Gaming Tax Rates are Simple—Gaming Tax Policy is Anything But

As more jurisdictions around the U.S. adopt various forms of gaming, the challenge of setting effective tax rates remains as important as ever. However, as veteran consultant Michael Pollock (l.) notes, tax rates should be part of an overarching gaming tax policy that takes many different factors into account.

Gaming Tax Rates are Simple—Gaming Tax Policy is Anything But

Stop me if you have heard this one before.

Gaming is in an expansion mode across many states, fueled by the prospects of attracting more players, leveraging new technologies and generating more revenue for states.

While this brave new world is tantalizing, it is also tethered to an old reality that dates back to the days of 8-track tapes and bell-bottom trousers: Regardless of ideology, political party or year (make that decade), elected state lawmakers will feel pressure to pursue a high tax rate on gaming, fearing that a lower tax rate will leave them politically vulnerable to the charge of leaving money on the proverbial table. That rule is not inviolable, as there have been exceptions, but it is nonetheless very real.

Consider the experience in New Jersey, which started this half-century-old snowball in 1976 when it became only the second state to authorize legal casinos with the tantalizingly low tax rate on gross gaming revenue of only eight percent. Was New Jersey prescient by recognizing that a single-digit tax rate would attract significant capital investment? Not quite.

The author and sponsor of the 1977 New Jersey Casino Control Act was Steven Perskie, a former legislator and chair of the New Jersey Casino Control Commission who is now enshrined in the Gaming Industry Hall of Fame.

Thirteen years ago, Perskie sent me an email to address New Jersey’s “far-sighted” approach to gaming tax policy: “In researching the drafting of the bill introduced in 1976, after the referendum passed, we found that the highest (combined) tax rate on gross revenues was 7.5 percent (in Nevada). For principally political reasons, we therefore set the initial rate for New Jersey at 8 percent. We assumed this would inoculate us from any argument in either direction (that the tax rate was too high or too low), and indeed we never had to defend that decision.”

In 2018, eight years after that enlightening email exchange, the U.S. Supreme Court opened the door to legal sports betting, and I had the privilege of testifying before the Illinois Joint House Revenue and Finance Sales and Other Taxes Subcommittee and House Executive Gaming Subcommittee.

In my October 2018 testimony, I urged Illinois lawmakers to view this opportunity “through the widest possible prism. If you look at sports betting by projecting the amount to be legally wagered on sports, and multiply that by the state’s share of revenue, you will arrive at a number.

“If, however, you broaden that vision to consider how sports betting can potentially work in conjunction with your existing gaming operators to become an effective marketing tool, to encourage visits to land-based casinos where adults will spend money on other forms of gaming, as well as in numerous non-gaming areas, ranging from dining to lodging to entertainment, you will also arrive at a number. But it will be a very different number, and a larger number.”

I could have made that same point yesterday. Actually, I practically did. In January 2023, I provided the following testimony to lawmakers in New York State: “When looking at tax rates, do not simply multiply the proposed tax rate by the expected revenue, and assume that the resulting number will constitute the full fiscal impact. Rather, examine how your gaming policy might either encourage – or potentially discourage – capital investment in gaming properties.

“Then, project how that change in capital investment will potentially affect employment, construction and purchases of goods and services that, in turn, would affect other fiscal streams, including sales taxes, income taxes and many other tax streams. That exercise would lead to a different number, but a number that can help ensure better-informed policy decisions.”

If I sound like a broken record, so be it.

The gaming-tax conundrum is fueled by the arguably false perception that, unlike most taxes, consumers are sheltered from shouldering these particular costs. According to that widespread perception, such taxes are paid by gaming operators in exchange for the privilege of holding a gaming license.

That perception, while based in reality, is belied by a more complex reality: Consumers pay that tax in the type of gaming they get. Higher tax rates equal less investment, and less investment equals fewer jobs, fewer visitors, less spending with local businesses and, in the grand picture, less revenue from ancillary fiscal streams.

Indeed, while drawing a straight line from gaming tax rates to consumers’ wallets is a challenge, the line is real, and it runs right through gaming policy.

Gaming policy goals can range from the far-reaching and ambitious – such as creating jobs, promoting tourism and aiding small businesses – to the basic and prosaic goal of simply increasing state revenue. Either way, the following rule remains in place: The highest tax rate is not necessarily the most effective rate. Lower tax rates can generate more well-planned capital that would, in turn, attract a broader demographic, create more jobs and fund multiple fiscal streams, ranging from sales taxes to hotel and employment-related taxes and beyond.

Does that mean that states should race to the bottom in their tax policies while crossing their digital fingers in the hopes of baking a bigger fiscal pie? Not quite. The corollary to the rule of advancing an effective tax policy is that such policies must be part of a larger plan.

The policy goal of generating capital investment must pay heed to the related question of how many licenses will be issued and to which entities. For example, if land-based operators in a state are granted regional exclusivity or primacy when it comes to iGaming licenses, then the goal of broadening the demographic reach of gaming can be more easily reached. This happened in Atlantic City when casino operators identified new players, enrolled these players into their loyalty programs and rewarded those players with inducements to visit Atlantic City. Quite simply, it worked.

However, state policymakers must also recognize the fungibility of capital. A low gaming tax rate in a state can provide operators with greater access to capital, but if that capital is invested in another jurisdiction, a state would then be in the uncomfortable position of effectively subsidizing another jurisdiction. That is hardly a sensible goal.

Capital flows to its greatest opportunity and its highest return, and states that seek capital investment from the private sector need to craft policies that recognize that economic reality. Such policies could include limiting the number of licenses when expanding gaming. Indeed, states that may seek to revise their tax policies could also require commitments from operators to invest the newfound gains back into their existing facilities.

Laws can change, and so can those vexing political realities that have been in place for decades. But one principle that remains inviolable is that gaming tax rates cannot be viewed in isolation. They are part of a larger policy puzzle, and that puzzle cannot be solved in the absence of a clear-eyed focus on tax policy.

Articles by Author: Michael Pollock

Michael Pollock recently retired after more than two decades as Managing Director of Spectrum Gaming Group. He now holds the emeritus title of Senior Policy Advisor. He is a former gaming regulator, award-winning journalist and university professor.