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High Tax Rates May Hurt Ohio Casinos, Analysts Say

Posted on May 11th, 2011

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After getting the approval of Ohio residents to build four gambling facilities in the state, problems on heavy government taxation have drawn negative sentiments and reactions from casino project developers. The increasing tension between Ohio’s governor and the casino developers may lead to cutbacks from the original plan which may ultimately result in lesser revenues. In 2009, Ohio voters authorized four casinos to be constructed in the cities of Cincinnati, Columbus, Cleveland and Toledo. The authorization also carried with it a taxation rate of 33 percent. The people’s approval was largely based on projections that, when completed, the casinos will generate annual gambling tax revenues amounting to $650 million. Many were convinced that the said amount will undoubtedly do wonders for the state funds.

The casinos will also propel Ohio forward and was even predicted to land behind Nevada, who is ranked third with its $835 million tax proceeds in 2010. Also, Ohio will become the fourth richest state in terms of gambling tax revenue—edging out Illinois, Missouri and even the formidable New Jersey. Inspite of the impressive figures, Gov. John Kasich felt that Ohio got a “raw deal”. He believes that the one-time licensing fee of $50 million—which totals $200 million for all four casinos—and the 33 percent tax rate are unacceptably low and are nowhere near good enough. Thus, Kasich sought the services of consultants in order to look for other possible ways to squeeze revenue out of the gambling facilities.

At first glance, increasing taxes and fees may seem good for government. However, it may hurt casino developments. Although it is unlikely that developers will abandon the casino projects altogether, there is a high possibility that several strategies to downsize the original plans will be adopted. Recently, developers have conveyed that they might actually cut back. According to analysts, government has the tendency to overtax casinos without fully realizing that higher taxes eat into a gaming establishment’s profits. Gambling analyst Steven Ruggiero elaborated that higher taxes have a chain effect on casino operations.

Smaller profits translate to a smaller capability to support operational costs such as paying the employees and promoting the facility. This means that there will be less money for advertising, and a lower number of people that can be employed. Less advertising will yield fewer patrons. Fewer patrons shall translate into less demand for dining establishments and wellness centers, which once again means less employment opportunities for residents. Ruggiero cites Philadelphia and Atlantic City as classic examples of the effects high tax rates have on casino operations. According to him, government imposes high taxes on Philadelphia casinos. This is why establishments there are more “bare-bones, big-boxes”. On the other hand, low taxes in New Jersey made possible the presence of full-service establishments in Atlantic City.

Illinois, another classic example, illustrates the negative repercussions of imposing high taxes. The said state has seven brackets, which starts at 15 percent but then jumps to 50 percent for a revenue of over $200 million. Visitors there are also charged with a $5 admission tax. Because of these, Illinois only ranks 7th in paid taxes, and a more dismal 9th in gambling revenue inspite of the fact that it is considered as the fifth largest in terms of population. Still, analysts were quick to say that it is not easy to compare state because they do not share the same tax structures. It is clear, though, that imposing a high tax on casinos does not always mean higher revenues for government. It can also bring negative effects to casinos such as those that will be opened in Cincinnati and Toledo casinos.

Unlike Cleveland and Columbus who have no immediate competition within a 100-mile radius, Cincinnati already has three riverboat casinos in Southeast Indiana that earn almost $700 million each year. The proposed downtown casino is less than 30 miles from the riverboat casinos. Thus, it would be an understatement to say that higher tax rates coupled with the presence of fierce competition will bring down the new Cincinnati even before it can begin. On the other hand, the Toledo casino suffers from the same misfortune as it is just 40 miles away from the Detroit gaming establishments.