Gaming's perfect storm

The funding of schools and programs for schoolchildren rates right up there with the flag, apple pie, and motherhood. It's tough to argue that money spent on the education of our children is undesirable. However, even money earmarked for good and noble purposes can have unintended consequences that are bad. The "Save Our Schools with Additional Funding" initiative is an example of good intentions gone bad or, worse, probably not well thought out in the first place.

The initiative, a creation of the Nevada State Education Association, seeks to increase the monthly percentage fee paid by Nevada casinos in order to raise additional funds for a variety of public education purposes. The source of this funding would be "a new monthly license fee, to be collected by the Nevada Gaming Commission from certain gaming licensees, equal to 3 percent of each licensee's monthly gross gaming revenue exceeding $1,000,000."

One million dollars a month sounds like a lot of money, and a 3 percent tax on this amount of money seems relatively small, especially when it is put in the context, as done by NSEA spokesmen, of the profits earned and the compensation and benefits paid to well-known gambling executives by the big, international gaming companies. However, what the proponents of the initiative don't tell the public in is how this new tax will affect the other gaming operators, particularly those located off the Las Vegas Strip, and the communities where they do business. In fact, the initiative has potentially devastating impacts for many of Nevada's non-resort gaming operators.

If adopted, the initiative will increase the percentage fee tax on gross gaming revenues from 6.75 percent to 9.75 percent, a 44 percent increase of this tax. Based on 2006 actual revenue numbers and reasonable projections, this increase will raise an additional $335 million annually from the gaming industry. It will represent the largest single increase in gaming taxes on the gaming industry since the gross revenue tax was implemented in 1963. The monthly percentage fee is, in fact, a tax on the gross revenues of casinos, which are basically all sums received by the casino as winnings less only losses. After this tax on gross revenues is paid by the casinos, the casino must pay all of its expenses of operation and other government taxes. Stated differently, the casino doesn't receive a dollar of profit from its gross gaming revenues until all of its employees are paid, all costs of goods sold and marketing expenses are paid, mortgage and interest payments due on the casino's property are paid, all other federal, state, and local taxes are paid, and all other costs of doing business are paid. Consequently, the "Million Dollar" level on which the initiative is based is an extraordinarily low threshold upon which to base a 44 percent "off-the-top" tax increase.

The teachers' initiative does not address the impacts of this tax on the gaming industry but instead plays to the public's perception that casinos are rolling in cash. Indeed, some casinos are very profitable, but many are not. There are approximately 126 casinos operating in Nevada that meet the criteria imposed by the teachers' initiative. Of this number, approximately 61 generate greater than $50 million annually in gross gaming revenues (or $6 million per month) and 65 generate less than $50 million annually but more than $1 million monthly. The burden of paying the additional $335 million in new taxes will therefore fall on 126 taxpayers, ranging from the predominantly local owned casinos that can be found throughout the sate to the biggest resorts on the Las Vegas Strip. What's the impact of this for Northern Nevada and the rural counties?

It's difficult to determine the actual impact because gross gaming revenue numbers of particular casinos are confidential by law and not publicly available. However, it is no secret that casinos in northern Nevada and the rural counties have suffered from the competition posed by Native American gaming operations in California, Washington, and Oregon that have come on line since 1989. According to Richard Wells of Wells Gaming Research, prior to the commencement of tribal gaming operations in surrounding states, the compound annual growth rate for Washoe County casinos during the decade of the 1980s was 5.9 percent. Due to competition from tribal casinos between 1995 and 2000, the growth rate slowed to 3.5 percent per year and, with the approval of Nevada-style gaming by the California tribes in 2000, gaming revenues in Washoe County declined through 2003. Since bottoming out in 2004, the growth of gaming revenues in Washoe County has been anemic. The impact of a 44 percent increase on the primary tax of an industry suffering such historic declines in revenues, increased competition from further expansions of tribal gaming operations in California, and a looming national recession can't be good. In fact, it appears that all of the elements of the perfect storm exist for the non-resort gaming operators of the state.

The Independent Gaming Operators Coalition made a presentation to the Nevada Legislature in 2007 in support of a bill seeking tax reductions for non-resort casinos. The coalition's efforts were not successful. However, some of the information provided in support of the bill presented an eye-opening revelation into the potential impacts that the loss of such casinos would have on Northern Nevada and the rural counties. Information presented to the Legislature reflected the impact of various theoretical casino closures on local governments, as compared with comparable closures in Clark County. If, for example, the El Capitan Casino, a historic mainstay of Mineral County, closed, Clark County would have to see the closure of Bellagio, Caesar's, MGM, Mandalay, Wynn, Mirage, Venetian, Luxor, Rio, and the Flamingo Hilton before suffering a comparable impact. Similarly, the closure of the Winners Hotel & Casino in Humboldt County would equate to the closure in Las Vegas of the MGM, Mandalay, and Mirage properties.

Many of the more profitable casino operations in the state will cope with the effects of the increase propounded by the Teachers' Initiative, if approved by the voters. How this additional tax will affect their employment decisions, operations, and future expansions is another story. However, many non-resort operators will not be able to handle the extra load. If there is any doubt about the economic vulnerability of Northern Nevada's gaming industry to adverse financial impacts, give a few minutes of contemplation to the fates of the Nevada Club, Harold's Club, Horseshoe Club, the Sundowner, the Comstock Hotel and Casino, the Virginian, and the Golden Phoenix Hotel and Casino. One really must question how our communities will fare when more profitable businesses are shut down as a result of the teachers' tax increase.

A. J. "Bud" Hicks is a senior partner in the law firm of McDonald Carano Wilson LLP, and has been practicing primarily in the areas of gaming and corporate law for more than 30 years.