The Truth About the Gaming Tax

Since the introduction of the 15% winnings tax on lottery games there have been many representations re the reduction in income and the negative consequence this will have on the industry and future tax revenue inflows. Some have even said that the tax will cause current government intake to fall significantly.

Illegal Market
There is no doubt that revenue intake by the lottery companies have declined, which is estimated to approximate 40%. Anyone who understands the gaming market would have predicted this effect, as there is a significant illegal gaming market, which has no doubt become much more attractive to the player as odds increase relative to the legal game. After all the illegal operator does not pay any taxes and usually has much lower overheads. The payout can therefore be higher. Similarly the player will not have to pay any winnings tax from the illegal bounty. It is a given that the tax will contribute to the growth of the illegal gaming market. We also need to remember that the drop pan game already has an illegal structure in place that existed for decades before the legal game. It is therefore not difficult for players to move back to that structure.

Government Revenue
The government is aiming to raise an additional $1 Billion by introducing the tax, while some are saying that the government will in fact realize less because of the reduction in revenue. It has been suggested to me that the advisors do not understand the gaming market and are therefore projecting incorrectly. Is this actually so? The only way to answer this is to look at the numbers based on the current fall off in sales and the contributions made to the government coffers.

The table portrays the 2002 revenue and tax structure based on information released by the Betting Gaming & Lotteries Commission.

The table shows the payout percentages to the winner and the various government agencies. At the bottom is the weighted average payout percentages based on 2002 revenues. From this we can compute what the government intake was and what it will be with a 40% fall off in revenues.

The second table compares the taxes under the old and new systems assuming a 40% revenue decline. This illustrates that even with a 40% revenue reduction the government agencies will collect $200 Million more than in 2002. This will be significantly less than the $1 Billion projected but will still be greater than the intake before the tax. An additional 5% decline in sales would, however, result in the government raking in less than before the introduction of the tax.

The tax will also redistribute moneys from the productive private sector to the government. If for comparison purposes we assume that salaries and other direct compensation to vendors amount to 10%, then the revenue fall off will cause a steep decline in moneys available for employment, directly and to vendors. From international studies we can also assume a multiplier of three times for earnings from the industry, which means that the $1,191 Million would become $3,573 Million in earnings. After the tax we could see that reduced to $2,145.

Charities (CHASE) will also receive substantially less. This implies a need for further support of charities from government and the private sector. Routing these funds to charities via government will have administrative costs, meaning less per dollar reaching the charities. Direct payments will always be more efficient.

Impact on the Economy
The immediate negative impact includes reduced employment and business activities. Ultimately this may result in lower corporate tax collections. In this example taxes would reduce as potential earnings fall from $3.6 to $2.1 Billion.

This analysis shows that although the government will collect more direct taxes from gaming operations, the overall net tax collections may be less because of:
- Less PAYE from reduced employment;
- Less profits tax from reduced company income levels; and
- The move to illegal gaming will mean greater expenditure on enforcement.
In addition to these factors, there is also the consideration that potential investments may not be realized because of the change in the payback ratios and the uncertainty of the rules. Also, the tax could possibly cause a prolonged stagnation of the gaming market.

Conclusion
The question to be asked is, have we measured the opportunity cost of introducing the tax? The tax may have been a short term solution, but what is the medium to long term implication. Already the tax will not have the desired revenue effect because of the revenue fallout, and in fact will not add much more. Added to this there may be a significant indirect negative effect on other future cash flows. Have we done the right thing to introduce this tax? I guess at this point only time will tell.