Taxing Questions – Where’s Our Share?

With gambling booming, the state of Pennsylvania is forcing municipalities to forego their previously legal cut of the profit from state licensed casinos earnings. In pursuit of this fiscal insanity, it is important to take a look on how casinos came to be, and reflect on another state which has been experiencing the same type of pains – California.

Pennsylvania embarked on its in-state casino journey facing considerable odds, given that it borders on New Jersey and New York, both powerhouses when it comes to landbaserd and online casinos. But the experiment worked, and residents of Pennsylvania stayed in-state to gamble and opted to keep their money locally rather than spend it in Atlantic City. On the State’s part, they responded to the public’s preference by expanding the number of casinos, to the point where Pennsylvania is now one of the best states in the country to take a casino vacation. It’s a huge success.

One of the most taken for granted issues about state casino growth is why they were allowed to expand at all as inline gambling was rejected. As with most things political, the underlying reason was money. The choices states had to make up for the losses brought on by the 2007 recession were:

Increase sales taxes. This is a possibility that equally distributes the tax burden, but for many residents all they have to do is to fill up the gas tank and head across to another state that has lower taxes to do all their shopping or just shop for the most expensive items. For example, long time residents of Massachusetts (also known as Taxachutsetts) will buy their cars outside of the state to avoid an onerous tax burden that will last for the duration of ownership of their car.

So while raising the state sales tax seems equitable, it is no guaranty of future revenues.
Raising the property tax rate. Always a bad idea politically, any property tax increase, however small, is a sure fire way to find yourself out of office, no matter how small the increase. The reason for this is simple: property owners are far more likely to stay in state and provide a consistent source of revenue on many fronts, including state income tax, property taxes, and sales taxes.

Consider for a moment why casinos are great sources of revenue despite the anti-gambling’s whining about their existence. All revenues derived from casinos are what amounts to a voluntary tax. No one is forced to go to a casino, and those who do know that the casino has a legally enforced payout rate and will have to pay taxes from their revenue. Yet everyone in the state benefits from the voluntary tax imposed on players because it goes into the general fund.

In California, casinos are battling one another for business, and the state is silent about who actually wins. Apparently they have realized what Pennsylvania courts have not – that imposing on what amounts to a voluntary tax on the players still adds to the coffers of the state. The only losers are the ones who fail to remain competitive, which is the way normal business is conducted. Keep in mind that though Las Vegas is a 4 or 5 hour trip for many Californians, like Pennsylvania, its residents are choosing to keep their money in-state.

You may be asking, then what is Pennsylvania’s problem? The answer lies in this statement from the Pittsburgh Post-Gazette: “They [the casinos] paid 2 percent if revenues topped $500 million a year or $10 million if they did not. Since the law was enacted, every casino has paid the $10 million. Justices ruled that the provision violated the state Constitution because it, in essence, imposed different tax rates on casinos depending on their size, violating uniformity standards.”

The thing is, it seemed only one casino filed a complaint, Mount Airy, which forced the state Supreme Court ruling. Contrast the complaint by Mount Airy with this from the manager of North Strabane township: “the ruling would cost the township, which is home to The Meadows Racetrack and Casino, $2.7 million a year — money being used to pay off a $9.8 million bond issue.”

Should the legislators fail to fix the problem, more than a few municipalities will have to make an adjustment to their annual budget to compensate for the casino revenue losses.

It is fair to ask whether this, like the California competition for casino survival in some areas, was inevitable. The economy is recovering, though not fully recovered, and it seems politicians cannot be happy with prosperity. It’s enough to make you want to side with the anti-casino advocates to avoid this scenario altogether. Forcing local municipalities to impose an involuntary tax on its residents when a voluntary tax has been working just fine makes no sense, political or otherwise. Like California, if Mount Airy sucks as a place to gamble, then it deserves to have to close its doors. It is more about greed than profit or paying taxes.

It is hoped that the state legislature will fix the problem and things will return to normal. But we need to keep an eye on other similar situations that may occur in other states. If it becomes a trend, residents will have to consider the future of state owned casinos when online gambling goes full force.

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