still a controversial industry that needs protections.”

The fee proposal is probably a quick fix to a bigger problem rather than deep thinking about the state’s regulatory role, he said.

“My suspicion is they’re desperate for revenue, and this is a way to pick up an extra few million” Eadington said.

Ideally, services performed by the Control Board would not be priced either too high or too low and therefore subsidized. It’s difficult to pinpoint what such services should cost to fully fund regulation, he said.

For example, the board charges $135 an hour for background investigations on casino licenses — well below what industry attorneys generally charge.

Others wonder whether charging fees to fund their budget will tie regulators more closely to the companies they regulate, making oversight less objective.

“It’s the theory of regulatory capture,” said one regulatory source, who declined to be named. “You could have a situation where, if the industry wants (slot regulation) to move faster they could come to the Legislature and say, we want to buy equipment for the board.”

Before changing the system, Sayre recommends that legislators streamline the regulatory process. Substituting administrative approval for state regulators’ approval for routine activities would save both regulators and the industry time and money without touching key oversight functions such as initial background investigations and ongoing undercover operations for license holders, Sayre said. Some activities requiring a lower standard for approval might include subsequent licenses for “restricted” gaming locations such as poker bars, new licenses for executives who move from one casino to another within the same company and approvals for public company debt and equity offerings.

“Anytime you can reduce the cost, timing and day-to-day friction in operations you’re going to produce an environment that is going to attract outside investment,” he said.