Cripple Creek’s casinos grapple with tax increase

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Cripple Creek casino operators hope rising revenues will make up for a tax increase the Colorado Limited Gaming Control Commission approved last week.

The commission reversed a 5 percent tax decrease on the gaming industry that cost the commission’s previous members their seats.

Casino operators had asked the commission in spring 2011 for a 10 percent tax reduction as relief after three consecutive years of losses. The commission agreed to a 5 percent cut, but Gov. John Hickenlooper unseated the board after members refused to reconsider the decision.

The new commission, appointed by Hickenlooper, voted May 23 to do away with the tax cut.

That might mean tough times ahead for casino operators in Cripple Creek, about 45 miles west of Colorado Springs, unless the economy improves. Based on 2011 tax revenues, the cut could cost Cripple Creek’s casinos more than $500,000 a year.

Michael Smith, general manager of Double Eagle Casino, said the tax cut helped him through hard times.

“The 5 percent decrease made more cash available to deal with our increased costs,” Smith said.

Without that extra money, Smith believes the casino would have had trouble keeping up with rising food delivery costs due to higher gas prices. It also would have been tough to make higher insurance premium payments on health and liability policies.

“I wasn’t surprised at all,” said Marc Murphy, owner and partner at Bronco Billy’s. “I felt like the 5 percent tax rate decrease last year was the surprise — a very pleasant surprise.”

He used the extra money to pay for salary increases, something he wasn’t able to do through the three or four lean years leading up to 2011.

“The tax cut allowed us to loosen the purse strings a little bit,” Murphy said. “And we’re absolutely not going to take any of that back.”

But he’s not rushing to hand out new raises or hire new people, either.

“We’re just going to take a wait-and-see approach,” he said.

That’s what most casino operators are saying.

While revenues in Cripple Creek have been falling year-over-year for the past five fiscal years, the news since the start of 2012 has been mostly positive with almost 1.5 percent revenue growth in the first four months of this year.

“We feel like we’ve bottomed out and we’re slowly going to recover,” said Kevin Werner, general manager at Wildwood Casino in Cripple Creek.

He said Wildwood funneled the extra money from the tax cut into marketing efforts and new promotions to draw visitors into the mountains from Colorado Springs and surrounding areas. He said the casino also increased its payroll and head count last year.

“This might impact us a little,” Werner said. “But, we’re not going to pull back on marketing. That’s for sure. We’re going to focus on building revenues and traffic. Not having reduced taxes isn’t going to be a game-ender for us.”

A fair tax?

Casinos are taxed on their adjusted gross proceeds, which means they pay taxes on what comes in before expenses.

“We pay our taxes and then our employees and then everything else,” Werner said. “I don’t know of any other industry that’s taxed on its top line like that.”

The tax is capped at 20 percent for the largest casinos — the ones with annual revenues greater than $13 million. But it’s incremental, and small casinos that bring in less than $2 million a year pay a much lower tax rate — as low as 0.25 percent. The top and bottom rates were set at 19.5 and 0.2375 percent respectively in the 2011-2012 fiscal year that started in July 2011.

Commission Chairman Robert Webb said in the May 23 meeting that the commission felt the rate was very attractive, much lower than rates in other jurisdictions, Smith said.

Casinos throughout the country are traditionally taxed on gross revenue. In most states they pay a much higher tax rate than in Colorado. Most states have tax rates between 19 and 27 percent. Maryland taxes casinos 66 percent of their revenue. Casinos in Indiana can pay 50 percent and those in Illinois can be taxed up to 40 percent, according to data from the American Gaming Association.

But Smith argues that the comparison isn’t apples to apples. Because Colorado gaming regulators allow an unlimited number of casinos in a limited space, there’s more competition for fewer dollars than in other states. That makes it unfair to compare Colorado to other jurisdictions, Smith said.

There are 40 casinos in Colorado and together they bring in $750 million in revenue each year. The only state with more casinos than Colorado is Nevada, which has 256, thanks largely to Las Vegas and Reno.

The next closest is South Dakota, which has 35 casinos. They only generate $100.9 million in revenue and pay 9 percent in taxes.

Mississippi’s 30 casinos bring in $2.24 billion in revenue and pay up to 13 percent of revenue in tax.

Both of those rates are much lower than Colorado’s highest rates.

“It’s frustrating when people tell me we’re right in the middle,” Smith said. “You can’t just look at the tax rate. You also have to look at the market where we’re operating.”

Murphy feels the rate is fair.

“The industry and the gaming commission have to address the tax structure on an annual basis,” he said. “And if there’s a downturn in the industry, we can go back to the commission and ask for tax relief. It’s fair in that regard.”

Paying for school

Gaming tax revenue goes to local communities, historic preservation, Colorado’s general fund and the community college system.

Gov. Hickenlooper cited concerns about robbing money from the already-troubled community college system to award a tax break to the casinos last spring when he asked the commission to reconsider its decision to cut the tax.

“We’d had $28 million in budget cuts in the same time our enrollment increased by 40,000,” said Nancy McCallin, president of the Colorado Community College System. “We’re grateful to the commission for restoring the tax.”

She estimated that the tax cut cost the system $250,000, enough to fund 75 full-time scholarships.

“We will not know the precise impact of the tax cut until the end of this fiscal year,” McCallin said.

And the community colleges won’t see the benefits of the restored tax or increasing casino revenues until 2014, she said.