Ohio casino construction stops for the two projects owned by Rock Ohio Caesars

The developer of two Ohio casinos has stopped construction due to the uncertainly surround a proposal by Governor John Kasich to tax the casinos extra.

Rock Ohio Caesars, a partnership between Cleveland Cavaliers owner Dan Gilbert and Caesars Entertainment, last week announced that construction was halting on Cleveland’s $350 million and Cincinnati’s $400 million casinos. The company has already spent $200 million on the two casinos. Gilbert said construction will resume once it becomes known how much tax the casinos will be charged and a “reliable state economic environment is in place."

Matt Cullen president and COO of Rock Gaming LLC, Gilbert’s company, commented. We just thought the prudent thing to do as a developer and investor was to stand down for now." Work will continue on planning issues associated with the casinos, Cullen said.

Although the 33 percent tax rate for the four casinos was approved when voters passed Issue 3, a constitutional amendment, in a statewide election in 2009, Kasich has said that the citizens of Ohio got a bad deal. He is unhappy that much of the taxes generated by the casinos will go to local government, and wants a much larger bite to go to the state treasury.

Current distribution of the taxes would provide the lion’s share, 51 percent to the state’s 88 counties, with 34 percent going to school districts, with another 5 percent going to the host cities. The amendment forbids special taxes or fees being raised on casinos: “no other casino gaming-related state or local fees, taxes or other charges.”

The taxes as written in the amendment would generate $650 million a year, making Ohio the fourth largest in terms of gaming tax revenue, more than New Jersey, for example, and only slightly less than Nevada.

Kasich has found a way to get a larger cut of the pie through a proposal that would calculate the commercial activity tax (CAT) using a different formula than is normally used to calculate gaming taxes. Maine is the one exception in the U.S. The tax is calculated at 26 cents for every $100 of commercial activity. However, under the new proposal instead of taxing the gross revenue, the total amount gambled would be the basis for the tax. One gaming industry expert compared this to taxing a real estate agent on the price of the house that he sells, instead of his commission.

The proposal has passed the House, but is still under discussion in the Senate.

Ohio’s casino developers calculate that the difference means tens of millions of dollars a year. They add that they are not sure how they could calculate the amount of money bet since they don’t normally keep track of that number.

Higher taxes don’t necessarily mean more revenues according to David Katz, a gambling analyst with Jefferies & Co. "The higher the rate, the harder it is to build a business of scale,” he said last week.

Another gaming expert commented, "Higher taxes affect how much labor you hire, and there's a flow through the whole project. The casinos are not going to look bad from the outside, but the finishing touches won't be the same quality."

Some industry analysts blame high casino tax rates in Illinois, which are capped at 50 percent, for the modest size of its casinos. Whereas Mississippi and Louisiana, where taxes max out at around 8 percent, have some of the larger payrolls in the business, outside of Nevada and New Jersey.

Depending on the methodology, the CAT could generate between $5.2 million and $50 million.

Kasich has also said that he wants to get larger up-front payments in addition to the $50 million per casino that each operator will pay. "You like to ask people to step up and help us in tough times," he said last month.

Both Rock Ohio Caesars and Penn National Gaming Inc., which will be operating casinos in Toledo and Columbus, say that this will create an uncertain economic climate and will affect how much they invest in the facilities.

Penn National Gaming Inc. may be planning something a little more confrontational than a work stoppage. According to Bill Lerner of Union Gaming Group in Las Vegas, “If the budget passes the Senate in its current form, it will likely lead to lawsuits from casino companies, particularly Penn National Gaming, who has gone on record saying that the tax hike is discriminatory and unconstitutional.”

Eric Schippers, Penn National’s spokesman, added, “If this provision is allowed to remain in the budget, it’s likely we'll be forced to reevaluate the scope of our planned investment, which for Penn National, has already exceeded $100 million for our casinos in Columbus and Toledo. In addition, we may be left with no choice but to turn to the courts to help resolve this matter.”

Legal scholar Steve Steinglass, author of a book on the Ohio Constitution commented last week, "I don't see how they change the tax rate or impose fees short of another constitutional amendment."

Penn National is already in court regarding its Columbus casino. It is suing the city of Columbus and Franklin County to force the city to sell it sewer and water service without forcing the land that the casino will be built on to annex to the city, giving the city much in taxes.

Penn is the subject of a lawsuit by Dispatch Printing, owners of the Columbus Dispatch, which supported the constitutional amendment that allowed Penn National to move its casino site, which it did when city and business leaders opposed the original site chosen in the Arena District. Dispatch alleges that it supported the amendment with the understanding that Penn would agree to the annexation.

Penn has counter-sued, claiming that the printing company interfered with its efforts to build a casino by purchasing land adjacent to it through a subsidiary in order to be able to object to the county issuing Penn and zoning certificate, which it needs to being construction. The lawsuit cites "unfair competition and deceptive trade practices.”

Civic leaders in Cincinnati and Cleveland reacted with dismay to the news of the shutdown. "This is another example of why saying Gov. Kasich and 'economic development' in the same sentence is an oxymoron, especially in regard to Cincinnati," said a city councilwoman from that city last week, according to the Cincinnati Enquirer.

Cincinnati Mayor Mark Mallory pleaded with the governor to work out a compromise. "There are people who expect to be on that job site making money right now. And they can't do it because the governor is trying to remake the deal. The governor needs to get this taken care of as soon as possible,” he said last week.

However, this is issue definitely coalesces around party lines, since the House and the governor are both Republicans. Hamilton County Commission President Greg Hartmann, also a Republican, said he supported Kasich’s efforts “for making sure they get it right. Because once the rules are in place, there is no changing them. The governor does have a job to do and he is making sure things are done properly."

Fellow Commissioner Todd Portune, a Democrat, disagreed. "It is a crime that Ohio's self-proclaimed 'pro-business' governor is so out of touch with the business needs of the state and the revenue needs of local governments that he would take action that threatens the opening of casinos in Cleveland and Cincinnati and will only worsen our already bleak governmental budgets," he said.

In Cleveland the halt of construction means that workers will put down their tools renovating the Higbee building, which was to be a temporary casino until the permanent structure could be built. Four floors have been demolished so far.

Cleveland Mayor Frank Jackson commented, "This is another action by the state that is having a negative impact on Cleveland. It is my hope that the state will resolve the outstanding issues quickly."

In Cincinnati the move was preceded by a cancellation of steel orders for the Horseshoe Casino Cincinnati.

Last week a spokesman for the governor commented that he had hired two consultants to ensure that the taxpayers get a fair deal. "The governor doesn't oppose gambling and wants the casinos to be successful," he said.

In a related development, former members of the Ohio Casino Control Commission, who spent only a few weeks on the commission before being booted by incoming governor Kasich, are asking the Ohio Ethics Commission if they are still bound by the ethical rules that would prevent them from being lobbyists for “casino-related “ clients for two years after leaving office.

Former Governor Ted Strickland appointed the seven-member panel before he was defeated for reelection by Kasich. Kasich asked that the Senate reject the nominees.

Charles R. "Rocky" Saxbe and Jerry Chabler, former members of the commission, submitted the request for an opinion.

Paul Nick, executive director of the ethics commission, said that his group would issue an opinion next month.

By Staff