MINUTES OF THE

SENATE Committee on Taxation

 

Seventy-First Session

March 13, 2001

 

 

Chairman Mike McGinness, called the Senate Committee on Taxation to order at 2:01 p.m., on Tuesday, March 13, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada.  Exhibit A is the Agenda.  Exhibit B is the Attendance Roster.  All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

 

COMMITTEE MEMBERS PRESENT:

 

Senator Mike McGinness, Chairman

Senator Dean A. Rhoads, Vice Chairman

Senator Randolph J. Townsend

Senator Ann O’Connell

Senator Joseph (Joe) M. Neal, Jr.

Senator Bob Coffin

Senator Michael (Mike) A. Schneider

 

GUEST LEGISLATORS PRESENT:

 

Senator Maurice E. Washington, Washoe County Senatorial District No. 2

 

STAFF MEMBERS PRESENT:

 

Kevin D. Welsh, Deputy Fiscal Analyst

Mavis Scarff, Committee Manager

Rochelle Trotts, Committee Secretary

 

OTHERS PRESENT:

 

Bobbie Gang, Lobbyist, Nevada Women’s Lobby

Andrew Barbano, Lobbyist

Danny L. Thompson, Lobbyist, Nevada State AFL-CIO

Harvey Whittemore, Lobbyist, Nevada Resort Association

Samuel P. McMullen, Lobbyist, Las Vegas Chamber of Commerce

Mary Lau, Lobbyist, Retail Association of Nevada

Janet L. Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada

Glen G. Arnodo, Lobbyist, Culinary Workers Union Local 226

William Bible, Lobbyist, Nevada Resort Association

Mark Dodson, Chairman, Nevada Resort Association, and Co-Chief Operating Officer and President of Western Casino Group, Park Place Entertainment Corporation

Gary Klug, Chief Financial Officer, Red Lion Hotel and Casino, Elko

William R. Eadington, Professor, Economics Department, and Director, Institute for the Study of Gambling and Commercial Gaming, University of Nevada, Reno

Steve Comer, Partner, Arthur Anderson Unlimited Liability Partnership, Las Vegas

 

Chairman McGinness:

Before we begin, I would appreciate committee introductions for the following bill draft requests (BDRs), (BDR) S-303, BDR S-302, and BDR 23‑299 which are from the committee on long-term care.

 

BILL DRAFT REQUEST S-303:  Requires Aging Services Division of Department of Human Resources to conduct study of feasibility of establishing a program for assisted living for low-income persons.  (Later introduced as Senate Bill 341.)

 

BILL DRAFT REQUEST S-302:  Establishes pilot program to provide support services for persons who provide care for certain persons with brain damage. (Later introduced as Senate Bill 342.)

 

BILL DRAFT REQUEST 23-299:  Requires board of the public employees’ benefits program to provide long-term care coverage for state employees and retirees.  (Later introduced at Senate Bill 343.)

 

SENATOR O’CONNELL MOVED TO INTRODUCE BDR S-303, BDR S‑302, AND BDR 23-299.

 

SENATOR COFFIN SECONDED THE MOTION.

 

THE MOTION CARRIED.  (SENATORS SCHNEIDER AND TOWNSEND WERE ABSENT FOR THE VOTE.)

 

*****

 

Chairman McGinness:

We will open the hearing on Senate Bill (S.B.) 104.

 

SENATE BILL 104:  Requires secretary of state to include on ballot for next general election advisory questions relating to increase in state license fee on gaming. (BDR S-808)

 

Senator Joseph (Joe) M. Neal Jr., Clark County Senatorial District No. 4:

Senate Bill 104 is being proposed, in conjunction with S.B. 105, in case the committee chooses not to increase the tax on gaming. 

 

SENATE BILL 105:  Increases state license fee on gaming. (BDR 41-797)

 

Maybe they could pass S.B. 104, and see what the people think about this issue.  Of course, if we cannot trust the people to determine and give us advice, then none of us have the right to be here, since we get here by the vote of the people.  Senate Bill 104 is in conjunction with the proposed tax increases that are listed in S.B. 105.  The bill is self-explanatory, telling the secretary of state to put these three questions to the people as to whether or not they would like to see the gross gaming tax raised by 2 percent, 4 percent or 6 percent.  It is not binding, but gives direction to the Legislature as to what the people actually want to happen.

 

Chairman McGinness:

Has there ever been something like this where you have a choice of a, b, or c.  Have you visited with the secretary of state?

 

Senator Neal:

No, to my knowledge there has not been.  This issue we are dealing with, in terms of trying to tax one of the most powerful industries in the state, calls for unusual circumstances to get at this issue.  This is the reason why this is being proposed.  I cannot fathom that anyone would be against the way this is being proposed because it gives a direction for the people who read it, to make up their minds if they want to vote 2 percent, 4 percent, or 6 percent, and then that is what will be accepted in terms of a recommendation back to this Legislature in its next legislative session.  I hardly think the form in which it is being presented is not improper, but something that could be considered.  It is no different than other advisory questions that have been put on the ballot in the past.  I can recall many years ago when we were dealing with the hot issue of the ERA (Equal Rights Amendment), and the Legislature did not want to vote upon that issue.  They submitted it to the people to have them vote on the issue.  It went out as an advisory question, and the people spoke in the affirmative, and the issue was not passed in this Legislature.  Given that experience and history of advisory questions, I made this proposal, and it is here before you today to act upon it as you see fit. 

 

Chairman McGinness:

I was not suggesting any impropriety, it is just most of them have traditionally been yes or no, but that does not mean we cannot break with tradition. 

 

Bobbie Gang, Lobbyist, Nevada Women’s Lobby:

(Presented her written testimony in support of S.B. 104 [Exhibit C.])

The Nevada Women’s Lobby urges you pass S.B. 104 and put on the ballot the question of increasing the fee on gaming revenues in this state.  We are concerned that the state is not able to keep up with the increasing services and infrastructure needed in the state due to the phenomenal growth in population.  It has been obvious to us the gaming industry, in the past, has been able to ward off legislation to increase the tax on their industry.  Yet, in other states, where legalized gaming has been introduced for the purpose of raising state revenues, the gaming industry in those states pay more in taxes for the privilege of operating their casinos.  Time after time the legislature has turned away from increasing the gaming tax.  It is time now to let the people speak.  We think there is no alternative but to ask the public to vote on this issue.  Additional services are needed and surveys have shown the public has a strong opinion on the gaming tax.  In the absence of any positive vote by the Legislature to identify increased sources of revenue this session, we urge you to put the question on the 2002 ballot. 

 

Andrew Barbano, Lobbyist:

I stand before you today, not only as an individual, but also representing the 100-plus people that circulated petitions on this issue throughout the state of Nevada, over and above the Clark County volunteers.  I was mostly involved in the rurals and northwestern Nevada, speaking on the behalf of those well-intentioned people from all walks of life that had concerns for the needs of the state.  I would ask you to consider their wishes and give this measure a fair hearing.

 

Danny Thompson, Lobbyist, Nevada State American Federation of Labor and Congress of Industrial Organizations (AFL-CIO):

Each year the Nevada AFL-CIO holds a yearly convention at which we consider all matters political.  We look at ballot questions, initiatives, and the problems of the state.  This last convention, we considered the idea of raising the gaming tax because there was an initiative petition being circulated.  It was relevant and at the convention there was a lot of debate about this issue.  At the end of the debate, 300 delegates voted to oppose any increase in the gaming tax.  I would like to tell you why.  We feel, with the advent today of Indian gaming and the proliferation of gaming in other states, the competition that it has caused for our industry, which provides the lion’s share of revenue to the state, should not be taxed further. 

 

We are concerned if you do raise gaming taxes, given all those other external pressures on the industry, we are setting ourselves up for a catastrophic situation.  We would like to see the tax base diversified in some form.  We do not believe putting all your eggs in one basket is the answer, because I read a report about the profitability of the Nevada gaming industry, and I also read in the newspaper this morning, that gaming revenue is down.  It only makes sense to us, if we increase dependency on gaming revenue and they continue to have problems, it is only going to create more problems for the state of Nevada.  The problem for us with S.B. 104 is it puts a question to the people of “do you want to raise the gaming tax or do you want to raise the gaming tax?”  We do not believe that is the right answer.  We do know there are critical education needs, there are critical needs within the state budgets for state employees and other programs the state is responsible for, and they continue to find problems and the money committees have to deal with these issues.  But, we just do not believe this is the answer for either of these bills.  We are opposed to both of them, and actively worked against the initiative for those reasons.  For the record, that vote against increasing the gaming tax was a unanimous vote.

 

Harvey Whittemore, Lobbyist, Nevada Resort Association:

The Nevada Resort Association is opposed to S.B. 104.  Senator Neal’s bill was introduced in February, and in February 1788, a group of patriots got together and wrote The Federalist Papers.  The Federalist Papers created the substance of the debate we are going to engage in today, and that is, What is the proper role of government? and What is the proper role of the republican form of democracy in implementing legislative efforts such as those proposed by Senator Neal?  I think that Hamilton, Madison, and Jay had a lot to say about what goes on in today’s debate.  They would remind you frequent appeals to the public are a serious defect in government.  They would also tell you the representative form of government is the best, and the legislature and these bodies, represented by the Senate and Assembly, are the closest to the people, they walk among the people, and they have ties both by blood and friendship to the people.  If the people believe there is an appropriate form of taxation, those people would say so. 

 

Mr. Whittemore:

Now, Senator Neal knows his past efforts to pass, to even qualify an initiative to raise the gaming, failed.  What he is doing is imposing his passion about this issue in a way which we believe is inappropriate.  Again, those Federalist authors had something to say about passion and reason.  They said if we look to the passion rather than the reason in the people, you would have a problem with government.  The role of government is to look to the reason of the people and not the passion, to decide what is appropriate to pass and not pass.  What I am suggesting is because of the passion of Senator Neal with respect to this, he is losing sight of the fact it is not reasoned.  It is not appropriate to ask.  This is akin to asking the condemned whether they want to be shot, hung or put to death by electrocution.  These are no choices to suggest a 2 percent, or 4 percent, or 6 percent tax is appropriate.  This industry cannot afford any of those amounts. 

 

The point about this bill asking advisory questions is, for a majority group to suggest a gaming tax increase is appropriate, it tramples on the rights of the minority.  Clearly, the gaming industry cannot marshal people to simply suggest they should vote against something like this when there is no explanation in the advisory question as to what is right or wrong.  At least with respect to an initiative you have a complete argument, a complete system that says these are the reasons why, this is how it is going to happen.  With respect to these advisory questions, I believe you would be appealing to the passion of the people, looking to undo what we see as an appropriate representative form of government, which is to have you determine what is an appropriate level of taxation and to come up with a series of bills, whether it is this session or next, that addresses the long-term needs of the state, once having determined what the needs of the state are. 

 

So, I would ask that you look to the formation of the U.S. Constitution and the arguments generated in favor of passage of the U.S. Constitution.  What this is really doing is putting it on its head to suggest this is an appropriate means to determine tax policy in the state of Nevada.  The Federalist Papers also included a substantial argument about what the role of taxation in government should be.  If you go back and read those, you will see we give up, as people in this society, certain funds to have government engage in certain activities on our behalf.  In doing so, we give up our liberties, and it is important that we do not do this in such a way we just simply appeal to the have-nots, suggesting that somebody should pay more at every turn and stretch of their imagination.  We know of Senator Neal’s passion with respect to this issue, but again, we believe this advisory question is misguided.

 

Senator Neal:

Mr. Whittemore, you have, in your testimony, brought forth as an argument against this issue, The Federalist Papers, and questioned the form in which the question is to be put before the people.  Are you suggesting to this committee and this Legislature the people of this state do not have a right to determine the issues of the state?

 

Mr. Whittemore:

No, I did not suggest they do not have a right; I suggested it is more advantageous to present these questions by initiative or referendum, not by advisory question with respect to tax policy. 

 

Senator Neal:

Are you suggesting, also, that gaming is a right in this state?

 

Mr. Whittemore:

No, I did not suggest that gaming was a right.  We all know, based upon years of service, it is a privilege. 

 

Senator Neal:

So, as a privilege then, it is subject to change by the will of the people if they desire, is it not?

 

Mr. Whittemore:

The answer to the question is, Absolutely, it is subject to change.  Again, The Federalist Papers speak to that, no succeeding legislature can bind the hands . . . .

 

Senator Neal:

But The Federalist Papers did not deal with gaming, did it?

 

Mr. Whittemore:

I could quote some provisions that would probably support you, but I will not.

 

Senator Neal:

But, are you suggesting that The Federalist Papers dealt with gambling?

 

Mr. Whittemore:

I suggested that there is reference in the Federalist Papers and in Thomas Jefferson’s writings to gaming.

 

Senator Neal:

To gaming or to gambling?

 

Mr. Whittemore:

To gaming.

 

Senator Neal:

Would you mind quoting that, so I can look it up?  I happen to have a copy of The Federalist Papers.

 

Mr. Whittemore:

It is Thomas Jefferson.  It is probably in a letter suggesting that the legislature’s function is to take care of four groups of people: infants, mentally ill people, gamblers, and drunkards.  If you would like the quote, I will look up the Thomas Jefferson letter.  It was probably to Mr. Dupont.

 

Senator Neal:

Yes, I would appreciate if you would look that up.  I would like to have a copy.

 

Samuel P. McMullen, Lobbyist, Las Vegas Chamber of Commerce:

The Las Vegas Chamber of Commerce is an organization that has over 6500 members, including gaming and nongaming businesses.  This is a matter of clear concern to us, and we are clearly opposed to both of these bills.  I would like to get some reasons on the record with respect to S.B. 104, just to make sure that those are differentiated from the testimony we will give against S.B. 105.  Fundamentally, and I will say the same thing on the next bill, we are against the taxation of gaming.  We think it is unfair and it makes no sense given the current economy or current sense of this state and the challenges facing it.  But, we will talk about that later in the next testimony. 

 

Mr. McMullen:

With respect to this advisory question, I think an advisory question like this is really not a vehicle for an adequate policy statement.  There is no way and, actually, without the expenditure of millions of wasted dollars, you can actually frame a question adequately to make sure the people understand the trade-offs, as Mr. Thompson has spoken about, for not only jobs and employees, but also the trade-offs for other businesses.  Let me just say at the outset, we talk about gaming like it was something that was started sixty-some years ago as just a taxpayer, and we were to milk it for the rest of our life.  I think this committee and this Legislature need to understand that gaming in Nevada was probably one of the most interesting social experiments that succeeded.  We not only built a tax out of it and a source of revenue, we built an economy and, if you look at it, we built a state.  So, we can debate that it is a right or a privilege, but the bottom line is there are ripple effects from any question like this that, I think, take the studied light of a legislature and the continued emphasis and expertise of committees like this to adequately deal with them.  Really, it is not something where you can punish one industry or punish them separately.  Again, we think they should be treated like any other business at this point, and probably given the clear recognition that they are the fuel of our economy and they can not be treated in an arbitrary or a punitive kind of way, because we need to make sure these kinds of choices are framed as carefully and as fully as possible.  In our opinion, this bill does not do that.

 

Senator Neal:

Did I understand you to say you were representing the Las Vegas Chamber of Commerce?

 

Mr. McMullen:

Yes, I made that clear.

 

Senator Neal:

Could you tell the committee as to whether or not the chamber of commerce ever ran any polls?  Paid for any polls?

 

 

Mr. McMullen:

We actually have a polling division and we have run polls over the last few years.  Yes.

 

Senator Neal:

And, why do you do that?

 

Mr. McMullen:

To make sure our members understand the issues, make sure we understand the fabric of those issues so we can adequately address them on behalf of our membership.  You need to understand, Senator, one of our roles, as we see it, is to promote and foster the business economy and the economy for our employees and our families in the state of Nevada.  We take that role very seriously and try and make sure we are deciphering those issues correctly. 

 

Senator Neal:

Ever poll the general public on issues?

 

Mr. McMullen:

Yes, of course, we poll the public.  We need to understand the fabric, as I said, of these issues across the board, and you cannot deal with these things in a vacuum.  I think that is our point.  The more understanding, the more information, the better off you are.

 

Senator Neal:

It is all right for your organization to poll the public, but it is not all right for the Legislature to poll the public.  Is that what you are telling us?

 

Mr. McMullen:

No.  Actually, this is more than a poll; this is actually, in a way, making tax policy.

 

Senator Neal:

It is an advisory question.  It does not do anything.  It comes back to the Legislature.  Is that correct?

 

 

 

 

Mr. McMullen:

Yes, but it is a question put on the ballot with all the sanctity of the ballot, and the messages of the ballot without, maybe, the full understanding or full information that makes that policy statement that would be . . . .

 

Senator Neal:

We get a number just as you would get in your poll from the Las Vegas Chamber of Commerce.  We look at that and we would determine how we should act.  Is that right?

 

Mr. McMullen:

Yes, but we only poll 400 to 800 people.  If you are willing to just do a poll to find out what people thought, maybe that would be an acceptable alternative.

 

Senator Neal:

Would you be willing to follow that if we did?

 

Mr. McMullen:

Again, if you put the questions out there in a meaningful way so people understand the full ripple of them, then I think you have a meaningful question and a meaningful statement of policy.  Again, we just do not think this gets there.  And, certainly neither would a poll question that was inadequate. 

 

Mary Lau, Lobbyist, Retail Association of Nevada:

We are in opposition to S.B. 104, and again, in all due respect to Senator Neal, it is our board’s contention, our legislative contention, that this is not appropriate format for tax policy.  We, of course, have recently gone through an initiative aimed more specifically at our businesses, but we also represent some gaming interests.  They would not be affected by this, most likely, because they are smaller casinos that have joined a self-insured group.  However, this type of question, and the way it is framed, only gives how much.  There is not a question of do you want to, or are you really considering it; it is just how much.  It would be inappropriate if it were aimed at the retail sector, it would be inappropriate if it was aimed at mining, and it is inappropriate because it is aimed at gaming.  I do believe in the voice of the people.  We very strongly respect that voice of the people.  I can remember one time being in Germany, I asked the question, What would you do if the law changed and everybody could only go 55 miles per hour on the autobahn?  Every person in that room said they would go 55 miles per hour, because that is what their government said.  And then, they said, we would vote them all out of office.  I think, if the people were totally dissatisfied with the way tax policy was being set, we would not be talking with so many incumbent legislators.  I respect Senator Neal’s opinion and I respect the fact he feels this could be put on the ballot, but it really is not a question that says either yes or no, just how much.

 

Senator Neal:

I understood you to say you represented the Retail Association of Nevada.  Are you familiar with the 1956 sales tax act?

 

Ms. Lau:

Yes, Senator, but I really could not quote the legal aspects of it.

 

Senator Neal:

You realize it was put on the ballot?

 

Ms. Lau:

No, I was not living in the state of Nevada at the time.

 

Senator Neal:

Do you know a portion of the sales tax was put on the ballot?

 

Ms. Lau:

Was the question also how much, because I am afraid I would be giving the exact same testimony?  Then, I would have said the question is, if yes or no, but not how much.

 

Senator Neal:

If the bill was amended to say yes or no, would your organization support that?

 

Ms. Lau:

I think, appropriately, not.  I think what is really happening in the state at this time, and I am not sure whether it is really appropriate at this time to go into all of it, but businesses of all kinds, all interests in this state, are going to be together and they are going to be working on issues.  Our Governor has represented a deficit, our Governor has represented we have a structural problem, we have some educational issues, and I would, perhaps, be more comfortable even in answering if we had time to really work through those issues at the table.  I am not totally comfortable with sales tax, gaming tax, industry-specific taxes, or anything else.  We see that happening right now in, I believe, Alabama.  They are very much dependent upon the same type of taxes we are talking about, and they are currently debating what programs they want to take out of their school system because they cannot meet their budget requirements.  I think the businesses, the people of this state, the legislators of this state, and everybody else, have to come to the table and work together. 

 

Senator Neal:

Do you believe the people are supreme to the legislature?

 

Ms. Lau:

I believe that people are supreme to everything.

 

Senator Neal:

So, if the people wanted to have this come before them, they should have it?  Is that correct?

 

Ms. Lau:

Again, the way the question is framed, how much.  No, it is not a fully evolved question and I think the purposes behind it and the intention is honorable, but I will defer to Mr. McMullen, when he talked about the cost of preparing a proper ballot initiative and a proper advisory question to the public, because this is not an informative advisory question.

 

Senator Neal:

So, I gather from the statement you have made, what you represented to the community here is, the Retail Association of Nevada believes the people are incapable of making a decision on these things.

 

Ms. Lau:

I would not ever want to be quoted that way, because I do not believe the people are incapable of making those decisions.

 

Chairman McGinness:

Did you consider putting in, in addition to your 2, 4, and 6 percent, a question, “Should the Legislature not increase the tax on gaming?”  Did you consider putting a zero percent increase in there?

 

 

Senator Neal:

We would consider that.  In this committee, you can amend that in if the committee desires to pass that.  I would surely not have any objections if you put zero percent or add another 8 percent to it.  Yes, we would consider that, and, of course, we do not have a problem putting zero percent.  After listening to the testimony, that would probably have been a proper course.  I think the people understand this issue very well and can make a judgment as to what they would like to see happen.

 

Chairman McGinness:

We will close the hearing on S.B. 104 and open the hearing on S.B. 105.

 

 SENATE BILL 105:  Increases state license fee on gaming. (BDR 41-797)

 

Senator Neal:

The issue being proposed in S.B. 105 requests this Legislature to raise the gaming tax to 10.25 percent, 4 percent over and above what has been in law since 1987.  Gaming in this state is a privilege, not a right.  The Legislature can deal with it just like they deal with the traffic laws of the state of Nevada.  It is no different.  The last time there was an increase in the gaming tax was in 1987.  It started with a proposal made by the tax committee of then-Senator Don Mello, and at that time the gaming taxes were 5.75 percent.  He proposed to increase the tax about 2 percent, and then he threatened to take this issue to an initiative petition. 

 

The gamers came to the table at that time and proposed a quarter of a percent in 1987, a quarter of a percent in 1989, to be collected in 1990.  That brought the tax on gross gaming revenue of $134,000 and above to 6.25 percent.  Fourteen years later, the gamers come back and they make the same argument: it is going to hurt them, it is going to destroy the industry, and they cannot afford this tax. 

 

But, in the same period of time, the fees and other taxes have risen over 200 percent, and gaming has remained at 6.25 percent.  Now, why should gaming pay more?  During the period between 1987 and today, gaming has taken in to its coffers over $118 billion.  As of last year, the tourism market for gaming was 46 million people.  Why is that significant?  Does it bring in money for gaming?  Of course, it does.  But also, when you have 46 million people that come into a state with a permanent population base of approximately 2 million, those individuals become temporary residents, and they need all of the services the permanent population needs.  Services like police protection, health care, water, et cetera.  Last summer, the residents in Clark County could not get into the University Medical Center because of the number of tourists that had taken up the space.  When the tourists come in, they drop their money, not in the coffers of the state government or the local government, but into the slots and the drop-boxes of the casinos.  Then we have to come back and get that money through the mechanism that is set into law which is 6.25 percent of the gross above $134,000 per month. 

 

Senator Neal:

Let me direct your attention to the brown folders (“S.B. 104, Gaming” Exhibit D).  The first tab that you see gives an overall picture.  Let me explain one other position so that you can understand the pictures that follow.  Within the gaming industry there are approximately five revenue streams:  “beverages”, “food”, “rooms”, “others”, and “gaming.”  “Others” include the shops that are within the casinos that sell items.  We are not talking about the tax on the rooms, on beverages, on food, and on the “others.”  We are strictly talking about gaming revenue.  The representative from the labor organization testified they are opposed to this bill.  The people we are talking about here are not represented in any union.  We are talking about individuals who are dealers, baccarat dealers, slot machine mechanics, and change girls, though the change girl is almost nonexistent now in the hotel casinos.  We are talking about gaming revenue.  Last year, the gaming industry took in a total of $17 billion, gross; $9 billion of that came from gaming.  Approximately $6 billion of that came from coin-operated machines.  I want you to get the picture so you understand what is going on.  Coin-operated machines, a slot machine sitting in the corner, electronically controlled, not labor intensive, just sits there making money.  It does not take a break, does not smoke, does not need a bath, just needs some Windex and a paper towel to keep it shining clean; it sits there and makes money.  It brought in approximately $6 billion. 

 

The gaming folks would have you understand if you tax this money from the slot machines and from the drop boxes, it is going to put them out of business.  It will never, never happen.  In order to be able to check the number of coins that are put into these machines, the State Gaming Control Board has set up what it calls the “slot count.”  Last year, they had 118 billion pulls on the machines.  One of the things we are going to show you in the brown folder is when you look at the amount of money and when you begin to look at the figures they show on the board, check the gaming report in terms of the billion dollar drop-box and the 118 billion slot pulls.  Over a 5-year period, we are going to show you, the pull rate on those machines consistently went up year after year.  They would tell you Indian gaming has had an impact on this.  It has not.  They would tell you the proliferation of gaming in other states would have an impact upon gaming in this state.  It has not.

 

Senator Neal:

What you must understand is those proliferating gaming outside of the state of Nevada are the same people who are sitting here in back of me.  They are the ones who are creating these gambling establishments outside the state.  When you say they are involved in a competitive field, they are competing against themselves.  They would tell us in the Legislature that they are hurting.  They are not hurting.  These casinos in this state which pay approximately $600 million a year in gaming revenue could pay over $1 billion a year and not be hurt and still make money, because most of their money does not come from any great ingenuity, it comes from the fact that people still come in and play those coin-operated machines.  They still pick up another $7 billion or $8 billion in food, beverages, and in room services.  

 

The people of this state understand what is happening.  That is one of the reasons why you get the testimony against putting that issue on the ballot, because they know from their own polling when they polled the 11.25 percent we had on the initiative petition last year, 64 percent of the people said they would vote for the 11.25 percent.  And, that was not the poll we had done, it was a poll conducted by the Las Vegas Sun newspaper.  So the fear is, if the people get an opportunity to speak, they will tax gaming far and above the 6.25 percent they have had on the books since 1987. 

 

We can no longer justify maintaining a 6.25 percent on gross gaming revenue in this state.  In states outside of Nevada, they pay as high as 25 percent on the daily gross.  They are happy to pay that.  But, here where they brought in 46 million tourists last year, we had to pay for all of these other services.  They build big houses, and our kids go without schoolbooks, yet they would tell you it is not their problem, they cannot be taxed because it would hurt them. 

 

If you look at some of the European jurisdictions, they pay as high as 80 percent on the slot tax, because they understand gambling.  It is a business from which you have to extract the highest amount to take care of the social needs of your state.

 

Senator Neal:

If you look at the information we have provided, you can see what the gross gaming win, for just gambling, was from 1996 to 2000.  We break that down on tab 2, where you can see what it has been statewide from 1995 to 2000.  These are the table wins: black jack, baccarat, et cetera.

 

At tab 3, you can see what the slot wins were statewide: 1995, $4.5 billion; 1996, $4.6 billion; 1997, $4.8 billion; 1998, $5.2 billion; 1999, $5.7 billion; and the year 2000, $6.1 billion. 

 

Tab 4 shows the tax rate for casinos in Nevada and other states

 

Senator Rhoads:

What is your answer to the argument these guys have a franchise, they do not have any other competition, so that is why they are taxed so highly?

 

Senator Neal:

It does not make any difference, because, if it is the same people, they are competing against themselves.

 

Senator Rhoads:

In many places, is there not only one establishment in town?

 

Senator Neal:

If there is just one establishment in town, and, “what they have done in their changing of the gaming laws [is] they have taken their overall structure, and for those operations that are outside of the state, they have also put them in the [corporate] structure, where they have now been able to write off a lot of their taxes from what they make in this state.”  They cannot have it both ways; they are competing against themselves.

 

senator townsend:

How many properties does this bill affect? 

 

 

 

Senator Neal:

This bill is not what I requested.  I would have requested another tier, for the 10.25 percent, as we had in the petition.  But, they put it on the 6.25 percent, which would affect any hotel that makes over $134,000 gross revenue per month, and that is just about every hotel that makes any kind of money in this state. 

 

Senator Townsend:

It is my reading of the bill that it affects everyone.  If there were properties that are currently not profitable, are you going to blanket this, or try to exempt some casinos that are currently suffering?

 

Senator Neal:

It was not my intent to put any property out of business, and if the committee sees fit to amend a fourth tier to exempt those casinos making $1 million, $1.5 million, or $2 million per month, the committee could do that and “just go after the big guys who actually are bringing in the big bucks.”  I would not have any problem with that, and would suggest that if the committee so desired.

 

Senator Townsend:

I respect your efforts, as I was involved in a statewide petition 22 years ago.  Many of us were here when Senator Mello proposed his three-tiered tax structure, which included a rather extensive analysis of why he proposed three tiers.  My recollection was the small first-tier individuals received a small reduction or they stayed the same, the medium-tiered individuals got a small bump or they stayed the same, and the large were at a different level.  Have you looked at that and analyzed it?

 

Senator Neal:

Yes, we looked at that, and you are entirely correct in your assessment of this, because if you should happen to have a fourth tier, starting at $1 million, that means a house could make up to $12 million a year before they could be taxed.  They have that exemption of $1 million per month as the formula now exists.  You have the three-tiered formula, in which the first $50,000 is taxed at 3 percent, and the next $84,000 is taxed at 4 percent, and over $134,000 is taxed at 6.25 percent.  So, if you add a fourth tier for $1 million, then you would exempt a lot of other houses that could get up to $1 million, and once they go over $1 million, then a figure, such as is proposed in the bill, could kick in.

 

Senator Townsend:

I compliment you on your remarkably cogent presentation.  My last point is one you made, and is that gaming properties are competing against themselves in other jurisdictions.  Were your organization and your efforts, at any time, in a position to analyze the issue of taxing only dollars that went to other jurisdictions for purpose of construction of competitive entities?  Because, if you are saying they compete against themselves, then you really have a question, that if they are under-taxed, which is your premise here, they really should not take money out of state in order to compete against us?  The people I represent are extremely sensitive because there is an organization, a publicly traded company in southern Nevada, who has entered into an agreement in northern California to build a facility that will directly impact us.  Having been in their facilities in southern Nevada, I know how good they are, and we are terrified.  So, that is why I asked the question about Nevada corporations who are in the gaming business and take money outside the state to compete against themselves. 

 

Senator Neal:

I am trying to figure out the question.

 

Senator Townsend:

The question is, did your organization, or you, or any of the people with whom you worked, look at the question of any money that leaves the state for purposes of constructing something to complete in the gaming world, if they would be taxed differently?

 

Senator Neal:

That information is not available to us, and we were not able to get that information.  What we did do was go back and have research people look at which organizations that were operating in this state also operated in Louisiana, Mississippi, Colorado, California, and other places.  The only area you can find where there is a little smattering of competition would be with some Indian reservations where they actually control their own casinos, and they do not have any of the guys from out of state actually running them.  You find those up in Connecticut and the far east area where they are very successful.  You would find that, in California, they are utilizing the skills and abilities of people here in the state of Nevada, who come over and help them with their facilities.  They are actually moving in and they are taking their expertise and transporting their jobs over into the California area.  Now that might increase, but we do not foresee that being a problem in the very near future, because the Indian population over there would never be able to build the type of facilities such as the Bellagio, the Luxor Hotel and Casino, and these other places.  We are still going to have a number of people who will be coming here as the population and the tourism records indicate.

 

Senator Townsend:

My perspective, perhaps, is a little different because I do not represent Clark County.  The facilities, the edifices constructed there, are like no other place in the world.  I recently visited a number of out-of-state and out-of-country large gaming establishments.  One of them is located in the Bahamas.  There are non-Nevada-based gaming companies starting to build facilities that are closing in on being par with our southern Nevada facilities.  You represent an area that is Mecca.  It has the largest corpus of total gaming facilities in the world, and the competitive pressure to keep Las Vegas at a level that is so much higher than everyone else, requires not only billion-dollar facilities, but also a constant reinvestment in those facilities and those employees.  If we were to pass this as an across-the-board manner, do you not see that the impact would allow other jurisdictions to start to gain ground on what everybody in the world wants to do, ultimately, and that is to come to Las Vegas?

 

Senator Neal:

No.  I think even if you pass the percentage of 10.25 percent across-the-board as we have it listed here, you would find little effect upon the gaming in this state.  It would not stop people from coming here, because you have to understand what is being taxed.  You are taxing the drop box, not the individual who stands and pulls the machine.  The person is still going to come to the black jack table, put up his dollar or whatever, and win or lose, but then the house win goes into the drop box.  So, that is what you are taxing, not the individual who comes into the gaming casino and plays the games. 

 

Senator O’Connell:

When you were looking at the other states, for instance, at Detroit, Michigan, did you look into the taxing of the car industry there in Detroit, or did you, when you were making any comparisons, ever look at the major industries that are supporting the state or other states?

 

 

Senator Neal:

No, we just looked at gaming, mainly because gaming is a money-intensive operation.  It is a dollar for a dollar.  You can go outside, or get in the corner of a room, put a blanket down, and put a dice game on.  It is not like the automobile industry, it is money intensive, and you cannot compare it with, say, an automobile, where you have to take into account the metal, the manufacturing, and all of that. 

 

Senator O’connell:

I think the concern a lot of us have is we are looking at the major industry for the state, the major source of our income; and my question bodes to the fact if we look at the major industries in the rest of the states, we should look at how they are taxed.  I just wondered if you had any sense of that.

 

Senator Neal:

No, I could not answer your question, because we did not look at that aspect.  But, I can say this to you, and I have said it before, gaming is different.  You should never get to the point where gaming becomes your primary industry.  We have gradually moved up to that point in the south, but not here in the north.  The north has been a little bit sharper than we have been, because gaming employment in the north only makes up about 17 percent of your employment.  In the southern part of the state it is much higher than that, about 36-38 percent.

 

You always have to look for some kind of diversification from gaming, because if you get to the point where it becomes the dominant industry, then it begins to feed on itself.  Your gaming houses begin to move into your residential communities.  We see that happening in the south, in fact we just had a bill introduced by Senator Rawson, limiting gaming in residential areas.  That happens when gaming is getting too far out of control and becoming too dominant, and it begins to move into your residential areas and feeds upon your residential population.  Gaming needs a source, and I have said, and a lot of people disagree with me, it is a parasitic operation.  It needs a host and the host has to have money.  If you do not have money, gaming cannot survive.  That is why many jurisdictions tax gaming to the point where they can provide for or have money to cure those social ills that might be brought about by gaming.

 

 

 

Senator Neal:

We just had a bill introduced today that talked about gaming addiction.  I thought that was a good idea because we now realize gaming is not a cure for our community, and you have to tax it while it is there.  If you do not, you let it get out of hand and then it is going to control you, and it will make your community poor.  That is where we are now, and that is why it is so important for the Legislature to look at this issue and act upon it now, because if you do not, you are going to continue to have the development of those casinos, and they are going to be in your community, and you are going to have a large segment of social problems that will develop.  We have to find money to try to cure those problems.  Right now we do not have that.  We see the other part of that because gaming brings in the employment, and the young people who work in the industry, go out and buy homes, and need schools when they begin to raise a family.  Clark County, right now, is $100 million short.  They are cutting their music programs, they will have to cut some athletic programs, some of the schools do not have books, and we have to understand who the enemy is in this fight.

 

Gaming is contributing a lot to those social problems, but yet gaming says let us spread the wealth, let us go out and tax other industries.  I do not mind that, but also, let us tax gaming.  Make gaming pay for its fair share of the growth from bringing in those tourists.

 

In the booklet at tab 6, we list the statewide slot count and the table games, the same as we had on the front, but we break it down in terms of the areas like downtown Las Vegas, The Strip, Boulder City, Sparks, and the Washoe County area.  You will notice that Washoe County took in $1 billion in slot wins. 

 

The second page of tab 6 shows the “Slot Coin-in” and the “Game and Table Drop.”  When you begin to show the dollar volume is beginning to slack off, then, in my judgment, you have to suggest somebody is skimming some money, because gaming has set this up whereby they can count those slot pools, and they have an understanding of what is going on.  When they collect the money and put it into the coffers, you can see we have a lot of bucks there, and that is money that is not labor-intensive at all.  We are talking about coin-operated machines and that is mostly what we are attempting to tax here on the gaming operation, not the food, not the beverages, not the rooms; they are all unionized jobs.  Those other jobs are not unionized, so I cannot understand why the gentleman from the union was up here talking about this because it does not affect him. 

 

Mr. Barbano:

I represent the more than 100 individuals and organizations that helped circulate Senator Neal’s petition last year endorsing the need for an increase in the gross gaming tax.  The gambling industry comes before you to say they are the biggest revenue generator for the state.  I would submit there is an additional downside to that.  The gambling industry gets a quarter to a third of its tax take back every year in the form of corporate welfare.  The budget at the Las Vegas Convention and Visitors Authority alone is well over $130 million a year, much of which goes to the promotion of the gambling industry.  Only a tiny portion goes toward local uses.  The original purpose, when this Legislature passed the fair and recreation board act in 1955, was for fair and recreation boards and the promotion of local recreation.  Reno made out much worse than Las Vegas because parks and recreation never saw any money from the Reno-Sparks room tax until the 1990s.  It all went to the promotion of the gambling industry. 

 

If you look at convention and visitors authorities around the state, and downtown redevelopment agencies, you will find that a quarter to a third of what the gambling industry pays in tax revenues is returned to them in the form of corporate welfare.  Anytime they quote figures of $600-plus million a year as a contribution to the state, look at the flip side to see what they have been able to generate in back-flow to their interests.    

 

When a tax break was passed a few years ago, Quebecor World Incorporated, Nevada, one of the biggest printing companies in the world located in Fernley, applied for and got a major tax break of over $100,000 a year from the Lyon County commission for an expansion it is doing.  They got the tax break because they are creating x-number of new jobs at $16 an hour.  In order to qualify for the approved tax break, a business has to create jobs that are new and paid higher than the state average wage, which is about $12 per hour.  A legitimate point was made that we should not be encouraging the development and creation of more low-wage jobs in Nevada. 

 

I also come before you today representing the Governor and the Lieutenant Governor of the state of Nevada, because I am bringing you their arithmetic.  The genesis of this study (Exhibit E) was largely based in some comments that Mike Sloan of Mandalay Resort Group made before this body in March 1999, and some additional research that was done by the Arthur Anderson Limited Liability Partnership accounting firm in conjunction with University of Nevada, Las Vegas (UNLV).  (Exhibit F.  Original is on file in the Research Library).  Mr. Sloan really fanned the flame before a joint Assembly-Senate judiciary committee hearing in 1999 by basically reiterating Huey P. Long’s old dodge of “Don’t tax you, don’t tax me, tax the fellow behind that tree.”  Mr. Sloan pointed out, all the companies being brought into this state under the guise of economic diversification, were not paying any tax at all.  There has been a groundswell to start looking at such companies brought here under the auspices of economic diversification.  That resulted in this study being commissioned by the Lieutenant Governor, who heads the Nevada Commission on Economic Development.  This study is an extremely interesting piece of work, developed by Tim Rubald, Research Director, Marketing and Research Program, Commission on Economic Development.  The conclusions provide empirical evidence that gambling is not paying its fair share. 

 

Mr. Barbano:

The principal purpose of my testimony here today is to deflate the frequent criticism, uttered by the gambling industry and by some in the media, that just because somebody can afford to pay additional taxes does not mean they should be forced to pay additional taxes.  The bone of contention was gambling has taken a “potshot” at jobs created under economic diversification efforts.  Look at the impact of gambling jobs versus the impact of good jobs such as those being generated by Quebecor World Incorporated, Nevada, in Fernley.  In effect, the Andersen-UNLV study concluded, “economic development efforts do not bring sufficient tax revenues to justify the program and results in further burdening an already over-burdened gaming industry.”  That was the premise the Rubald study went about to refute.  What they did in this study was to “trial-heat” the creation of 8000 new gambling jobs versus the creation of 8000 new manufacturing jobs.  Mr. Rubald was very careful to eliminate any short-term jump in construction employment.  The results of this study were outstanding, especially in the area of growth spawning more growth.

 

(Mr. Barbano quoted from his article (Exhibit G) which quoted the study.)

After the fourth year of the creation of those new jobs, the hotel industry continues to generate population growth long after the manufacturing segment influence on population slows.  The significance of continued population growth caused by increased
hotel industry jobs should not be understated.  The higher growth rate of population due to the hotel industry is significant because of the increased burden in government services which population growth brings.

 

The state commission found that manufacturing jobs pay a lot better than casino jobs.  Nothing new there, but for the first time, it placed evidence on the record that casino jobs breed bigger government.

 

Mr. Barbano:

Conservatives point to these huge increases in state revenue that are outstripping the increase in the population, saying, “There must be fat, waste, fraud, and abuse in state and local governments because you could not have these huge increases in revenue that far outstrip the percentage increase in population without there being fat, waste, fraud and abuse.”  Now, liberals and progressives say, “Look at what is happening out on the street; we do not have enough books; schools in Ely are crumbling; infrastructure has serious problems; there is a problem with retaining state employees because the pay is so poor.”  The real-world consequence is of a society that does not take care of its people, or of a state that does not take care of its people because it does not have the money.  How can conservatives and liberals both be right?  This survey gives you the answer.  When you create low-wage, no-benefits, largely nonunion jobs, you spawn an entire plethora of social ills and it creates bigger government.  It creates the need for more government and government services.  I actually have a document of a staff meeting at the Reno Hilton in 1995, in which they were talking about layoffs going toward the winter.  They were actually advising their supervisors to advise workers to do the company a big favor and see if they could get volunteers to go on part-time, and to advise them that there is partial welfare available from Washoe County welfare if they go on the part-time pay.  So, the casino industry is by no means ignorant of the fact they are foisting costs onto the general public.  But his study shows you big government is spawned by low-wage jobs.  It has all the graphs, charts, pictures, and numbers you need to show that after an initial surge, gambling-industry jobs continue to create a drain on government resources. 

 

I made a speech in 1982, where I said the time would come for this state to make serious decisions about what it is and what it is going to be.  We will either become a state, like many others, that offers all the elements of community, schools, parks, roads, higher education, the arts, or go back to being what we started as, which is a boomtown mining camp without schools, without anything more than saying, “This is where you go to party.”  I submit that day is now.  Look at the report delivered to the finance committee yesterday about a looming $30-million deficit.  This study, done by the Governor Guinn-Lieutenant Governor Hunt Administration, shows you why the conservatives and the liberals are right, and the finger has to be pointed at our principal industry that does not pay its fair share.  You have an open-and-shut case in front of you and there is no more time.

 

Senator Townsend:

The case Senator Neal made begs the question, and since you have made reference to it, I want to ask your opinion.  Let us assume this bill becomes law and we now have a section of money that is rather substantial.  Does that mean that the Legislature and/or the public, working together, can go home and be completely confident the remaining tax structure is exactly what the state needs?

 

Mr. Barbano:

If you are asking if this is the “be-all and end-all” solution, and all else should remain status quo, I certainly would not be so arrogant as to say this is the only solution.  Thanks to the 1981 tax-shift, we now base the future on the crystal ball from the Economic Forum.  I think you need to look at the broad spectrum, but as I understand it, the lines crossed finally a couple of years ago where growth stopped paying for growth.  The Governor had some research to that effect early in his administration.  I do not know if it has been published, but the Governor has been advised that growth really did stop paying for growth sometime in the late 1990s, and something has to be done.  I do not think this is a one-shot solution, but this is part of what has to become a solution, or you are going to have to start telling people, “We do not have any more room in any of our schools for any more kids, so do not move here.  If you have kids in school here, move them somewhere else.  ”It is going to be that drastic.  From what I understand, the Governor’s Steering Committee to Conduct a Fundamental Review of State Government has only found $30 million of savings, and that is stretching it.  That will not cover the projected deficit brought before the Senate Committee on Finance yesterday, let alone the hundreds of millions Clark County is looking at coming up short.

 

 

Senator Townsend:

I asked that question because of your long history in Nevada and your ability to analyze in a rather analytical fashion.  The tax shift, I believe, took two sessions.  We now find ourselves 20 years later with a vast majority of responsibilities, particularly welfare, prisons, and education, being funded by the state, and the growth in this economy and the revenues are being garnered by the counties.  As a result, the rural counties struggle, and our own county in the north has its own issues, and yet the state is coming up short to fund these needs.  Is there not a need to analyze that basic premise, 20 years later, as we debate this issue?

 

Mr. Barbano:

I certainly think so, and as you are well aware, in this state, all power resides in the Legislature, so you have ultimate power over what they can tax and what they cannot do to their constituents.  But the 1981 tax shift was, as proven in retrospect, a poor idea based on political momentum from the state of California, and I think that needs some serious review.

 

Senator Neal:

I was here when the tax shift was passed, and I did not vote for it.

 

Senator Coffin:

Senator Neal, I am glad you added that, because your protest against increased reliance upon the yo-yo taxes we have right now is yo-yoing in terms of the reliability of sales and gaming, and should actually tell you, maybe your approach on this tax policy should not be gaming, because that would be a further reliance on the yo-yo source of tax, and maybe a return to property tax.  It is funny because you could nail these casinos with a property tax increase and they would probably be willing to pay it because that is based on value, value which local government is protecting.  Are you opposed to that?

 

Mr. Barbano:  

Somewhat, Senator, because the gambling industry is very adept and hires a lot of highly qualified people to mitigate its tax burden, and unlike the average householder, the value of the assets of the gaming industry is valued in a far different manner than a single-family dwelling.  A gaming property has its taxes based on its fair market value.  A gambling hotel-casino does not sell very often.  It is not like getting comparable house properties across town.  Gambling properties are essentially valued on a multiple of their cash flow.  Practically speaking, it is about five times cash flow.  In the case of the Reno Hilton, it was valued at $134 million, based on a gross profit of about one-fifth of that number.  The Reno Hilton came in and showed the Washoe County Board of Equalization its true value should be somewhere around $116 million, because its profits were below the 3-year benchmark on which its $134 million valuation was determined.  The Washoe County Assessor could not fight it.  Based upon national formulas, the Reno Hilton made about $20 million a year, around 1996, and so was worth about $120 million or less calculated on the way you figure the value of a casino.  They came in for a tax reduction, from being based on a value of $134 million down to about $116 million, and it cut their property tax somewhere around $400,000 per year. 

 

Mr. Barbano:

John Ascuaga’s Nugget started that with a reduction of about $130,000 a year and they have been lower ever since.  Anytime a casino’s cash flow tracks downward for a 3-year period of time, boards of equalization and the assessors have no choice but to cut their property taxes.  Homeowners enjoy no such luxury.  Granted, a home may have appreciated in value by a couple of percentage points over the last couple years, but the owner cannot come forward to the tax man and say, “I lost my job and I am only making $28,000 a year now, as opposed to the $56,000 cash flow I had before, so please, cut my taxes.”  Casinos can do that.  The way property taxes are assessed on casinos is different because they already have a lot more flexibility than does the individual homeowner.  To reiterate what Senator Neal said, the gambling industry is a privileged industry, it is a “sin” industry, and it is an industry we allowed to exist because the state was hurting for money, and gambling was supposed to pick up the tab, because we allowed it to exist here as a disfavored, privileged industry.  It is not to be treated like any other type of industry.  You have, essentially, a vice industry that creates documental impacts in the community that makes for bigger government and more costly government, and it has to pay privilege taxes.  You cannot say, “Okay now, gambling is too legitimate to quit, so we are going to make gambling pay taxes like any other business or homeowner.”

 

Janet L. Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada:

We would like to commend Senator Neal for being the only legislator who is willing to address the problems, issues, and needs in our state by asking for a gaming tax.  My organization is comprised of 43 member groups and many of them support the increase in the gaming tax.  All of them support a broad-based progressive tax.  We can no longer rely on the sales tax, which only hurts poor people more than it does the wealthy.  There are two members on this committee who sit on the finance committee, and every single day we hear that every budget does not have enough money to provide the services the communities need.  I feel it is the responsibility of this committee to find that money.  I would urge this committee to take the responsibility and look to a solution for this problem, whether it is a gaming tax, a business tax, or a banking tax.  We need to find something soon.  People are going to be hurting in this state and we continue to hear there is a shortfall.  The budget bills continue to mount as to how many needs there are in this state.  We do not score very well in this country.  Nevada seems to be last on the list, or first of the worst.  I think it is because we do not have a funding base that will support the programs we need.  I urge this committee to look to a broad-based tax, whether it is a little bit of gaming or a little bit of business.  We cannot wait 2 more years.  I appreciate the opportunity to speak.

 

Glen G. Arnodo, Lobbyist, Culinary Workers Union Local 226:

I am in opposition to S.B. 105.  (Mr. Arnodo read from [Exhibit H].)

 

Senator Neal:           

Mr. Arnodo could you tell the committee whether or not the Culinary Union represents the black jack dealers or the baccarat dealers?

 

Mr. Arnodo:     

No, Senator Neal, we do not.

 

William Bible, Lobbyist, Nevada Resort Association:

In 1987, I was the State’s budget director and a number of things were happening that would bring us, really, to this position today.  One of them was Congress was processing the Indian Gaming Regulatory Act, which was adopted in the late 1980s.  The other item was that New Jersey had recently legalized gambling.  In 1987, Nevada had very limited competition, but we were concerned about the competition from a fiscal perspective, as to what was going on in New Jersey and what, potentially, would be the effect in Nevada.  We were probably deciding whether we should project gaming revenues at 12 percent instead of 10 percent, or 10 percent instead of 12 percent.  We had double-digit growth through most of the 1980s.  The industry was growing rapidly; there were very few competitive threats on the horizon. 

 

I left the budget office in 1987, took a year off, and then served as chairman of the State Gaming Control Board for 10 years.  During that time, gaming evolved in this country to a degree we had not anticipated.  It started out in Deadwood, South Dakota, with the legalization there and proceeded down the Mississippi River from Illinois and through Iowa, Missouri, Mississippi, and Louisiana.  We now have legalized gambling in all except two states in the union.  Nevada’s gross gaming revenues now are no longer at the top of the report, tribal gaming revenues are now at the top, and it is anticipated that riverboat gaming is going to overtake the gross gaming revenue from Nevada in the very near future.  Tribal gaming was just recently legalized both by the state and the federal government, and you are going to start seeing a growth of gambling within close proximity to Nevada, and within the heartland of the Nevada market. 

 

Mr. Bible:

Tribal gaming is different than the normal commercial gaming because it is governmental gaming, if you adopt the theory that the tribes are sovereign nations.  The tax effect of these operations is essentially zero, because they are being operated by governmental entities which allow those operations more flexibility than a normal commercial operator would have.  They can have higher payouts because they are not subject to taxation, and they have greater cash flows to generate facilities.  Now that gambling has been formally legalized within the state of California, you are going to see growth in a manner we probably do not anticipate.  There are tribal casinos we can be proud of if they were operations were licensed and regulated by the state of Nevada.  They are the kind of operations the future holds for us in the state of California.  Senator Rhoads asked the question on a franchise.  Michigan has 3 licenses within a huge population center.  Illinois has 11 licenses, again within close proximity to huge population centers, and the same is true as you go down the Mississippi River where there is either limitation on licenses or there are limitations, because of geographic proximity, where the gaming is allowed to occur.  If you look at Nevada, you have got to put it in perspective.  The gambling we offer is a long distance from the population centers.  We have the requirement to keep our product fresh and the freshness of that product is the billion dollars of capital to build a product that attracts people.

 

I do want to talk about one thing that was in Senator Neal’s presentation where he alleged that the numbers might reflect skimming.  I believe it would be incumbent upon Senator Neal to present this committee with evidence, if he has evidence, that skimming has occurred to the levels he indicates. 

Mark Dodson, Chairman, Nevada Resort Association, and Co-Chief Operating Officer and President Of Western Casino Group, Park Place Entertainment:

My background includes new jurisdictions, how they came about, why they are taxed, where they are taxed, economics and monopolies, how the economics of taxes work, what increases in taxes after significant capital investment will do to mitigate future expansion and mitigate future growth potential in the market place. 

 

I want to discuss the position statement presented to the committee members, the “Nevada Resort Association’s Policy on New Nevada Taxes” (Exhibit I).  The Nevada Resort Association believes a clear case of need for additional tax revenues must be explicitly spelled out prior to the consideration of any new tax proposals.

 

Once the need for new taxes has been defined, the Nevada Resort Association strongly believes any new tax burden be equally distributed, broad-based and considerate of the taxpayers’ ability to pay.  We are here to try to fix the permanent infrastructure of the taxing system that will carry us into the next 20 to 30 years.

 

The State must not seek any new, single-source taxes, such as new taxes solely on the banking, mining, or any specific, individual industry.  The gaming industry will pay its fair share of any new taxes in the same manner, and to the same extent, as any other Nevada business.  We surely are more than willing to pay, like all businesses, in terms of a profit tax.

 

Finally, assuming the case for new taxes can successfully be made, these new taxes should not be aimed at any individual citizens, and appropriate safeguards or exemptions should be put in place to help Nevada’s small-business owners.  Gaming will continue to be responsive to the financial needs of state government.

 

I would also like to take this opportunity to point out a few conceptual issues in terms of the tax perspective I am not sure have been conveyed properly.  First of all, the gross gaming revenue tax is not a pass-through tax.  Second, the tax at 6.25 percent is on revenue.  If you take that down to a profit line item, they have spent millions of dollars on marketing and invested billions of dollars in drawing attractions to Nevada.  That equates to approximately 4 or 5 percent of the profit tax.  So, right now, it is 6.25 percent and we are paying 24 to 30 percent, depending on the size of the property, on profits to the state government for taxes.  That is a very highly effective tax rate from a state perspective.  If S.B. 105 were to happen, we would be looking at paying 40 to 50 percent of our profits in taxes. 

 

Mr. Dodson:

Last, from a company perspective, if S.B. 105 had been in place 3 years ago, we would never have built Paris Las Vegas, because we could not have justified to our shareholders an adequate rate of return to do that project.  If you look at Atlantic City, you will see their tax structures are not of the monopolistic type markets you find in Illinois, Indiana, and Michigan. 

 

In closing, it is essential the State Legislature and the State of Nevada provide a long-term solution to the state’s budgeting, education and social needs.  This will not be accomplished with Band-Aid tax solutions, tax solutions which single out one particular industry, or put any undue burdens on any individual group or group of people.  This is a very complicated situation that needs a well though-out strategy and is essential to the long-term viability of this state and its programs.   

 

Gary Klug, Chief Financial Officer, Red Lion Hotel and Casino, Elko:

We own an airline and we fly people in from all over the country.  We bring in about 100-110 each day, they spend 3 days, and then we fly them home.  It is not a big program, but it is a significant economic development bringing in about $20 million, annually, into the city of Elko.  We used to fly two flights daily, but rising costs made that economically unfeasible last year.  This tax would eliminate 75 percent of the net income we had last year.  As someone talked earlier about property taxes, that reduction in our profit would also lead to a $50,000 reduction in property tax.  In addition, we have nine hotels in northern Nevada; of those three of our casinos would be affected by this tax, even the one in Winnemucca.  The Red Lion Hotel and Casino in Elko would be affected at any of the thresholds Senator Neal talked about earlier.  In the last 6 years, the owner of our organizations has put back 100 percent of the profits into the community.  We purchased a hotel, built a new hotel, and we have done several major renovations.  If this tax were in place, he would not be making those renovations and putting those capital dollars back into the community.  I ask you to, please, reconsider this for small casinos in the rural areas that are not making money.

 

William R.  Eadington, Professor, Economics Department, and Director, Institute for the Study of Gambling and Commercial Gaming, University of Nevada, Reno:

We (Institute for the Study of Gambling and Commercial Gaming) were commissioned by the Nevada Resort Association to look at a variety of factual issues dealing with the tax structure and profitability of the Nevada gaming industry and to make comparisons with other Nevada industry sectors.  The study (Exhibit J.  Original is on file in the Research Library.) was undertaken through the institute by myself with the assistance of three other faculty members at the university, Richard Mason, John Mills, and Mark Nichols.

 

(Mr. Eadington began a Microsoft PowerPoint presentation (Exhibit K) based on (Exhibit J). 

 

Our study’s main objects were the following (page 2 of Exhibit K):  First, we wanted to estimate the role the gaming industry has played in the economic growth and performance of the state of Nevada.  Second, we wanted to examine recent trends in the gaming industry and see what implications they might suggest for Nevada in the immediate and intermediate future.  Third, we wanted to compare the tax burden of the gaming industry with that of other major economic sectors within the state of Nevada.

 

We made a number of findings resulting from detailed quantitative analysis of public documents that came either from the State of Nevada or from a variety of federal agencies.  Some of these are not surprising; some of these are things that are certainly well-known; others are perhaps more educational and interesting in the implications that they carry.

 

Our first finding (page 3 of Exhibit K), is the gaming industry remains the largest employer in the state of Nevada among the major economic sectors.  This can be seen by the following chart (page 4 of Exhibit K) that notes, based on 1999 data from the Department of Employment, Training and Rehabilitation, the gaming, hotel, and recreation categories still employ about 25 percent of the labor force within the state.  The next largest sector is trade, which is at 21 percent, and other services at 19 percent.  It does point out the gaming industry is still, by far, the most significant employer within the state. 

 

Our second finding (page 5 of Exhibit K), which again is not terribly surprising, is the tax on gross gaming revenues is the largest source of General Fund revenues for the State of Nevada, and as you well know, Nevada’s General Fund revenues are dominated by two sources of tax revenue (page 6 of Exhibit K): gaming tax is at about 41 percent using 1999 data; and sales and use taxes are at about 40 percent in 1999 with a handful of smaller taxes making up the remainder of General Fund revenues for the State. 

 

Mr. Eadington:

Our third finding (page 7 of Exhibit K), is in comparison to all other major economic sectors in the state of Nevada, the gaming industry is by far the largest taxpayer in the state.  This is reflected in the following chart  (page 8 of Exhibit K), which uses a variety of assumptions as well as the tax rates themselves, and extrapolation from a variety of Internal Revenue Service publications to estimate the tax payments made by various sectors within the state of Nevada through payroll taxes, real estate taxes, business taxes, license fees, and industry-specific taxes which, in the state of Nevada, apply to the gaming industry, the mining industry, and the insurance industry.  You will notice here the amount of payments in fiscal year 1997 by the gaming industry exceeded $1 billion.  The next largest sector would be the trade sector which was somewhere in the vicinity of $350 million. 

 

Another finding (page 9 of Exhibit K), and this one starts getting into the areas that are somewhat more subtle.  The profitability of Nevada’s gaming industry has been declining since the mid-1990s.  The following table (page 10 of Exhibit  K), taken from the Nevada Gaming Abstracts 2000  (Nevada Gaming Abstract 2000, State Gaming Control Board.  Available in the Research Library.), can give you some inclination of what has happened over the last decade.  This particular chart maps net income, before federal income tax, divided by total revenues that accrue to the gaming companies who have a minimum of $1 million a year or more in gross gaming revenues.  You will notice the ratio of net income to total revenues, which is a proxy for profit rate, “maxed out” in 1993, at about 12 percent and in the most recent report came in at 2.8 percent, and the decline has been relatively steady over the last 7 years.  

 

The next finding (page 11 of Exhibit K), is the percentage of revenue in the gaming industry, coming from gaming as opposed to other sources, has been declining steadily since 1993.  In many respects, this is a reflection of the success of the Las Vegas Strip mega-casinos to transform themselves and substantially diversify the offerings they have to their primary clientele.  In many respects, this is very good news, but in one respect, and that is with regard to the tax base, it may not be very good news.  As we trace the ratio of gaming revenue to total revenue (page 12 of Exhibit K) among the roughly 240 gaming properties that generate gaming revenues of $1million a year or more, we find in the early 1990s, indeed until 1993, the amount of revenues coming from gaming exceeded 61 percent.  However, between 1993 and the year 2000, that has fallen by 8 percent, and at present, only 53 percent of revenues that accrue to gaming companies throughout the state come from gaming.  The balance, or 47 percent, comes from other sources.  Indeed, if we were to look at the largest casino companies operating on the Las Vegas Strip, they already generate more than half of their revenues from nongaming sources. 

 

Mr. Eadington:

Our next finding (page 13 of Exhibit K):  Tax collection from the gaming industry as a percentage of total industry revenues has declined considerably since 1993.  What we are measuring in this chart (page 14 of Exhibit K) is the ratio of taxes paid to total revenues for gaming industry companies.  You will notice it peaks out a little over 9 percent in 1993, and declines to slightly more than 8.2 percent in the year 2000.  Again, this is really a reflection of the diversification of the entertainment product offered by Nevada casino companies, especially those in Clark County.  Their success at diversifying, which I think is a very astute response to the proliferation of gambling throughout the United States, has as a somewhat regrettable side effect, which is an erosion of the tax base for the state of Nevada, which effectively taxes only the gaming revenue portion of their revenues. 

 

Our next finding (page 15 of Exhibit K), is the return on invested capital in the gaming industry in Nevada has also been declining since the mid-1990s.  As Mark Dodson said, this is an industry that has benefited phenomenally by its ability to refresh and redefine itself, and build new phenomenal structures that have made Nevada, and especially Las Vegas, very attractive to all the existing and potential visitors to its markets.  Yet, the ability to build billion-dollar properties, or to make multi-hundred million-dollar refurbishments and refreshments of existing properties, is very much dependent upon the return on invested capital companies can expect to get from those activities.  If that kind of investment is not forthcoming, then the prognosis for the gaming industry is quite a bit different than if it has the capability of continuing such investments.  The following graph (page 16 of Exhibit K) is a ratio of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) which is earnings before interest depreciation, taxes, and amortization divided by total assets, as a proxy for return on invested capital.  The EBITDA is roughly comparable to cash flow or unencumbered cash flow for a corporation.  You will notice here, a return on investment capital using this chart again peaks out in around 1993 at about 22 percent.  But, between 1993 and the year 2000, that has fallen to about 10 percent.  Many corporations use as a hurdle-rate somewhere in the vicinity of 15 percent before they will even consider making investments, because of their fiduciary responsibilities to their shareholders.  What this is suggesting is it is going to be more difficult in the future for companies to justify the kinds of capital investments that have taken place in Las Vegas over the last decade as they look forward into the future.  This chart (page 17 of Exhibit K), I think, makes the same point quite dramatically.  This basically looks at a number of mega-casino projects that opened on the Las Vegas Strip prior to 1998.  They are not sequential in time, but they have all generated a return on invested capital, defined as a first-year EBITDA dollar or cash flow divided by the capital expenditure, at 20 percent or more.  Among the five major casinos that have opened since 1998, we find a stair-step pattern, declining from the most successful being Paris Las Vegas, to Bellagio, to Mandalay Bay Resort and Casino, to the Venetian Resort-Hotel-Casino, and if data were available on the Aladdin Resort and Casino, I suspect it would be one step further down.  One of the implications here is, even without California Indian gaming, even without a relatively uncertain economy facing us at the national level, and even without the risk of tax increases, this is an industry that is going to be somewhat challenged in justifying major capital expenditures in the immediate future, if not the intermediate future as well.

 

Mr. Eadington:

The next finding in our report (page 18 of Exhibit K) is the growth of the gaming industry in the state of Nevada has been concentrated in Las Vegas, and particularly on The Strip, in the 1990s.  Other regions in the state have experienced considerably slower growth.  As Senator Townsend earlier noted, northern Nevada has not experienced the kind of ebullient growth that has characterized Las Vegas in the last decade.  What I have done here (page 19 of Exhibit K) is to break the total revenue growth out for the State of Nevada which is the top line, and then broke it into the various regions, the Las Vegas Strip being the purple line with the rectangles.  You will notice all the other areas in the state that are included, Laughlin, Washoe County, and south Lake Tahoe (Stateline), as well as downtown Las Vegas, are clustered in that very flat line at the bottom.  So, in many respects, the growth of Nevada’s gaming industry has been very much the growth of the Las Vegas Strip, especially for the last decade. 

 

The net income (page 20 of Exhibit K), as a percentage of revenue for the gaming industry in the state of Nevada, has been declining in almost all regions in the state since 1996.  This chart (page 21 of Exhibit K), which tracks the ratio of net income by region, first for the state, the top line, and then for the various regions in the state, points out, perhaps without tremendous clarity, the difficulties that have occurred throughout the state.  The purple line is the Las Vegas Strip, which has gone from net income before federal income tax of nearly a $1 billion in 1996 to under $200 million in the year 2000.  The rest of the regions in the state have experienced downward movements that are not quite that dramatic, and, of course, the net income for the entire gaming industry in the state of Nevada has fallen from a peak of nearly $1.4 billion in 1996, to slightly under $500 million in the year 2000.

 

Mr. Eadington:

Finding number 10 (page 22 of Exhibit K):  The return on invested capital has generally declined in all of Nevada’s major tourist markets.  In light of this and because of growing competition from Indian gaming in California and Arizona, new investment in Nevada casinos is going to become harder to justify throughout the state.  Here, even though this is a bit of a spaghetti chart (page 23 of Exhibit K), the underlying implication is very similar to what I said earlier about the expected return on invested capital demanded by shareholders or potential owners, and builders of casino properties.  If that does not meet an expectation threshold, it is going to be very difficult to generate financing to build significant facilities, whether they cost in the $50-million or $100-million range, or whether they are in excess of a billion dollars.  The blue diamond line for the year 2000 shows the lowest point is for the Las Vegas Strip, and the others represent the other regions within the state of Nevada.  With the exception of south Lake Tahoe (Stateline), none of them are above that 15 percent threshold.  South Lake Tahoe, of course, is constrained by a variety of other reasons besides return on capital in terms of its ability to substantially invest in new properties.

 

Our next finding (page 24 of Exhibit K):  In comparison to other major economic sectors in Nevada, the gaming industry has served as the state’s major export and has provided the major source of income for Nevada’s residents.  We worked with an input/output model called the IMPLAN (Impact Analysis for Planning) economic impact assessment modeling system (page 25 of Exhibit K), to try to estimate two important components broken down by sector within the state.  The first component is the so-called export component of that particular sector which, roughly speaking, is the proportion of sales from a sector that comes from sales to people who live outside of the region.  You will notice, as you run through the various sectors we were examining, the gaming industry has the largest export component of any particular sector.  Basically, what this says is something fairly obvious.  Out-of-state residents do most of the gaming and most of the spending done within gaming properties within the state of Nevada.  Therefore, the gaming industry becomes a major pipeline to the rest of the world in which revenues are poured into the state, and these have the potential of transforming into incomes.  Whether they transform into incomes or not has to do with the second factor, which is the so-called value-added phenomenon.  Value-added is a reflection of how much of the value of goods and services sold by a given sector are actually created by Nevada-owned resources.  You will notice, in comparison, the trade sector, which had about $33 billion in sales, but a fairly small proportion of that was to outsiders, about 23 percent by our estimates, and of those sales, a fairly small proportion was value-added, which basically said what people were purchasing in trade was manufactured or put together, somewhere else, and reflected value-added resources that came from another state as opposed to Nevada.  Only 17.8 percent of the total trade expenditure was value-added by individuals or other assets that came from Nevada.  On the other hand, gaming had approximately 94 percent as its export component, and about 64 percent as its value-added component, which basically says, whether you like the gaming industry or not, it is a major source of revenues from outside of the state.  It is our “auto industry”, and casinos are our “factories.”  It is a major source of income because there is such a high value-added component with respect to the gaming industry, in comparison to other industries.

 

Mr. Eadington:

Our next finding (page 26 of Exhibit K):  In comparison to other economic sectors in the state, Nevada’s gaming industry has experienced good economic performance in the recent past.  However, there is growing evidence their financial position has deteriorated since the mid-1990s.  This was a thread we were determining throughout our findings.  We took the 1997 corporate income tax accumulations at the national level, compiled by the Internal Revenue Service, broke it down by one-digit SIC (Standard Industry Code) categorizations into the categories of mining; construction; manufacturing; transportation, communication, and public utilities; wholesale and retail trade; finance, insurance, and real estate; services in general; and the gaming.  We did a number of computations of the performance of the gaming industry in Nevada for which we had very good data through the Nevada Gaming Abstracts and other sources, and compared them to the performance of other industries.  This particular chart (page 27 of Exhibit K) looks at the ratio of net income to total assets, and it basically takes national averages for the other sectors, compares it to Nevada gaming, and what it suggests is Nevada has experienced, in the period 1994 to 1997, fairly good performance on its assets base in terms of being able to generate income from those assets.  However, I would point out here, this is a stair step in the opposite direction to what you are normally used to reading, so the left-hand bar reflects 1997 and then the second, and third, and fourth bars are 1996, 1995, 1994 respectively.  As you look at the gaming sector, it was getting the return for the ratio of net investment to total assets, but it was declining in each of those 4 years, which is slightly disturbing in the context of our being in the midst of the largest economic expansion the United States economy has ever gone through.  The gaming industry, which was performing well, was seeing deterioration, driven by its own cycle, and as a result of common-sense economics.  The gaming industry was experiencing diminishing returns to additional assets being added, especially on the Las Vegas Strip.  The following chart (page 28 of Exhibit K) makes a similar point by taking the ratio of the EBITDA, or cash flow, to total assets.  The only significant difference between this chart and the previous chart is this chart pulls out whatever methods of financing were used to generate those assets.  Again, as you look at the gaming sector, you see the stair-step pattern, but, in this case, the performance of the gaming industry is not that far out of line with some other industries, such as construction and services, even though those three sectors outperform all the other sectors for the period of time in question. 

 

Mr. Eadington:

Our next finding (page 29 of Exhibit K):  In comparison to other economic sectors in the state, the gaming industry has paid a higher-than-average proportion of its net income for taxes to the state (page 30 of Exhibit K).  In this case, we are computing the ratio of taxes paid to net income.  We are using national averages and comparing them to Nevada gaming.  Nevada is above the all industries’ average which is at the far left of the chart, but it is behind services, and roughly comparable to construction, wholesale, and retail trade.  This is not quite so dramatic as the next finding, finding number 14 (page 31 of Exhibit K):  In comparison to all other economic sectors in the state, the gaming industry pays a considerably higher proportion of its total revenues in taxes.  Notice here (page 32 of Exhibit K), the comparison we are making to the ratio of taxes to total revenues, using national averages for the other sectors and specific Nevada data for Nevada gaming.  Roughly speaking, the gaming industry pays in excess of twice as much of its total revenues in taxes.  This does not include federal income tax to primarily state and local entities. 

 

Mr. Eadington:

Our next finding (page 33 of Exhibit K):  The taxes collected by the state, as a percentage of total assets of the gaming industry, are at a considerably higher rate than taxes, as a percentage of assets, for any other economic sector.  This chart (page 34 of Exhibit K) shows the ratio of taxes paid to total assets with national averages for everybody but the gaming industry.  In many respects, and this is true of gaming industries throughout the world, government, because it tends to tax gross revenues, is a de facto partner to some degree with the casino industry.  In some jurisdictions, as Senator Neal indicated, this tax rate can get very high.  In many European casinos, the casinos effectively become government operations when the tax rate goes beyond some threshold.  Nevada does have a comparatively low tax rate, but there is still a question the government is serving as a de facto partner.  Indeed, in the year 2000, the State of Nevada received approximately $700 million in taxes on gaming licenses and fees.  The profitability of the gaming industry was less than $500 million.  The state was, in effect, a majority partner, if you take that particular perspective.  Nonetheless, the gaming industry has been able to be a good citizen to the state, as a de facto partner, by generating a higher return on the assets of the gaming industry than is the case for any of the other sectors we might look at.  This is using national figures for the other sectors and specific state figures for the state of Nevada.

 

Just a couple of other observations that are not included in the charts, but certainly are observations others have made and I would fully support.  One of the interesting issues behind our study, and it is a point that has been around a long time, is Nevada has a long and very precarious tax structure by being heavily dependent upon a single industry for its major source of tax revenues.  As long as the gaming industry grew at phenomenal rates and pushed Nevada into being one of the fastest growing states in the nation, as a direct result of the gaming and tourism industry, we have managed to get away with it (page 35 of Exhibit K).  However, there is growing evidence Nevada’s population growth is becoming increasingly “unhooked” from the gaming industry’s growth.  I would make an observation in the last 10 years we have been quite successful in efforts for diversification.  We have become quite successful in promoting, especially southern Nevada, as a very desirable retirement region in the state, and we have, fortunately or otherwise, benefited by the population and economic growth in the West, especially in the state of California.  California has created spillover into the state of Nevada, and so we are seeing a lot more growth being driven by factors besides gaming and tourism than historically has been the case.  That might be good news, but it does create some problems.  Nongaming-induced growth creates demand for public services, but does not expand the tax base proportionally.  That is an issue that is very serious and legislators, policy makers, and other concerned citizens have to take quite seriously.  If gaming growth slows down, and the population growth continues to expand at rates Nevada has gotten used to in recent years, Nevada cannot avoid a fiscal crisis with its present tax structure.  That is a reality, whether you like it or not. 

 

Mr. Eadington:

Some of the important conclusions (page 36 of Exhibit K) we draw from our study is:  First, in all likelihood, the rates of growth of the gaming industry are going to slow, at least over the next 3 to 5 years.  The return on investment issues, the slowing of the national and regional economy, the proliferation of Indian gaming, especially in California but also in Arizona, are all factors that throw a degree of uncertainty, if not a concern, among those analysts within publicly traded corporations and other potential investment organizations, for those that might be considering or contemplating building competitive gaming properties anywhere within the state of Nevada.  They look at the same numbers that we look at.

 

Second, diversification in the gaming industry, in the sense casino companies are going to increasingly generate revenues from nongaming sources, is a trend that will probably continue.  I think Las Vegas and the Strip casinos in Las Vegas are at the edge of the envelope.  In all likelihood, they are going to be copied or duplicated by other resorts within the state of Nevada, and for that matter, by other gaming resorts in competing jurisdictions which will also be trying to attract customers who have grown to enjoy their Nevada experiences.

 

Third, competition from California and Arizona will just add to the competitive pressures on the gaming industry.  California is going to be a much larger casino industry than most casual observers give it credit for.  It is really just a matter of time before the knowledge, expertise, know-how, and marketing skills Nevada has polished, transmit themselves across the state line and create very formidable gaming resorts within the state of California considerably closer to population centers.

 

Fourth, Nevada should explore tax alternatives that are broad-based and less dependent on the performance of any single industry.  This is just one of those fundamental principals of good tax policy, whether we are at that point now or not, I do not know.  One of the implications of our study is the existing tax structure is going to have considerable difficulty performing as well in the future as it has in the past.

 

Steve Comer:  Partner, Arthur Andersen Limited Liability Partnership, Las Vegas:

In 1999, the Nevada Resort Association asked the center and us for business and economic research to study the physical impact of population growth in Nevada.  We issued our report in March of 2000 (Exhibit F).  Some of the findings in the report are rather unsurprising.  The gaming industry in Nevada employment grew in the 1990s, along with the population, and stayed in a range of over 20 percent of total employment.  Our state expenditures also increased significantly and along with population growth.

 

There were two parts to our study:  1) Who pays the taxes in Nevada, and 2) What are the implications for that and for growth for the state of Nevada?  

 

First, who pays the taxes in the state of Nevada?  One of the books that we utilized during our research was put together by the government in the District of Columbia.  (Statistical Abstract of the United States, United States Department of Commerce, 1998.  Publication is on file in the Research Library.)  It shows tax rates and tax burdens for the largest city in each one of the states in the United States.  It has both state and local taxes.  It computes the tax burden for a family of four at different income levels.  What this study indicated was, Las Vegas ranked 48 out of the 50 states, and the tax burden for a family of four was less than one-half of the average tax burden for a family in the rest of the United States.  Why is that?  I think, for the most part, in the other states, on average, their state revenues are made up of 40 percent from state income taxes.  That is not a value judgment; I am not saying that is good or bad.  What it is telling us is individuals in the state of Nevada are not paying the taxes, and are not paying the state tax revenues.  If individuals are not, who is it that is paying?  Mr. Eadington, in his report, and also in our report, found there are two major sources of taxes in Nevada, the gaming taxes and sales taxes.  We know where gaming taxes come from, but often we only think sales taxes are collected from the stores, and we do not think other sales taxes are paid by the gaming industry.  The gaming industry pays significant sales taxes on its construction.  The gaming industry pays significant sales-and-use tax on all of the things it utilizes in trying to bring people into the state of Nevada, such as food and beverage complementaries for players.  The gaming industry is the principal driver of sales taxes derived from tourism, which is significant in this state.  If you look at the Nevada Gaming Abstract 2000, it indicates  although the total revenues for the gaming industry were over $17 billion, the expenses for the gaming industry were almost $17 billion.  The significant part of those expenses is incurred to bring customers to the state of Nevada. 

 

Mr. Comer:

In the study, we allocate the taxes between the gaming industry sector and all other sectors.  The purpose was to determine what are the fiscal impacts of growth in the state of Nevada, and what part does the gaming industry play in paying for that growth.  What we found was the gaming industry pays approximately 50 percent of the taxes, yet the workforce makes up less than 25 percent of the workforce or, said another way, 75 percent of our workforce in the industry pays for less than 50 percent of the taxes in the state of Nevada. 

 

Our state expenditures have grown over the past 10 years in line, principally, with population growth and in line with what the federal government requires us to pay.  Our state government, principally, spends money on people.  They are people-related expenditures, whether it is welfare, social services, education, university system, public safety, law, or justice.  We compared the spending on people to the revenue that are derived from the industry sectors.  We found the gaming industry, on average, pays twice as much in taxes as are incurred in expenditures for that industry sector.  In all sectors other than gaming, the amount of expenditures for that sector is twice the taxes that are derived from that industry sector.  Again, this indicates as we continue to diversify our economy, the gaming industry is subsidizing a large portion of the growth that occurs in the state, because the gaming industry is paying for the services of those other people.  We calculated this amount to be approximately $600 million in 1998.  We also looked at total growth between 1990 and 1998 in nongaming sectors, and we asked how much in taxes were paid for that sector that could have been used for other services in the state, if we had not had that growth.  The amount was $300 million.  Growth clearly has a cost in Nevada and clearly that cost is being paid by the gaming industry.

 

Senator Schneider:

During the last century, Las Vegas has doubled in population every decade.  Each decade we doubled in population, gaming grew and was paying its fair share.  As you are giving these numbers, you are relating it to the mid-1990s through today.  What I would like to see is how these numbers compare to the decades of 1940-1980.  Then we can determine if our population has been doubling every decade, and what was gaming’s share they were paying during that time compared to what gaming is paying today, and then compare that to other businesses.

 

Mr. Eadington:

We looked at the period from 1990 through 2000.  My suspicion is we would have found considerable similarity.  We would have had a lot more up-and-down in terms of the return on investment and profitability issues of the gaming industry, but the one point I think would be very clear over that period, especially for southern Nevada, is a very high correlation between the rate of growth of employment in the casino industry and the rate of population growth.  It is my suspicion this might be the dimension that is changing in the year 2001, and in the first decade of this new century.  In some respects we have been very fortunate to have a high correlation between gaming industry growth and population growth, because our tax base was so closely linked with the performance and growth of the gaming industry. 

 

Senator Townsend:

Following up on Senator Schneider’s inquiry, on page 16 (Exhibit F), which deals with sales tax rates, personal/business income, household tax burden (family of four), it relates states to Nevada, which has neither the personal nor the business income tax.  Then it shows the sales tax burden and the household tax burden; but then on page 14, it lists the property tax burden of cities and Las Vegas is thirty-second.  Did you have statistics that could be extrapolated to put a column on page 16, where you have the states’ property tax burden, based on Oregon, Utah, Arizona, Idaho, California, and Colorado?  Is there a place, in the appendix somewhere, where I can pull that out?

 

Mr. Comer:

We do have those numbers, I do not think they are in this report, but they are in the District of Columbia government report on state tax burdens (Statistical Abstract of the United States), and it does have a column in this report for property taxes for each one of the cities, the largest in that state.

 

Senator Townsend:

Do they have it by the state?  Your figure 8, page 16, represents the western region by state.

 

Mr. Comer:

That is correct.

 

Senator Townsend:

What I am trying to get at is adding a fourth column that lists the burden on the property tax.

 

Mr. Comer:

The source of this information is the District of Columbia report, so we used the largest city in each one of these states.  Yes, that number is available.

 

Mr. Bible:

I believe the chart on page 14 takes a hypothetical family and ascribes to them certain income and ownership patterns, puts them in the largest city in each state in the United States, and shows what their tax bill would be.  In this case, the tax bill in Las Vegas would be $1167, whereas in Bridgeport, Connecticut, their tax bill would be $8417.  The problems with a lot of the statistics you see about tax burdens is they simply take total income and divide it by total state population, which does not reflect the result of the tourism in the state of Nevada, and does not reflect it fairly. 

 

Senator Townsend:

I was just trying to add another column of property tax burden that would give us a fair representation, by state.  I know what the property tax burden is in Oregon, because it says the sales tax burden is zero.  You have not checked the property taxes in Oregon lately.  They are substantial, and it is important to add that additional issue.

 

Mr. Bible:

We can provide that information because it is included in that district study.

 

Senator Townsend:

On page 15 (Exhibit F), they list the 10 largest, taxable property owners for 1998/1999.  Is there an updated version for 1999/2000?

 

Mr. Comer:

It would be my belief there probably is at least one more current year.  This was the most current when we did our work.

 

Senator Townsend:

The reason I ask is you have the chairman of the Nevada Resort Association with you, and he is “behind the curve” here, and if he has moved up, he is behind the power company. 

 

Mr. Bible:

My guess is this is the property of the operating entities.

 

Mr. Dodson:

That is correct.  If we were to do a consolidation of the properties into one category, it would be much different.

 

Senator Neal:

When I look at this data you have presented, one of the things I was not able to discern by perusing these two documents, is where you made a comparison of the services the tourists use when they come to this state.  In my argument, one of the premises was the tourists become temporary residents when they are here, they utilize all the services the permanent population utilizes: health care, streets, police protection, and all.  But I do not see that figured into the cost, and if it is here in either one of the publications, I wish you could point it out to me.

 

Mr. Bible:

We have not looked at that issue.  When I did, I found very few tourists enrolling in elementary and secondary education in the state of Nevada.  Those tourists who enrolled in the university system paid an out-of-state enrollment fee.  If you look at the state budget, at least half of the expenditures go to areas not driven by tourists.

 

Senator Neal:

Have you talked to a Clark County sheriff, lately?  He would tell you law enforcement is driven by tourists, they hire police on the basis that they have to deal with the tourists. 

 

Mr. Bible:

We recognize tourism does have an impact on social services, on police services, but I am just saying you take 50 percent and subtract out for education, I think you would allow us to make the argument tourists are not coming here and enrolling in the elementary and secondary school system.

 

Senator Neal:

The point is if they are here, they are utilizing the services, and there is a cost for those services somebody has to pay for.

 

Mr. Bible:

That is true, and the gambling industry, on a specific targeted tax, contribute about 50 percent to the State’s General Fund.  Additionally, there has been a lot of revenue increases since the year 1987.  The gaming industry pays all of those taxes, the same as other businesses and other people.

 

Senator Neal:

The premise of my argument is based on the gaming tax, particularly the table drops and the slots.  We are not talking about the food, beverages or the shops; just the gaming take alone is what we are dealing with.  Tell me, if you just looked at the take from the drop boxes, of the $9 billion in the year 2000, how could you figure all of this and trace the assets in your charts.  We are not talking about the total part, the structure of the hotel.  We are just talking about the gaming portion, the money-intensive portion, where you drop your money in and they take it out and take it to the counting room.  How do you figure that in?  Do you figure that in or do you separate that out in some way?

 

Mr. Eadington:

The world looks upon the casino industry as an industry that is comparable in terms of financial measures and long-term and short-term performance, in the same manner that it looks at any other major-industry sector.  This is reflected by the kind of attention given to the gaming industry in the last 15 years by Wall Street analysts, and by the diversification and performance of the various publicly traded companies that have become quite important in Nevada’s economy.  One cannot look at the gaming revenues as a separate entity without examining all the other assets and all the other complementary products and services that go along to providing the environment where people are willing to spend money on the gaming tables or the gaming devices within the state of Nevada.  One has to look at the kind of structure we are examining, and examine the gaming industry as an industry, and individual companies within the gaming industry as businesses that will survive or fall based on their financial performance.

 

Senator Neal:

Is it not a fact gaming is treated as a separate revenue stream within the hotels? 

 

Mr. Eadington:

It is identified as a separate revenue stream, but as a reality, it is still part of a much more complex, multi-dimensional business enterprise.

 

Senator Neal:

You could be making all the money in the world in terms of your drop box, but if you have a shortage in your rooms, you are not going to lay off the dealers, you are going to lay off the maids. 

 

Mr. Eadington:

The response is gaming may be the primary rationale for many people to come to the state of Nevada, but the fact is, in the fiscal year 2000, the gaming industry generated revenues of roughly $17 billion and expenses of roughly $16.5 billion.  The difference is the net income before federal income tax.  In order to make the gaming revenues, which are a key component of their revenue stream, they have to spend a lot of money on labor, on physical plant, on services, and on cost of goods sold.

 

Senator Neal:

You just gave a prime example I did not see in your chart.  You talked about the overall take of gaming of $17 billion, which includes the rooms, beverages, food, and other things along with gaming.  Then you said they had $16 billion in expenses.  Can that be traced anywhere?

 

Mr. Dodson:

First of all, this is the second accusation, direct or indirect, I take exception to.  First, with the skimming, second, is that we are publicly traded . . .

Senator Neal:

Wait, wait, let me tell you something about the skimming.  You did not hear what I said on the skimming.  I said the gaming control board has a mechanism where they count the drop box, and I said, if the money dropped in there does not match the pool on those machines, then you could probably suggest there is skimming, okay?  I did not say you were skimming, but if it does not match what is coming in, in the terms of participation of playing, then you have some question as to why that is the case.  That is the question I raised.

 

Mr. Dodson:

If I misunderstood you, my apologies.  We do have mechanisms to trace our expenses.  We are a publicly traded company, audited by the SEC (Securities and Exchange Commission), and by public accounting firms.  Do you think I am going to let money go out the door I do not know about?  There is no smoke-and-mirrors diversion of funds going on here to try and skirt taxes or show our ability to pay taxes.  Regarding separating gaming, hotels, food and beverages, we have spent the last 10 years trying to market Las Vegas as a destination resort.  That is what we have done.  That is why people come here.  It is not just for the gaming.

 

Senator Neal:

I participated in it.  You know I have to pass the laws to do that.

 

Mr. dodson:

I am not saying you did not.  What I am saying is there are mechanisms, ways to track all this information, and to start a process where you are trying to draw people in and entertain them, lodge them, sell food, beverage, and gaming, you cannot start to bifurcate the different revenue streams.  That is half the problem with the state tax structure right now.  We have room taxes we pay, close to 11 percent, it goes to the LVCVA (Las Vegas Convention and Visitors Authority) and they market it, and they only get 48 percent of it, 10 percent goes to local government as a collection fee.

 

Senator Neal:

Since you brought that up, is it not a fact when the convention authority takes the money and the room tax, they also give contracts to go out and advertise to bring people into this state?

 

 

Mr. Dodson:

They give contracts out to advertise and attract, that is why a piece of it is there.  But, earlier in testimony, it was inferred it is all gratuitous to us, without mentioning the fact we pay that room tax.

 

Senator Neal:

You do not pay the tax, it is a pass-through.

 

Mr. Dodson:

Let me give you a little food for thought.  If I am walking down the street and I have $100 to pay for a room, where am I going to stay?  Where the room is $100 and I pay another $10 for my room, or am I going to stay somewhere where it is $90 and it will be $99 for my stay.  So to suggest it is pass-through, I would disagree with, conceptionally. 

 

Senator Neal:

You are suggesting it is not a pass-through?

 

Mr. Dodson:

I am suggesting people have budgets and people live to budget.

 

Senator Neal:

And, the room tax is not a pass-through?

 

Mr. Dodson:

Conceptually, from a business perspective, I do not believe so.  When someone’s bill is rung up, there is a room rate and there is a tax on his or her bill for a total cost.  If they pay that tax, they have $10 left in their pocket to go buy an ice cream cone, play a slot machine, or buy a candy bar. 

 

Senator Neal:

And, that is not a pass-through.

 

Mr. Dodson:

Conceptually, I think there are trade offs in life and that is one of them.

 

Mr. Comer:

With respect to expenses, the state of Nevada is where Mr. Eadington derived his number, so it is something the state puts together on an annual basis and indicates how much was spent, and Mr. Eadington has that report on the table and that is where he got the $16.5 billion in expenses.  That was something put out by the State of Nevada.

 

Senator Neal:

You said the State of Nevada put that out, you mean our State Gaming Control Board put that figure out?

 

Mr. Comer:

That is correct.  The second thing is the State Gaming Control Board collects those numbers for all the departments, because they know we have an integrated business where there may be advertising, other promotional costs, a lot of other costs, interest, and depreciation associated with any types of revenues. 

 

Senator Neal:

Is it the position of the gaming representative here, the gentleman from Red Lion Hotel and Casino, and you, from Park Place Entertainment Corporation, you should not pay any additional taxes at all? 

 

Mr. Dodson:

It is, and I stated that position for the record.  We are not here to say, “if there is a need, we should not pay additional taxes.”  We have said, “If there is a need, we should pay taxes, others should pay taxes, and it should be done on the same basis equally.” 

 

Senator Neal:

Who, in your judgment, should determine the need?

 

Mr. Dodson:

I think a lot of that determination, what the sources and uses are, and what the needs are, will be presented in May with the total budget.  We have an indication there is some kind of need.  We just do not have the full disclosure of information on what exactly is out there.  I think it is a governmental process that is going to go through, in terms of determining the budget and what the needs are in the future, and to find out how to fund those.  There is a problem with the tax system here, and it has got to be fixed if we are going to grow and provide the services we need to provide for a state of this size. 

 

Senator Neal:

Will you lead the way by making a proposal to increase the gross gaming tax?

 

Mr. Dodson:

Again, I think the tax structure should get away from increases in gross-revenue taxes, and focus on a net-profit tax. 

 

Senator Neal:

A net-profit tax for gaming?

 

Mr. Dodson:

For the business tax.  If you are looking for a new tax strain, the calculation should be the same for gaming, for prospective revenues, or for additional revenue sources, as it is for any other business.

 

Senator Neal:

To follow that recommendation, of net-profits tax on gaming, this state would have to be the biggest sucker in the world, because no gaming industry jurisdiction is going to put in a net-profit tax on gaming.”

 

Mr. Dodson:

That is not true.  Right now, if you are in the state of Illinois, you pay an Illinois income tax whether you are a gaming or any other business.  In New Jersey, you pay a state income tax whether you are gaming or anyone else. 

 

Senator Neal:

But, in Illinois, you also pay taxes on the adjusted-gross revenue of 15 percent on annual, adjusted-gross revenue which is less than $25 million.  You pay 20 percent on adjusted-gross revenue which is $25 to $50 million.  You pay 30 percent on adjusted-gross revenue between $75 and $100 million, and you pay 35 percent on adjusted-gross revenue over $100 million.

 

Mr. Dodson:

Right, and I understand in the jurisdiction you are reciting is one that fosters a monopolistic situation where there are a restricted number of licenses.  They have not spent billions of dollars, it is a new industry there, and they still pay a state income tax.  I am not suggesting the 6.25 percent changes, I am just saying when this state sits down, looks for additional revenue sources, and develops a business model for a business tax, we participate prospectively and share the additional tax equally.

 

Senator Neal:

You say the people of the state of Nevada should tax themselves personally if they want additional revenue.  That should be part of the tax scheme I see you suggesting.  Is that correct?

 

Mr. Dodson:

No, purely business.  I am not suggesting a personal income tax; let me be specifically clear about that. 

 

Mary Lau, Lobbyist, Retail Association of Nevada:

I would have avoided coming back to the table, but Mr. McMullen also requested his previous testimony on S.B. 104, with your permission, be entered in on S.B. 105, because he was called away to a meeting and unable to be here.

 

Senator Neal:

We just heard a proposal put on the table for an increase in the business tax.  Are you supporting that too?

 

Ms. Lau:

No, we have no business tax in this state at the current time, and we all just went through an initiative that was structured very poorly that would have taxed individuals also, so your point was very well-taken.

 

Mr. McMullen: 

The Las Vegas Chamber of Commerce is an organization with over 6500 members, including gaming and nongaming businesses.  This is a matter of clear concern to us, and we are clearly opposed to both of these bills.  I would like to get some reasons on the record, with respect to S.B. 104, just to make sure those are differentiated from the testimony we will give against S.B. 105.  Fundamentally, and I will say the same thing on the next bill, we are against the taxation of gaming.  We think it is unfair and it makes no sense given the current economy or current sense of this state and the challenges facing it.  But, we will talk about that later in the next testimony. 

 

 

Mr. McMullen:

With respect to this advisory question, I think an advisory question like this is really not a vehicle for an adequate policy statement.  There is no way, and actually without the expenditure of millions of wasted dollars, you can actually frame a question adequately to make sure the people understand the trade-offs, as Mr. Thompson has spoken about, for not only jobs and employees, but also the trade-offs for other businesses.  Let me just say at the outset, we talk about gaming like it was something started sixty-some years ago as just a taxpayer, and we were to milk it for the rest of our lives.  I think this committee and this Legislature need to understand  gaming in Nevada was probably one of the most interesting social experiments that succeeded.  We not only built a tax out of it and a source of revenue, we built an economy, and if you look at it, we built a state.  So, we can debate that it is a right or a privilege, but the bottom line is there are ripple effects from any question like this that I think take the studied light of a legislature and the continued emphasis and expertise of committees like this to adequately deal with.  Really, it is not something where you can punish one industry or punish it separately.  Again, we think it should be treated like any other business at this point, and probably given the clear recognition they are the fuel of our economy and they can not be treated in an arbitrary or a punitive way because we need to make sure these kinds of choices are framed as carefully and as fully as possible.  In our opinion, this bill does not do that.

 

Chairman McGinness:

We will close the hearing on S.B. 105 and adjourn at 5:21 p.m.

 

RESPECTFULLY SUBMITTED:

 

 

________________________

Mavis Scarff,

Committee Secretary

 

APPROVED BY:

 

 

                       

Senator Mike McGinness, Chairman

 

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