What do Pennsylvania and Macau Have in Common?

Pennsylvania and Macau, not a pair that crops up in everyday conversation; both have casinos, but Sheldon Adelson is probably the only casino guy in the world with a major stake in both.  Normally I try not to mix metaphors or casino jurisdictions.  The reason is simple; each jurisdiction is unique, a fact even when two states border each other.  In every case the conditions that led to legalized commercial gambling were unique to that state and that time.  The political and economic conditions when the enabling legislation passed led to a unique set of regulations and levels of taxation.   However, there are times when I think I see a broad principle at work which crosses jurisdiction lines and the recent news from Macau and Pennsylvania is one of moments.

In the 1980’s I attended a gaming conference where legalized, commercial gambling outside of the United States was on the agenda.   One of the speakers was an employee of Hilton Hotels, which at the time had several international hotel operations that included gaming.  And for a short period of time, Turkey was home to one of those Hilton hotels with gambling.  But Hilton had been forced out of Turkey.  The Turkish government wanted to push out foreign investors and had raised the tax on gaming past the point of profitability.  Hilton cried foul, but no one listened, so Hilton packed its bags and left Istanbul.  The executive speaking at the conference warned other gaming companies to be very careful when investing in foreign countries: “Be especially wary of unstable and unpredictable governments and uncertain tax rates,” he said.

Everyone in attendance thought that was good advice, but it hardly applied to us.  At the time only Nevada and New Jersey had casinos and internationally, except for Monaco there weren’t many legal jurisdictions.  Today the international picture has changed, most notably with legalized gaming Macau sanctioned under the umbrella of Communist China.  When given the opportunity to invest in the wild-wild world of casinos in Macau, operators from this country and Australia jumped at the chance.  They rushed in as soon as they got permission, invested billions and immediately started to cart home billions of dollars in profit. Then in 2012, the new president of China, Xi Jinping, started a campaign against graft and corruption and everything changed.

A Chinese military court sentenced Gen. Guo Boxiong to life in prison for accepting bribes…The wide-spread bribery investigations and convictions may have had some surprising consequences, particularly in decreased appetite for the high-end products favored by many in China’s elite. Since late 2012, Xi has initiated a battle against corruption, trying to reform a “bloated, bureaucratic, and corrupt” party that “has largely lost the trust of ordinary Chinese citizens.  J Walker Glascock, Christian Science Monitor, 7-25-16

The casinos are scrambling to find a way to survive and service the debt they incurred building very elaborate and expensive palaces in Macau.  Should they have suspected something long ago and been more cautious in investing in a place controlled by the Chinese Communist Party?  Certainly if they had listened to that Hilton executive from the 1980’s, the outcome in Macau was imaginable, if not foreseeable.  Communism does not place the same value on business as in a market based economic system.  Clearly, it is risky for any capitalistic enterprise to invest billions of dollars in a communist system; that is not a stable business environment

Communist economic systems don’t value and protect business the way market-based systems do, right?  Here is where my metaphor and jurisdictions get mixed; Pennsylvania is going rogue.  Pennsylvania is the Keystone, the very block of stone that held together the original union of colonies and made the United States of America possible.  Nothing could be more American or one might argue capitalistic than good ole’ Pennsylvania.  And yet, it seems the politicians in Pennsylvania can be as untrustworthy as the Chinese communists.   In the midst of a billion dollar budget deficit, the lawmakers in Pennsylvania turned on the gaming industry like a rabid dog and started changing the rules and the tax rate.

Beginning next week, the state’s 12 gambling halls will start paying a higher tax on table games…from 14 percent to 16 percent — is projected to cost Sands roughly $4.6 million a year. Matt Assad, Allentown Morning Call, 7-25-16

Now a measly two percent increase in tax may not seem like much, but it is.  Pennsylvania already has the highest casino taxes in the nation and any increase will harm the state’s casinos.  But more than the specific rate change is the implied threat that whenever the state wants more money casinos taxes are fair game.  The industry fought off attempts to legalize VLTs the way that Illinois has, but there is no guarantee the issue will not be back – that billion-dollar black hole still looms on the horizon.  While the legislature was raising the table game taxes, it also decided casinos could buy liquor licenses for the hours that liquor sales are currently forbidden.  They looked into their crystal ball and decided a million dollars was a good number for the license.  Unfortunately for the politicians, the casinos don’t agree that the price or the concept is reasonable.  In the six weeks since the bill was signed, no casino has exercised its right to buy the extended-hours liquor license.

State legislators figured giving casinos the right to buy a $1 million license to sell liquor around the clock was one of those win-win scenarios politicians covet. The state gets $12 million and casinos no longer have to cut gamblers off at 2 a.m. A no-brainer, right? …But since the expanded liquor sales provision was signed June 8…the word there are no takers has trickled back to legislators. Matt Assad, Allentown Morning Call, 7-25-16

“Who advises these legislators? This doesn’t make sense,” Sands Casino CEO Mark Juliano said.  But Juliano is wrong.  It makes perfect sense to a desperate politician to change the long-term rules to solve short-term problems.  That was the warning from the Hilton so long ago: “Be careful when you invest in a casino venture that the government is stable and predictable and the tax rate is certain.”   It is not just the volatile Turks or deceitful communists that are unstable and unpredictable.  When the chips are down, every government is unpredictable.  Pennsylvania and Macau have that in common; the chips are down and casinos are fair game.



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