After 18 months of political debates and endless negative advertising, the $2 billion November 2012 election produced a status quo United States government …a divided Congress and an incumbent president.
Neither Democrats nor Republicans earned greater autonomy. However, not facing reelection, President Barack Obama emerged more forceful in his quest to alter the U.S. tax and business structure. Regardless of philosophy, everyone recognizes the crucial stakes for the future of American capitalism.
On January 1, 2013, the U.S. faced a potential “fiscal cliff” of uncertain taxes and spending, which could have eroded the nation’s economy and closed the government. Congress frenetically struck a deal, which Obama signed it into law before the new Congress’s swearing in on January 3.
American Gaming Association (AGA) President/CEO Frank J. Fahrenkopf Jr. claims the last-minute Congressional resolution prolongs uncertainty for gaming. The final compromise’s major points included:
• Topping out at $2,274 annually, all U.S. wage earners will pay 6.2% – or 2% over 2012 – towards their social security, on the first $110,000 for 2012 taxes and $113,700 for 2013. This real deduction will hurt lower scale employees more.
• Americans earning over $400,000 singly/$450,000 per couple will pay 39.6% income tax, up from 35%. Obama wanted a $200,000/$250,000 minimum; the Congressional Republicans sought a $1 million threshold.
• Taxes will rise on investments. Capital gains and dividend taxes will increase from 15% to 20%, plus a mandatory 3.8% tax subsidy for the Affordable Care Act (ACA), often called “Obamacare.”
Wall Street worries that investors’ possible unwillingness to risk capital at the new 23.8% tax rate could adversely impact numerous public gaming companies on the stock exchanges. Business and individual tax changes will also impact private organizations, as employers and their employees confront many surprises found in the fine print.
FIGHTING THE TAXMAN
For months, Obama campaigned that everyone should “pay their fair share”, which would require wealthier Americans to assume more of the national financial burden. Statistically, the top 20% of taxpayers pay almost 70% of all federal taxes; the uppermost 2% pay the bulk of that total. Although paying other taxes, approximately 50% of the U.S. population pays no federal income tax.
Many analysts pushed to extend the Bush-era tax cuts. They believe significant tax increases will damage those industries, like gaming and hospitality, that depend on consumers’ discretionary spending.
Gaming Analyst Bill Lerner, of Las Vegas-based Union Gaming, states that since the top 2% do not provide most gaming revenues, higher taxes do not affect their game play. For the middle-income markets’ primary customers, fewer discretionary dollars means decreased casino visits and spending.
Unwilling to chance huge ramifications for its investors, some larger operators took proactive steps in late December 2012. MGM Resorts International’s (MGM) $5 billion refinancing program, which called in bonds early, refinanced at a lower cost.
“Despite millions in penalty fees, they lacked the confidence in the economy and political market,” Lerner says.
Sheldon Adelson and his Las Vegas Sands Corp. (LVS) pre-paid special dividends to owners of its 823.4 million shares by distributing about $2.26 billion on December 18, 2012.
Lerner says, “Investors become wary of higher taxes and less disposable income. It won’t influence operator behavior or trends, but could influence their purchasing patterns. That affects slot manufacturers.”
Who gets the blame? Caesars Entertainment Corporation CEO/ President Gary Loveman accuses Washington politicians of lacking the “capacity to find pragmatic solutions” and creating a “dysfunctional” debate.
He condemns tax increases, aiming to reform U.S. entitlements instead. Loveman’s advocacy group wants age and/or income eligibility “means testing” for social security and Medicare programs. Loveman urges long-term thinking to achieve demographic solutions for American entitlements, which also include social programs.
Loveman recently stated, “The economy is weak and needs to support job creation and economic vitality. Entitlements are now 40% of government spending and will grow.”
Some gaming suppliers may choose to weather the financial obligations of tax increases and healthcare. President Skip Davis of Reno, Nevada-based Gary Platt Manufacturing, says, “We will have less money for expansion. Employees will feel it because of fewer dollars to spend. However, we will not sacrifice our growth plans, moving ahead because of our great ownership group.”
The November election’s retention of a Democratic Senate majority solidified the implementation of Obamacare. The 2,700-page health care overhaul legislation passed in 2010, but few in Congress actually read it. As provisions kick in, companies of all sizes will face consequential business decisions.
Those with 50 or more fulltime employees must comply with specific healthcare benefit programs or face penalties. Millions of companies may choose to offset these fees via hiring more part-time help to remain under 50, or paying the penalty if cheaper. Employees would then enter state or federally-run healthcare buying programs.
Fahrenkopf predicts negative investment and growth repercussions from Obamacare’s unexpected spike in costs and taxes. He says, “Many governors will veto participating in state buying exchanges, returning it to Washington.”
Some companies will absorb the price. With 60-65 employees at Gary Platt, Davis sees no immediate healthcare issue. “We have always believed our great plan was an important benefit,” he says.
WHAT’S NEW FOR 2013?
Across the U.S., approved ballot questions will expand gaming jurisdictions and gaming states had mixed overall election results. Obama won Nevada, New Jersey and Pennsylvania – the three largest gaming states – but state and local elections were split nationwide.
Latinos, comprising 19% of Nevada’s electorate, overwhelmingly supported Obama’s reelection, despite their high joblessness figures and the state’s disastrously high unemployment and foreclosure rates since 2008. The current 10.8% unemployment rate is the lowest in three years, but still tops the national average.
Large operators like Steve Wynn (Wynn) and others confirm their planned Las Vegas operating and employment adjustments. Wynn recently rejected a proposed multi-billion-dollar Las Vegas Strip project.
Jon Ralston, a Las Vegas-based reporter and political observer in the “Ralston Reports”, minimizes Wynn’s and Adelson’s comments.
“Steve and Sheldon are in love with China. They have looked to that part of the world for revenues for a while,” says Ralston.
Adding to the tax insecurity, Internet gaming remains the key legislative issue. Democratic Majority Leader Harry Reid had worked with former Arizona Republican Senator Jon Kyl, who retired in January 2013, to secure practical Internet gaming legislation.
Failing to pass anything, the process must restart. Nevada’s incumbent senators, Reid and Republican Dean Heller, must forge a greater cooperation to promote positive legislation.
One potential obstacle is the new Congress’s altered legislative composition. The 2012 election ushered in 84 new House members (36 Republicans/49 Democrats) and three vacancies – with special elections scheduled. The Senate has 12 new members (three Republicans/nine Democrats).
Three new senators – all Democrats – and 37 new representatives (16 Republicans/21 Democrats) represent 23 traditional commercial gaming states. Overlapping with commercial gaming states are 57 new House members (21 Republicans/36 Democrats) and seven new senators (three Republicans/four Democrats).
This split, plus veteran representative losses, prevents any one consensus. New members must be educated immediately to encourage thoughtful, sensible decisions.
For example, seven-term Las Vegas Democratic Congresswoman Shelley Berkley vacated her congressional seat for a Senate run. Her loss and replacement by an inexperienced Democrat negates Nevada’s strong gaming presence in the House.
Ralston says, “With Shelley gone, gaming has no one with seniority, knowledge or power in the House. It takes years to develop the experience, influence and seniority to sit on certain committees. Frank Fahrenkopf of the AGA does a good job developing Congressional relationships for his members. This must continue.”
Online gaming will happen, predicts Fahrenkopf, saying, “Internet gaming is here. The questions are whether a federal statute will limit gaming to poker, regulate tribal gaming and delegate the legislative and tax rights back to the states if they want to participate.”
The public prefers state operation. A December 2012 Rasmussen Reports national phone survey of 1,000 adults reports that 34% favor federal online gambling government regulation; 40% prefer state operation, and 26% are unsure.
Some states have already aggressively established preliminary plans. Nevada, New Jersey and Mississippi have either passed, or are seriously reviewing, online gaming laws to be legislated within their states or federally. Nevada has begun to license online gaming services providers.
Earning an estimated $10 billion-plus annually, Internet sweepstakes cafes are a second potential threat. Proliferating in 12 states, these venues use state sweepstakes regulations to avoid state antigambling laws and licensing restrictions. Their games replicate traditional slot and video poker machines, without mandated consumer protections, and also cannibalize revenues from state-authorized operations.
An AGA formal statement calls them “rogue businesses…posing a threat to existing state-licensed businesses and the thousands of jobs they create…neither the cafes nor the software companies that support them pay state or local gaming taxes…the AGA is educating governors, state legislators and regulators about this threat and working with them to deal with these establishments.”
Other issues are open to changes. Legalized sports betting remains in discussion, but will probably not see passage anytime soon. Also, a declining union membership nationwide could also impact employment legislation and gaming industry hiring and operating decisions.
No one can guarantee the future of U.S. consumers and businesses. With so many dramatic changes on the horizon, all anyone can do is watch and wait.