Tag Archives: Nevada

Delaware Senate votes to bail out three casinos

Delaware’s state senate has voted to redirect $10 billion in economic development funding to bail out three gambling casinos. The measure now goes to the House. Two reasons the casinos are failing: increased competition from Maryland and Pennsylvania and having to share a large chuck of revenue with the state. Lawmakers admit the bailout is only a “Band Aid,” and not enough to salvage the operations.

Supporters defend SB 220 as a jobs protection measure. But the real incentive is more likely the revenues involved. Lottery receipts are the fourth largest source of Delaware’s revenues at about 7 percent of the total bringing in $277 billion in 2013, right behind Income taxes, Franchise taxes, and Abandoned Property.

The casinos are certainly in trouble. According to Delaware Newszap.com Dover Downs Gaming & Entertainment saw a $1 million loss in Q1 2014 and is $46 million in debt. During that same first quarter the casino paid the state $16 million in revenue.

Revenue sharing between the state and the casinos has grown more onerous over the past 20 years. In 1997, the casino claimed 50.2 percent of the revenue and the state took 25.2 percent. In 2009, that split reversed, with the state claiming 43.5 percent of revenues and the casino keeping 37.8 percent.

The incentive for the bailout is fairly clear though the economic thinking is convoluted. Why not reduce the tax rate instead? Economist James Butkiewicz at the University of Delaware notes that as a voluntary tax it’s easy revenue and the state doesn’t have to raise taxes elsewhere.

But do casinos deliver for state coffers and economies?  Economists Douglas Walker (whose field is casino economics) and John Jackson find that while lotteries and horse racing tend to increase state revenues, casinos and greyhound racing tend to decrease it. Using recent data, Walker and Jackson find casinos have a positive economic impact. There are many other things to consider when thinking about the effects of casinos. As state creations there is ample opportunity for corruption and regulatory capture. Walker and Calcagno find just such a link in their paper in the journal Applied Economics (Dec 2013), “Casinos and Political Corruption in the United States: A Granger Causality Analysis.” And as a recent article by the WSJ notes oversaturation of casinos on the East Coast has also triggered an interstate “war” for revenues. Delaware’s gaming revenues are down 29 percent since 2011. A Delaware Casino Executive laments that the business model they are using is simply, “unworkable.”

 

 

 

Nevada’s new film tax credits to benefit casinos

Until recently, Nevada was one of a handful of states that did not offer film companies tax incentives. With the passage of Senate Bill 165 last month qualified film producers are eligible for transferable film credits valued at 20 percent of production costs. Lawmakers were in part persuaded by testimony (offered by film maker Nicholas Cage) that such credits would result in a film boom for Nevada. Some features of the credits: they are limited to $20 million a year. Productions that shoot 60 percent of their work in Nevada and spend between $500,000 and $40 million may earn a credit for 15 percent to 19 percent of total in-state, qualified expenses. Each production is capped at $6 million in credits.

Nevada does not tax individual or corporate income. The credits may be applied to payroll taxes, casino taxes and insurance premium taxes. Gasoline, cigarette, liquor, sales, live entertainment and property taxes aren’t eligible.

Part of the value of Nevada’s credits to film companies is that they are transferable. The credits can be sold by film companies to other Nevada businesses, such as casinos, becoming, “the coin of the realm.”

The Las Vegas Sun News explains how the new program will help generate a niche financial industry of brokers to help parties buy and sell credits. For example, a film company with a $1 million production and 15 percent credit is awarded $150,000 by the state of Nevada. If the film company only pays $50,000 in payroll taxes, that leaves $100,000 in credits on the table. This credit can then be sold at discount (let’s say 80 percent of the value of the remaining credit) to an interested buyer. Thus, a casino with a $100,000 tax liability can buy a tax credit from the film company at a price of $80,000.

The legislature promises to study the effectiveness of the program after a five-year trial period.

 

Tax Foundation Releases New State Business Tax Climate Index

On Wednesday the Tax Foundation released the updated State Business Tax Climate Index by Mark Robyn. Wyoming, South Dakota, and Nevada ranked highest on the index because they have low overall tax burdens and tax policies that introduce minimal distortions to business behavior.

The three states at the bottom of the ranking — New Jersey, New York, and California — were also the worst-ranked states last year. Unsurprisingly, these three states are also experiencing domestic outmigration as individuals and businesses leave for locations with lower tax burdens. A study by Jed Kolko, David Neumark, and Marisol Cuella Mejia demonstrates that the SBTCI is one of the most accurate indexes for predicting economic outcomes.

 

Illinois had the largest change in ranking over last year’s, dropping 12 spots. Robyn writes on the importance of tax policy in business decisions:

Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois early last decade, hundreds of millions of dollars of capital investments were delayed when then-Governor Blagojevich proposed a hefty gross receipts tax. Only when the legislature resoundingly defeated the bill did the investment resume. In 2005, California-based Intel decided to build a multi-billion dollar chip-making facility in Arizona due to its favorable corporate income tax system. In 2010 Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate. Anecdotes such as these reinforce what we know from economic theory: taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of business-friendly tax climates.

The Tax Foundation is not alone in finding these states relatively lacking in economic freedom. Indexes developed by the Mercatus Center and the American Legislative Exchange Council also ranked these states as among the least economically competitive in the country.

While lawmakers may be tempted to try to improve their states’ rankings in these types of indexes with special business tax breaks or increasing state spending, all three studies demonstrate that the best way to improve a state’s competitiveness ranking is to provide a climate of low, stable taxes that do not favor specific industries.

 

Which Governors Are Proposing Spending Increases and Which are Proposing Cuts?

This week, the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) have released their biannual Fiscal Survey of States. It is full of lots of interesting information, much of which I plan to highlight over the next week or so.

Today, I’ll start with a simple look at the proposed changes in FY2012 spending, alongside enacted changes in FY2011 spending. I’ve organized the data by FY2012 changes, so you can see that Florida’s Gov. Rick Scott is proposing the single-largest percentage increase in General Fund Spending, while Nevada’s Gov. Sandoval is proposing the largest cuts. I should note that, unlike NASBO’s other regular report (the State Expenditure Report) this one only includes General Fund spending, which is less than half of total state spending. Nevertheless, it is the portion of state spending over which state politicians have the most control, so it does provide some important information. I also included indicators for the party-id of the current governor. It is not surprising that there are greater differences between the parties when it comes to proposed 2012 changes than when it comes to enacted 2011 changes; partisan differences in proposed spending tend to be moderated by the legislative process.

In FY2012, the average Democratic governor proposed a spending increase of 5.8 percent, while the average Republican governor proposed a spending increase of 3.4 percent. I ran a regression and these differences were not statistically significant, even after controlling for regional effects. It was a very simple analysis, with limited data, few control variables, and no attempt to overcome concerns about reverse causality (maybe states whose institutions encourage spending growth are more-likely to elect Republicans in hopes of reining in spending?). Nevertheless, this does comport with more-sophisticated analyses. For example, a study by Besley and Case (2003) finds “little evidence of Democratic governors spending more overall” (though they do increase workers’ comp spending).

The literature does, however, find that the political id of the governor–in conjunction with the political makeup of the legislature–does make a difference: Rogers and Rogers (2000) find that when Democrats control both the house and the governor’s mansion, government tends to be larger than when Republicans control both.

It also turns out that divided government, in and of itself, can make a difference. Besley and Case (2003), for example, found that “greater party competition in the legislature is associated with significantly lower taxes, and significantly lower spending on workers’ compensation.”

More analysis of the NASBO/NGA data to come…

Rating State Business Tax Climates

Today the Tax Foundation released its annual State Business Tax Climate Index.

Good tax policy is not just about low rates. The Index’s author, Kail Padgitt, writes:

State lawmakers are always mindful of their states’ business tax climates but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. This can be a dangerous proposition.

The public choice pressures that Dr. Padgitt is talking about encourage state policy makers to cut special tax deals for politically-important businesses and to keep rates high for those who are aren’t so well-connected. The Business Tax Climate report is a nice antidote to such thinking:

The goal of the index is to focus lawmakers’ attention on the importance of good tax fundamentals: enacting low tax rates and granting as few deductions, exemptions and credits as possible. This “broad base, low rate” approach is the antithesis of most efforts by state economic development departments who specialize in designing “packages” of short-term tax abatements, exemptions, and other give-aways for prospective employers who have announced that they would consider relocating. Those packages routinely include such large state and local exemptions that resident businesses must pay higher taxes to make up for the lost revenue.

The best climates: South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.

And the worst: New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina.