Many factors play into taxing casinos

"These include applying different tax rates to different casino markets or levying a graduated tax that is higher on larger amounts of gaming revenue," states the report "Gaming in the Commonwealth."  

Earlier this year, the Virginia General Assembly passed a bill calling for a study of what regulatory environment would need to be established to legalize casinos in the state, along with a voter referendum in any municipality wishing to do so. The study was presented Nov. 25. Now, legislators in the 2020 session must pass the identical bill a second time before it becomes law.

The study projects that all five casinos — if they are allowed — in Danville, Bristol, Portsmouth, Richmond and Norfolk would be viable at a gaming tax rate of 27%. 

In 2017, the median effective tax rate for casino gaming nationwide was 27%, according to the report. 

Tax rates can affect the size of a casino project and its fiscal and economic impact on the localities, including Danville. 

"I want us to have a tax rate that works best for our locality revenue-wise, but also allows the casino operator to grow and thrive," said Danville Vice Mayor Lee Vogler. "Finding that balance will be important."

A higher tax rate can negatively affect local economic benefits of a project if an operator — responding to a steeper tax rate — scales back investments to maintain profitability, the report points out.

"The higher the tax rate, the smaller casino you'll build because your profits will be lower," said Erik Beecroft, chief methodologist with JLARC. "The more the state takes, the less the casino owner gets."

A lower tax rate, the report points out, would not guarantee that an owner would use increased profits to build a larger casino or add more amenities, the report points out. 

Casinos in larger markets with higher populations to draw from can be profitable under a higher tax rate because of increased customer volume and more spending. But a project in a less-populated area would need lower taxes to make profits and invest in its size and amenities.

"Incentivizing larger developments can be more important in smaller markets because casinos can have a larger impact relative to the size of the local economy," the report states.  

How much a lower a tax rate encourages more investment from an owner can also depend on the market, however. As the report points out, if a 75,000-square-foot casino is the largest project a local population can support, the operator that can afford a 25% gaming tax rate will not likely build a bigger facility with more amenities under a 12% rate, for example.

If casinos are allowed in those five localities in Virginia, the state would limit the number of casino licenses. States that do so tend to have higher tax rates, according to the report. 

"There's way less competition," Beecroft said. "You're basically granting a monopoly to a casino owner."

States that do not limit the number of casino licenses will have more casinos and more competition, so that will usually result in a lower tax rate. 

"If you have a lot of casinos you're competing with, it's harder for you to make a profit," Beecroft explained. "You have to tax their casinos at a lower rate or they won't be profitable."

Other tax options for the state mentioned in the report include a graduated tax that increases as revenue climbs for a casino, such as a 10% tax on the first $10 million of revenue and 20% on revenue surpassing $70 million — a tax used in Oklahoma.

Also, a higher tax rate could be applied to revenue from slot machines and a lower one imposed on that from gaming tables. Pennsylvania levies 55% on slot machine revenue and 16% on money from gaming tables. 

"Slot machines are more profitable, so they can support higher tax rates," Beecroft said. 

A lower rate incentivizes a casino to offer more gaming tables, he added. 

"From the state's perspective, you want a casino to have gaming tables because there are more jobs with table games than slot machines," he said. "You need a dealer for every table game."

From a local view, Vogler said he looks forward to talking to state representatives and city officials about the issue of taxation. 

"You don't want to go too high with it, but at the same time, you want to make sure you get the revenue," Vogler said.  "My main priority is to make sure it's [a casino] a huge revenue generator for Danville and a huge job creator."