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Ohio Consultant Warns Against Raising Casino Taxes

18 May 2011 by admin

Last week, we reported on a conflict of interest regarding one of the consulting firms hired by Governor Kasich to study the casino taxation situation. Kasich hired Moelis & Company to determine the viability of raising taxes on the casinos, but it would be difficult for them to be impartial. Since they make a percentage of any extra revenue they bring the state of Ohio, the consulting firm directly benefits from proposing increased taxes.

That issue was brought to light based on an AP story regarding their contract with the state. There was no mention of the contract between the other consultant, Spectrum Gaming, and the state, though. At this time, it seems that information on their contract isn’t public. If they are not similarly burdened by a conflict of interest, though, it is likely that they will offer an opinion Kasich doesn’t like. Why do I think so? Because they have done it before.

Back in November, approximately five months before Kasich hired them as consultants, Spectrum Gaming released a report on the state of the casino industry. In that report, they advised against raising taxes on casinos. Spectrum warned that increasing taxes on the casinos would reduce their profits – an obvious conclusion – and may force the casino developers to build smaller casinos. One developer, Rock Gaming, has already said they may do that if Kasich’s planned tax hike goes through.

Not only that, though, but Spectrum also stated that increasing the tax rate on casinos would reduce the tax revenue brought into the state by casinos. That means in every possible way, it would be counterproductive. The idea that increasing taxes would decrease tax revenue may seem crazy to some people, but it is a sound economic principle that has been understood for many decades.

laffer-curve-300x258Though the idea was around long before that, it is most associated with Reaganomics and the Laffer Curve. In its simplest form, the Laffer Curve is a graph that shows the relationship between government revenue raised by taxes and each possible tax rate. At 0%, there is no tax revenue because the companies aren’t paying anything, but at 100% there is also no revenue, because there is no incentive for the person or business to make money. Between the two points, there is a curve, where for a while, increasing tax rates increases revenue, but then it hits a peak, where any tax rate above that point actually reduces tax revenue. The economic model shows that there is a certain point, the equilibrium point, where raising taxes is counterproductive because it results in diminishing returns.

Without going into too much detail on how those diminishing returns are caused (read an economics blog for that; this is a gambling blog), keep in mind that this supply-side economic model is accepted by most economists. However, others, especially progressive Keynesian economists, vehemently disagree.

In any case, whether you believe it or not, back in November Spectrum Gaming did. They released a report stating that case and saying that the tax rate currently on the books for Ohio casinos is already at or near the equilibrium point for maximizing tax revenue. Increasing beyond that like Kasich wants to do would hurt the casinos and decrease tax revenue, they argued.

At that time, without knowing it, they were refuting the policies that Governor Kasich would later advocate. They are now working for Governor Kasich. It will be interesting to see if they change their story.

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