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States Weigh Gaming Tax Hikes

Many states have raised taxes in the past several years. For example, last September Michigan lifted the rate on the three casino operators in Detroit to 24% from 18%. The move has already had a significant financial impact on Mandalay Resort Group (MBG), which Thursday said its 53.5%-owned MotorCity Casino saw taxes increase by $6.3 million in the quarter ended Jan. 31.

But the state that engineered the steepest recent increase was Illinois. In 2002 and 2003, the government raised the top rate on its graduated casino tax first to 50%, then to 70%. The AGA said the high taxes have hurt gaming businesses, which have cut 700 jobs and postponed or canceled hundreds of millions of dollars worth of planned construction projects. In turn, state revenue from casinos has fallen.

Bradford Smith of International Gaming Consultant Services said legislators need to be savvy about how much they tax gaming. "You can tax it to death and see it shrivel, or you can leave a reasonable rate and see investment grow," he said.

In Louisiana, the governor's top fiscal adviser late last month said he had asked state economists to look at raising various gambling taxes to 32.5%. Current rates are 21.5% for riverboat and land-based casinos and 18.5% for slot machines at racetracks. Video poker machines are taxed 22.5% at racetracks, 26% at bars and restaurants and 32.5% at truck stops.

Analysts said such an increase would dent earnings at a handful of publicly traded companies. David Anders at Merrill Lynch estimates 2005 and 2006 EPS at Harrah's Entertainment (HET) could each take a 13-cent hit. (Merrill Lynch does and seeks to do business with companies covered in its research notes.)

Anders' current EPS estimates are for $3.71 in 2005 and $4.22 in 2006 and account for Harrah's pending acquisition of Caesars Entertainment (CZR - Get Report). The company operates four casinos in Louisiana, although Anders and other analysts noted the Harrah's New Orleans property likely would be immune from any tax hike because it signed a special state contract, expiring in 2014, requiring it to pay the higher of either $60 million a year or 21.5% of gross gaming revenue.

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