By Martin G. Knott Jr.
12:00 PM EDT, July 4, 2012
Maryland's casinos need table games to compete with neighboring states. And we need them as soon as possible.
Some believe our state has the luxury of waiting until the state's current casino program is fully up and running. A recent editorial in The Sun argued against holding a special session to expand gaming on the grounds that the legislature might not get the tax rate right again. It is true, as the editorial stated, that Maryland, by passing the nation's second-highest gaming tax, "betrayed an unsophisticated understanding of gaming economics," chasing away most investors. In fact, Maryland ended up with only one qualified investor for each of its major sites, in Anne Arundel County and Baltimore City.
But the fact is, Maryland does not have the luxury of waiting. The state is losing $300 million in tax revenue each year it does not act. The state's consultant also projected that Maryland taxpayers will lose as much as $120 million on government-owned and leased slot machines because the state is paying nearly twice as much as private operators.
Because gaming legislation is in the state Constitution, the next time voters could act to change the law would be 2014. This means table games could not arrive any earlier than 2015, and a sixth state casino at a destination resort at National Harbor, requiring years to construct, could not open until 2017 or 2018.
Meanwhile, Maryland's competitors are not standing still. Pennsylvania, which opened its first casino in 2006, generated $1.5 billion in gaming tax revenue last year. West Virginia and Delaware also continue to far outpace Maryland. Because Maryland has no table games or destination resort sites, we continue to export dollars to neighboring states, mostly because Maryland's program is designed just for day trippers who want to play slot machines.
According to Nomura Securities, Hollywood Casino at Charles Town Races in West Virginia, operated by Penn National, is projected to generate $190 million in pretax profits. It is the most profitable casino outside Nevada and New Jersey, with much of those profits coming from Maryland residents. We need to bring these Marylanders home with destination resorts and table games. Our neighboring states — and their operators — would like nothing better than to see Maryland infighting continue.
As a member and newly elected chairman of the board of the Maryland Economic Development Corp., I have gained an understanding of the flaws of Maryland's gaming program as we have worked to transition the money-losing Rocky Gap from state ownership into private hands. This was only possible with the promise of a casino and lowering the tax rate from 67 percent to 50 percent.
One thing that I have learned from this exercise, as well as from my experiences in private business, is that if something isn't working, you need to take swift action to fix it. So, knowing what we know, it seems as though the legislature should take action now.
In this economy, Maryland simply cannot afford to turn away 8,400 new jobs or $800 million in new investment because of political infighting. While we fight for jobs, Maryland's competitors are acting with unity, speed, and competitive gaming programs. We need to do the same now, or risk losing more jobs and more funding for schools and police, and to avoid further tax increases.
Maryland's weak position is puzzling to national economic experts, especially because it enjoys such a strong, unrealized potential market. The state has a robust economic base, with significant disposable income for quality leisure activities, yet it has no destination location with high-end hotel, retail and entertainment. Maryland is located next toWashington, D.C., a top national destination site, but it has no gaming destinations near the nation's capital. And most puzzling, Maryland is located directly north of Virginia, North Carolina and the District, jurisdictions with no commercial gaming, yet it has no location to attract this market.
The governor recently convened a work group to study Maryland gaming. House SpeakerMichael E. Buschsaid the work group was "98 percent in agreement." The majority of the work group appeared to agree on table games and a sixth destination site near Washington, D.C. Maryland also appears ready to get out of the expensive business of government-owned slot machines, which always cost taxpayers twice as much as the private sector. For the gaming industry, these are pretty obvious decisions.
The missing "2 percent" issue, which apparently bogged down the work group, was tax rates. Maryland's extremely high tax rate of 67 percent, adopted in 2007, created immediate competitive disadvantages for the state. Most high quality investors stayed away. Now the CEO of Caesars has said that the lack of table games and high tax rates would impose obvious limitations on the potential of the Baltimore City site, for which Caesars is the only qualified bidder. None of this is surprising.
Maryland's high tax rate was part of a legislative compromise to win gaming approval in 2007, and not as a result of thoughtful business judgment on how to maximize investment and quality for the state. Maryland's video lottery terminal (slot machine) tax rate is nearly nine times higher than the rate in New Jersey or Nevada, and more than double the tax rates of 14 of the 22 states that offer gaming. The operators of the world's highest-quality entertainment resorts know the direct correlation between competitive tax rates, debt capacity and quality investment.
It's easy to understand why the political system would produce high slots tax rates, but in financial markets, this does not result in high-quality investment. Instead, it has led to the investments of limited quality and scope that Maryland has experienced to date.
The Sun correctly pointed out one obvious problem: the dynamic of having slots tax rates set by state legislative bodies. These are complex decisions that involve an analysis of market factors, investment and economics that is more suited to regulatory bodies like state public service commissions. (Imagine if your state legislature was setting electric rates for your local public utility.)
Gaming tax rates must strike a complicated balance that should encourage rather than discourage large capital investment. A jurisdiction's gaming tax policy should have the twin goals of attracting investment and maximizing state revenue.
Having adopted the nation's second-highest tax rates, Maryland now faces a different set of challenges that we need to clearly recognize. We now see another market dynamic, the incentive for existing licensees to defend a very high tax rate as a barrier to new entry into the market. It is well known that Maryland's high rate has discouraged investment. But there is also the danger that existing licensees, who enjoy a favored market position, may view high tax rates as a protective barrier, shielding the state from those who seek to offer a higher-quality gaming experience.
Legislative bodies are not equipped to perform complex regulatory functions, such as assessing capital investment and imposing tax rates. That's why Maryland might consider utilizing an independent, professional regulatory commission to make these complex decisions. This structure would ensure a professionally staffed, independent analysis of potential investment and state benefit. It would also insulate the tax-setting process from intense industry lobbying associated with legislative bodies everywhere.
Maryland probably has the highest unrealized potential of any state with authorized gaming, especially at the very high end of the market. But the state will need to apply well-recognized business and market principles to its decision if seeks to offer more than slot machines for day trippers. If Maryland decides to simply continue political infighting, this will be good news for Pennsylvania, Delaware and West Virginia, but bad news for Maryland taxpayers. The time to take our state's gaming program to another level is now.
Martin G. Knott Jr., the co-owner of Maryland-based companies Knott Mechanical Inc. and Wye River Technologies, is the newly elected chairman of the Maryland Economic Development Corporation (MEDCO). His email is firstname.lastname@example.org.
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