The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Web shop taxes will increase by a minimal sum as a result of budget hikes that could extract $20m per annum from Bahamian gaming patrons, new studies suggested yesterday.

The Bahamas Gaming Operators Association (BGOA), in its latest salvo against tax increases it views as equivalent to "expropriation" of the industry, unveiled research showing gambling customers will pay a hefty price from the twin five percent levies.

The 2018-2019 budget plans to impose this tax on both customer deposits and over-the-counter (ORTC) lottery sales, targeting patrons directly, with the resulting reduction in gaming activity leaving operator contributions to the Public Treasury virtually unchanged despite the significant turnover-based tax hikes.

Christiansen Capital Advisors, in a study commissioned by the Association, predicted that the two five percent levies will suck between $13.3m and $19.9m annually from the pockets of Bahamian gaming patrons.

The advisory firm, describing itself as having worked in 50 states and countries on gaming and wagering, branded the five percent stamp tax on gaming deposits as "unprecedented" and "unique" - something it had never encountered before.

Referring to the five percent stamp tax as a levy on "drop" or player bankroll, Christiansen said the Bahamian web shop industry's "three to one" ratio of customer deposits to losses in 2017 implied a 15 percent increase in patron costs.

"It is likely, however, that consumer behaviour will change somewhat in the face of this tax," the Christiansen report said. "Today, customers can withdraw and reload their accounts at no additional cost. If this tax goes into effect, Bahamians will withdraw and deposit from their accounts less frequently.

"In other words, consumers are now disincentivised to withdraw from their accounts and reload the next time they come in. The extent to which they do this today is unknown but, in short, the ratio of deposits to consumer losses (operator revenues) will likely decrease."

Christiansen estimated that the ratio of customer deposits to losses will reduce by one-third as a result of the proposed tax, resulting in a 15-22 per cent fall in online gaming revenue. Based on 2017 industry results, the consultancy suggested web shops' online gaming revenue will decline by between $25.9 million to $35.9 million annually.

As for the 5 per cent tax on OTC lottery sales, the study argued that gaming was "price sensitive" and should not be compared to products such as gasoline for which there was an inelastic demand.

It added that the tax increase was equivalent to a 16.7 per cent price increase, and would result in an 18 per cent decrease in OTC lottery sales and taxable revenues. "Today, a consumer may buy $100 worth of lotto tickets," the Christiansen report said. "If that player is statistically average, he or she will lose $30 and get $70 back in prizes.

"With a 5 per cent tax on sales, those same $100 in tickets now cost $105. The game itself has not changed. Thus if our player is still statistically average, he or she still gets $70 back in prizes but has now spent $35."

Using Association data for 2017, the study added: "OTC lottery sales represent approximately 18.2 per cent of gross gaming revenues, or $35.4 million in 2017. Based upon the price elasticity of lotto games we estimate that this will result in the loss of approximately $6.4 million in lottery revenues."

The impact on gaming patrons from the 2018-2019 Budget tax hikes has been little noticed, with much attention focused on web shop operator predictions that they will be forced to lay-off 2,000 workers and close 192 locations if the Government follows through with its plans.

The Christiansen report, though, highlights the direct impact on gaming patrons - already hit by the VAT rate increase to 12 per cent - from the Government's decision to impose 'front end' taxation on consumers. With this and the VAT rate increase, gamblers are effectively facing a 'double whammy' come July 1, 2018.

The Government is forecasting that gaming tax revenues will near-double to just over $70 million for 2018-2019, but the web shop-commissioned study found that the bulk of any revenue risen - which it projects will fall short of target - will come from patrons rather than the operators.

The Christiansen report pegs current web shop industry tax ($22 million) and licence fees ($4 million) at an annual $26 million, but forecasts that the Budget-induced decline in gaming activity will result in operator revenues barely increasing to between $27.4 million and $30.8 million.

"The end result is that new taxes on Bahamian consumers will total between $13.3 and $19.9 million per annum, and that taxes on Gaming Houses will total between $27.4 million and $30.8 million," the study forecast.

"These new taxes imposed on Bahamian consumers, but not on casino tourists, will result in gaming revenue declines of between $30.2 million to $42.2 million from 2017 results.

"Under the proposed regime, Bahamians will face additional taxes of $13.3 to $19.9 million; taxes paid to government by the gaming houses will increase by 25.9 per cent to 40 per cent, or $3.9 to $8.8 million; and it will come at the expense of between 1,324 to 1,517 Bahamian jobs and between $25.2 to $29 million in wages."

Even with the "conservative" assumption that web shop industry margins do not change, the Christiansen study predicted that the tax burden on patrons alone could result in 693 total job losses and a $13.3 million fall in wages.

"Furthermore, the combined impact of declining revenues and a higher tax rate will undoubtedly lead to downsizing and the closing of marginally performing locations," the report warned.

"In a first quarter 2018 performance review, the largest operator of gaming houses, Island Luck, identified 14 marginal performing locations and 26 marginally performing franchisees representing estimated gross gaming revenue of approximately $37.3 million, or 35 per cent of gross gaming revenues.

"If these new tax rates go into effect, these identified locations will almost certainly be forced to close, and as this review was conducted before these new taxes were proposed, there could be more locations forced to close as well," Christiansen added.

"Island Luck had 54 store locations and 62 franchisees in 2017. Thus, these marginal operations constitute approximately 26 per cent of Island Luck's stores, and 48 per cent of its franchisees.

"If we assume that other operators on the island have a similar ratio of poor performing locations and franchisees, that means that these new taxes will likely lead to the loss of 69 stores and 711 employees at 10.3 employees per store, and $13.5 million in wages and indirect employment of 114 indirect jobs and between $2.1 million in wages."

While gaming house closures typically saw half the revenues divert to rival businesses, the Christiansen report said: "When applied to the $194.6 million in gross gaming revenue the industry generated in 2017, we estimate that forced industry downsizing in the face of this new tax regime will result in the loss of an additional $34 million in taxable gaming revenue.

"To recap, we estimate that the new taxes on Bahamian consumers will result in a decline in taxable gaming revenues of between $30.2 million and $42.2 million from 2017 (to between $152.4 million and $164.3 million, respectively).

"Furthermore, we estimate that the graduated climbing gambling privilege tax scale on gaming house operators will result in facility closures and downsizing that will further reduce revenues by $34 million, or to between $118 and $130 million."