Illinois Rolls Dice, Bets Casinos Will Just Pay Hefty New Taxes
BY MARILYN ALVA
INVESTOR'S BUSINESS DAILY
Riverboat operators in Illinois are assessing the damage from an unexpected tax tornado that was unleashed Sunday night.
That's when state legislators OK'd a bill that raises the casino revenue tax from 35% to 50%.
The bill is expected to be signed by the governor and take effect July 1. Some operators of boat and barge casinos hope they can overturn the tax via a legal challenge.
Illinois already had the highest gaming tax rate in the country.
Las Vegas levies 6.2%. In New Jersey, home to Atlantic City, the rate is 9.2%. Riverboat states in the central U.S. average about 20%.
Shares of companies operating riverboats in Illinois fell sharply, including Argosy Gaming (AGY), Harrah's Entertainment (HET), Mandalay Resort Group (MBG), Boyd Gaming (BYD) and Hollywood Casino (HWD). Shares of other gaming firms fell, too.
Budget Gap
"We did not anticipate anything as Draconian as this," said Gary Loveman, chief operating officer of Las Vegas-based Harrah's. He says the company estimates it will be required to pay as much as $30 million a year in new taxes. That amounts to 3% of the company's systemwide cash flow.
The bill, passed by legislators during the second day of a special session, is meant to help fill a $1.3 billion budget gap caused largely by the slowdown in the economy.
Gaming firms expected a tax hike, but nothing like the one that was passed. They offered alternatives, such as upping the number of allowable gaming slots to offset the tax impact, but to no avail.
To make matters worse, the tax bill includes a $1 per head hike in the so-called admission tax to $3. Rather than charge customers, the companies just pay the fee.
Key Tax Source
Illinois takes in more taxes from casinos than any other state but Nevada. Last year, it raised $555 million vs. $688 million for Nevada, according to the American Gaming Association. And that's with just nine riverboat casinos vs. Nevada's 247 casinos.
Illinois figures it'll take in an extra $135 million in casino taxes.
Riverboat casinos are "sitting ducks," said Robin Farley, analyst with UBS Warburg. "The fact those markets held up so well made them tax targets for the legislatures. The thinking was, 'Maybe we can get more out of them.' "
The tax bug could spread to other riverboat states, Farley warns. "Missouri talked about it. Indiana is considering it. There could be other states."
Indiana is the only riverboat state whose legislature is still in session this year.
Hugging the Mississippi and its tributaries from Michigan down to Louisiana, riverboat casinos have been one of the few survivors of a sinking economy.
Unlike air-travel dependent Las Vegas, which was hit hard by Sept. 11, riverboats, with their drive-in customers, kept chugging along through the fall and winter.
But riverboat gaming is more vulnerable to regulatory swings than those in older gaming markets. "This is a reminder why central U.S. gaming cash flow trades at discounts to . . . more stable markets like Vegas," Farley said.
Argosy, which has the most exposure to the Illinois market, cut its earnings guidance in the second half of this year by 22 cents.
Merrill Lynch estimates the taxes will cut Argosy's projected net by 14% next year, Harrah's by 6% and Mandalay's by 9%.
Casino companies with business in Illinois are scrambling.
Mandalay is taking a second look at plans to expand the Grand Victoria property in Elgin, Ill., where it holds a 50% stake.
Argosy may scale back a $70 million project at the site of the Empress Casino in Joliet, Ill., where it planned to replace two boats with one dockside barge. It's also looking into other ways to make up an expected $23 million tax hit.
"Right now we are evaluating all our options," said Dale Black, Argosy's CFO. Besides the Empress Casino, Argosy runs Alton Belle Casino in Alton, Ill.
Harrah's will rethink capital investments in Illinois, too, Loveman says. It recently spent $80 million on a new barge in Joliet. And it might have to cut back on marketing and staffing.
"There is a customer who is profitable at a 35% tax rate who is not profitable at 50%," Loveman said. "Customers come to casinos in many cases because of the offers we give them. If we're paying 50% on their revenue, the offer may not be profitable."
There are other ripple effects. MGM Mirage (MGG) said Monday it withdrew its bid for the Emerald Casino near Chicago, saying it no longer made economic sense.
The tax increase could generate more problems than solutions, says Thomas Swoik, executive director of the Illinois Casino Gaming Association. "As soon as you reduce your edge with marketing and new capital, people go to the other riverboat (states). There's talk (in Illinois) of reducing hours, cutting back on payouts and charging admission again."
BY MARILYN ALVA
INVESTOR'S BUSINESS DAILY
Riverboat operators in Illinois are assessing the damage from an unexpected tax tornado that was unleashed Sunday night.
That's when state legislators OK'd a bill that raises the casino revenue tax from 35% to 50%.
The bill is expected to be signed by the governor and take effect July 1. Some operators of boat and barge casinos hope they can overturn the tax via a legal challenge.
Illinois already had the highest gaming tax rate in the country.
Las Vegas levies 6.2%. In New Jersey, home to Atlantic City, the rate is 9.2%. Riverboat states in the central U.S. average about 20%.
Shares of companies operating riverboats in Illinois fell sharply, including Argosy Gaming (AGY), Harrah's Entertainment (HET), Mandalay Resort Group (MBG), Boyd Gaming (BYD) and Hollywood Casino (HWD). Shares of other gaming firms fell, too.
Budget Gap
"We did not anticipate anything as Draconian as this," said Gary Loveman, chief operating officer of Las Vegas-based Harrah's. He says the company estimates it will be required to pay as much as $30 million a year in new taxes. That amounts to 3% of the company's systemwide cash flow.
The bill, passed by legislators during the second day of a special session, is meant to help fill a $1.3 billion budget gap caused largely by the slowdown in the economy.
Gaming firms expected a tax hike, but nothing like the one that was passed. They offered alternatives, such as upping the number of allowable gaming slots to offset the tax impact, but to no avail.
To make matters worse, the tax bill includes a $1 per head hike in the so-called admission tax to $3. Rather than charge customers, the companies just pay the fee.
Key Tax Source
Illinois takes in more taxes from casinos than any other state but Nevada. Last year, it raised $555 million vs. $688 million for Nevada, according to the American Gaming Association. And that's with just nine riverboat casinos vs. Nevada's 247 casinos.
Illinois figures it'll take in an extra $135 million in casino taxes.
Riverboat casinos are "sitting ducks," said Robin Farley, analyst with UBS Warburg. "The fact those markets held up so well made them tax targets for the legislatures. The thinking was, 'Maybe we can get more out of them.' "
The tax bug could spread to other riverboat states, Farley warns. "Missouri talked about it. Indiana is considering it. There could be other states."
Indiana is the only riverboat state whose legislature is still in session this year.
Hugging the Mississippi and its tributaries from Michigan down to Louisiana, riverboat casinos have been one of the few survivors of a sinking economy.
Unlike air-travel dependent Las Vegas, which was hit hard by Sept. 11, riverboats, with their drive-in customers, kept chugging along through the fall and winter.
But riverboat gaming is more vulnerable to regulatory swings than those in older gaming markets. "This is a reminder why central U.S. gaming cash flow trades at discounts to . . . more stable markets like Vegas," Farley said.
Argosy, which has the most exposure to the Illinois market, cut its earnings guidance in the second half of this year by 22 cents.
Merrill Lynch estimates the taxes will cut Argosy's projected net by 14% next year, Harrah's by 6% and Mandalay's by 9%.
Casino companies with business in Illinois are scrambling.
Mandalay is taking a second look at plans to expand the Grand Victoria property in Elgin, Ill., where it holds a 50% stake.
Argosy may scale back a $70 million project at the site of the Empress Casino in Joliet, Ill., where it planned to replace two boats with one dockside barge. It's also looking into other ways to make up an expected $23 million tax hit.
"Right now we are evaluating all our options," said Dale Black, Argosy's CFO. Besides the Empress Casino, Argosy runs Alton Belle Casino in Alton, Ill.
Harrah's will rethink capital investments in Illinois, too, Loveman says. It recently spent $80 million on a new barge in Joliet. And it might have to cut back on marketing and staffing.
"There is a customer who is profitable at a 35% tax rate who is not profitable at 50%," Loveman said. "Customers come to casinos in many cases because of the offers we give them. If we're paying 50% on their revenue, the offer may not be profitable."
There are other ripple effects. MGM Mirage (MGG) said Monday it withdrew its bid for the Emerald Casino near Chicago, saying it no longer made economic sense.
The tax increase could generate more problems than solutions, says Thomas Swoik, executive director of the Illinois Casino Gaming Association. "As soon as you reduce your edge with marketing and new capital, people go to the other riverboat (states). There's talk (in Illinois) of reducing hours, cutting back on payouts and charging admission again."
