Experts say Nevada gaming tax hike can work

Oct 30, 2007 5:09 AM

In Nevada, "tax hike" is a dirty word — two words, actually.

And with recent discussions about raising the state gaming tax, casinos have started laying the foundation of a campaign designed to nip any such notion in the bud.

However, several economists say a proposed increase in the state tax on casino revenues would have a minor impact on casino companies and would not likely affect future investment levels.

The Nevada State Education Association has put forth a ballot initiative that would add another 3 percentage points to the tax on gambling revenues collected by Nevada’s biggest casinos, those that gross more than $1 million a month.

It would raise the taxes for such companies to 9.75 percent, and generate more than $200 million a year to fund the state’s schools.

Economists say demand for Las Vegas’ key consumer good, a feeling that gives visitors a mysterious sense of freedom and glamour, is a unique and powerful attraction that keeps tourists coming in larger numbers every year.

Economists call this phenomenon "inelasticity of demand." As with a life-saving drug sold only at a single pharmacy, price appears to have little effect on the demand for the Vegas experience, especially for the fairly well-off.

If the tax is increased, the economists argued casino resorts should have little problem passing on the cost to the consumer.

James Mak is a University of Hawaii tourism economist who’s written a college textbook on the subject. He studied room occupancy and money spent by tourists in Hawaii after the state levied its first 5 cent room tax in the mid-1980s. The tax had no effect on either, he found.

He said he would expect the same in Las Vegas.

"You have a fairly irreplaceable product. So in that sense, I can’t see a measurable impact on the bottom line," Mak said.

Keith Schwer, director of the University of Nevada, Las Vegas’ Center for Business and Economic Research, said the tax might hurt more gambling-dependent downtown operators, but otherwise agreed with Mak’s sentiment.

Schwer said, however, taxing one industry was not a good idea.

"The idea that any one industry is an ATM machine, that’s not good government," Schwer said.

Adding 3 percentage points to the gaming tax would amount to a 44 percent increase — from 6.75 percent to 9.75 percent. But Nevada operators would still be left with one of the lowest gaming taxes in the nation while facing no corporate income tax, unlike in competing states such as New Jersey.

Other states collect higher gaming taxes but, in exchange, limit the number of gaming licenses — and competition.

Gambling revenue also accounts for only about 40 percent of Strip resorts’ overall profits, as business from rooms, restaurants, bars and showrooms grows in importance.

Wall Street was less sanguine about the tax increase.

For casino operators, a 3 percentage point increase in gaming taxes would roughly yield an 11 percent decline in operating profit, according to Deutsche Bank, one of the casino industry’s top lenders.

"The current development pipeline, which would create more than 124,000 jobs and countless billions in economic benefits, could be cut significantly as future projects won’t pencil given that returns on investment are already quite thin," said Bill Lerner, a stock analyst with Deutsche Bank.

"Further, existing casinos ... would likely have to cut jobs, resulting in diminished service levels, which longer-term could turn visitors away."