Click below to view "The Effect of a Gaming Tax Increase on the State of Iowa," an independent study which explores the implications of altering the current tax structure of Iowa's commercial casinos. For ease in download, the report has been divided into several sections.
This study was prepared by RSM McGladrey, with analysis from two principals of the Strategic Economics Group: Harvey Siegelman, Iowa's former chief economist, and Dr. Dan Otto, Professor of Economics at Iowa State University.
The Iowa Gaming Association commissioned this study to help legislators, the media and the public understand the significant factors of a casino's tax structure so that well-informed decisions can be made based.
Section 1: Introduction/Executive Summary
Section 2: History of Gaming in the State of Iowa
Section 3: Current Situation
Section 4: Gaming Taxes in Iowa and Other States
Section 5: Effect of Raising the Gaming Tax on Iowa Casinos
Section 6: The Effect of a Gaming Tax Increase on the State of Iowa
Section 7: Conclusions
Section 8: Representations and Warranties
Section 9: Appendix A. Input-Output Modeling Basics
Fast Facts
- Iowa's riverboat and racetrack casinos are taxed differently than other corporations and businesses in Iowa. Currently, gaming taxes of up to 20% are paid to the state based on adjusted gross receipts, which means this is paid right off the top before any deductions for labor, lights or other operating expenses. A number of other taxes, fees and charges are levied at the state and local level to which other businesses are not subject. In addition, traditional corporate income taxes are charged on this revenue after expenses for Iowa casinos run by corporations.
- Though casinos don't charge an admission fee; they do pay an admission or similar tax to both the local & state governments. In addition they make contributions to their non-profit license holder partners for charitable giving and pay several additional fees causing the current effective tax rate to already exceed 25%. On top of that, fees such as rent and federal income taxes escalate each casino's expenses.
- The current tax structure and required fees and payments make Iowa's effective tax rate on casinos 94.75% (as a percentage of pre-tax income). By contrast a non-casino corporation with similar pre-tax income would have an effective rate of only 40.70%
- An increase in the tax rate from 20% to 25% actually amounts to a 25% tax increase on casinos. The effect of this 25% increase would have an overall negative effect on net income, equity and cash flow. At this rate, the study projects that a 25% gaming tax increase would not allow some casinos to maintain a positive cash flow.
- The effect of a 25% gaming tax increase would also have a substantial effect on net income (loss). The average net income for Iowa casinos was $4.40 million in 2001. This would decrease to an average net income of $.3 million in 2006 under a 25% tax increase according to projections. In fact, if this rate had been in effect in 2001 it would have resulted in a 50% decrease in net income for some Iowa casinos.
- Gaming companies would be faced with a substantially reduced return on original investment under a 25% tax increase eventually pushing them below industry norms. Casino operators faced with this dilemma may be forced to reduce their scope of investment, transfer investment to other states, and could eventually cease operations in Iowa.
- According to the study, a gaming tax increase will decrease the amount of money available for investment and marketing. Over time, this reduction will inevitably cause Iowa's casinos to become less competitive with casinos in other states and other forms of entertainment. This will cause gaming revenues to stagnate or decline, which will reduce the amount of gaming taxes paid to the state of Iowa.
Executive Summary
The effect of a gaming tax increase on the State of Iowa would likely have a significant detrimental effect on many different groups including the State of Iowa, the local counties and cities where the casinos are located, the non-profit gaming license holders, and the casino operators. It would also have significant effects on employment levels in the communities where gaming occurs, other vendors in the State and on economic development in the State. Direct and Secondary Economic Effects Iowa's casinos paid approximately $200 million in gaming taxes to the State of Iowa and their local counties and cities for the fiscal year ended June 30, 2002. These taxes are used to supplement the General Fund, fund the Vision Iowa program and pay for infrastructure and school programs.
The casinos pay approximately $7.5 million in property taxes to their local communities, and collect $6.3 million and $1.4 million in sales and use taxes and lodging taxes, respectively. The Iowa casinos employ almost 10,000 individuals. The Iowa casinos as a whole are the fourth largest employer in the State. Only Hy-Vee, Rockwell Collins and the Principal Financial Group employ more individuals. These casino employees are paid approximately $180 million in salaries and wages, and receive another $37 million in benefits. In 2001, Iowa's casinos purchased $240.2 million in goods and services from other Iowa companies. They contributed $40 million dollars to non-profit organizations in their communities. In addition, they paid $9.5 million in attendance fees to their local communities, and paid $16.8 million in rent to local governmental entities. The Iowa casinos have secondary effects on the Iowa economy. The $915.6 million in gross gaming revenues are linked to $453.8 million of additional spending in the rest of the Iowa economy. Overall, an estimated $1.4 billion of gross sales or output in the economy is directly or indirectly related to the Iowa casino industry. This includes 17,811 jobs, $367.6 million in salaries and wages and $815.0 million of value added to the Iowa economy.
Gaming Tax Structure
Iowa's casinos pay to the State of Iowa a 5% gaming tax on the first $1 million of gross gaming revenue, 10% on the next $2 million and 20% on gross gaming revenues over $3 million. In addition to these taxes, the casinos pay additional taxes and fees to Not-For-Profit License holders and city governments. The casinos also fund their regulatory (Iowa Racing and Gaming Commission) and enforcement (Department of Criminal Investigation) costs. These additional taxes and fees put the Iowa gaming effective tax rate at greater than 25%. This puts Iowa's gaming tax rates somewhere in the upper end of those charged by other states. A further illustration will show that the amount of taxes and statutory payments paid by Iowa's casinos is extraordinarily high compared to other industries. By adding up all the statutory payments required of Iowa's casinos, the effective tax rate as a percentage of pre-tax income is actually 94.75%. Statutory payments are defined as state and federal income taxes, gaming taxes, contributions to the non-profit license holder, admission fees, subjective rent payments, and other required payments to the local counties and cities. By contrast, a non-casino corporation with similar pre-tax income would have an effective tax rate of only 40.70%. Iowa casinos have shown a history of re-investing profits into new development including new hotels, convention centers, restaurants, and other amenities. A gaming tax increase will decrease the amount of money that is available for investment and marketing. Over time, this reduction in investment and marketing dollars will inevitably cause Iowa's casinos to become less competitive with casinos in other states and other forms of entertainment. This will cause gaming revenues to stagnate or decline, which will reduce the amount of gaming taxes paid to the State of Iowa. In addition, a gaming tax increase will certainly cause the casinos to reduce the number of employees at their casinos as certain services will be reduced or eliminated. Fewer employees and increased unemployment will, to some extent, offset some of the additional gaming taxes the state may receive. Iowa casino operators have other investment options if the Iowa gaming tax structure changes significantly. Of the 11 eleven states that offer casino style gaming, six have no limit on the number of gaming licenses they will issue.
Due to state budget shortfalls, many other states are considering or have considered adding or expanding gaming to raise tax revenues. Arizona, Kentucky, Indiana, Maryland, Minnesota, Missouri, Ohio, Kansas, Florida, Pennsylvania, Rhode Island, Massachusetts, Nebraska and Maine are all considering expanded gaming. All of these jurisdictions have the potential impact of attracting investment dollars away from the Iowa operations. Another issue for Iowa's casino operators is that they compete within their own corporations for investment dollars. As four\ of the casino operators have operations in other states, they may chose to invest in a casino in a state that affords them a better return on investment than an Iowa casino. Effect on Iowa's Casinos If the tax rate were increased from 20% to 25%, this increase would amount to a 25% increase in the rate. Assuming a 25% gaming tax increase, no changes in revenue, only inflationary increases in expenses and replacement of current property and equipment, the average casino in competitive marketplaces is projected to see significant decreases in net income, equity and cash flow. Based on 2001 historical information, the increase would have decreased the net income of the casinos by greater than 50%. Sustained reduction in net profits will have a long-term negative effect for the gaming industry in Iowa and ultimately the State of Iowa. The
Effect on the State of Iowa
Iowa casinos, faced with a declining return on investment, may decide to downscale their operations in the State of Iowa and focus on development in other states. If casinos downscale their operations in the State, this will have both direct and secondary effects on the Iowa economy. Over time, this reduction in investment and marketing dollars will inevitably cause Iowa's casinos to become less competitive with casinos in other states and other forms of entertainment. This will cause gaming revenues to stagnate or decline. It is also possible that at least one casino, depending on the size of a gaming tax increase, could find operations unprofitable and close. If one to three casinos close in Iowa, the tax decrease could range from $10.4 million to $58.6 million (net of the gaming tax increase on the other casinos). Similar effects will be felt in salaries and wages, employment and purchases from Iowa suppliers. The decrease in salaries and wages could range from $22.2 million to $66.6 million. The losses in jobs could range from 900 to 2,700. Purchases from Iowa casinos could also see reductions ranging from $13.3 million to $50.0 million. Finally, contributions to the non-profit license holders and other payments to the local communities will also see a decrease. Losing one to three casinos could decrease these payments anywhere from $3.6 million to $10.8 million. In addition to the direct effects of losing casinos, the secondary effects will also ripple throughout the Iowa economy. On average, the total secondary effect of losing a casino would be 1,374 additional jobs, $28.6 million in salaries and wages, $67.8 million in value added, and $112.2 million of sales in the Iowa economy. If up to three casinos were closed, this would equate to 4,123 jobs, $86.0 million in salaries and wages, $203.3 million in value added, and $336.5 million in sales in the Iowa economy.
Conclusion
The casino industry has become an important component of the Iowa economy. It provides approximately 10,000 jobs, pays approximately $180 million in salaries and wages, and contributes approximately $200 million in gaming taxes to the State. It also provides many secondary benefits to the rest of the Iowa economy. Assuming no other changes to their operations, a 25% gaming tax increase would have significant negative impacts on the casinos. At a 25% gaming tax increase, the casinos' projected average cash flow will be negative. Equity levels and median return on beginning invested capital will deteriorate and average projected earnings will decrease. Because of these decreases, the casino operators will likely reduce the scope of their investments or potentially be forced to close some of their locations. This would have a significant detrimental effect on many different groups including the State of Iowa, the local counties and cities where the casinos are located, the non-profit gaming license holders, and the casino operators. It would also have significant effects on employment levels in the communities where gaming occurs, other vendors in the State and on economic development in the State.
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