The Tourism Industry’s Contribution to Major Public Revenues 1.3 Contribution to... · The...

The Tourism Industry’s Contribution to Major

Public Revenues

Volume I | Issue III

February 2009


Public Revenues

pplied Analysis was retained by the Las Vegas Convention and Visitors Authority (the “LVCVA”) to review and analyze the economic impacts associated with its various operations and southern

Nevada’s tourism industry more generally. This is the third in a series of reports detailing the findings of our review and analysis; it is specific to the share of major tax revenues generated by the state’s tourism industry.

FINDINGS IN SUMMARY

Although the state of Nevada imposes hundreds of taxes, fees and charges as part of its state and local revenue systems, the vast majority of its own-source revenues are attributable to three primary levies: 1) retail sales and use tax; 2) ad valorem (property) tax; and 3) gross gaming fees. It is worth noting that gaming, hospitality and other tourism-related enterprises pay all of the taxes and fees imposed on business generally, while also bearing the additional burden of industry-specific levies such as lodging taxes, gross gaming win percentage fees, levies imposed on slot machines and table games, live entertainment taxes and taxes imposed on taxicab trips. While some smaller industry-specific and general business levies are considered, this analysis focuses on the share of major taxes borne by the tourism industry.

Analysis of tax burdens is always challenged by the fundamental question: who pays a tax? In a retail transaction, is it the consumer who is paying the tax at the point of sale or is the business paying the tax when it remits its monthly payments to the state? Would the tax ever be collected if the business wasn’t there? Do businesses pay taxes at all, or are all taxes ultimately passed down to consumers? Does the form of the tax matter? For example, gross receipts taxes such as percentage fees imposed on gross gaming win are never actually seen by the consumer but generated by a transaction very similar to the retail example provided above. Who then is responsible for this levy, the player or casino operator? Too often, this debate tends to elevate form over substance, muddying the waters unnecessarily.

In this analysis, we offer a global look at tax generation at the industry level, allocating major collections to businesses, their employees, and their patrons. We also take a closer look at some of the major revenue source allocations (e.g., how much do visitors contribute to sales tax collections or how much of the property tax burden is borne by hotel and hotel-casino operators).

A

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Analysis of Tax Burdens by Industry

The first of the two analyses undertaken estimates total major tax payments attributable to businesses, their employees and their patrons. This analysis allocates expenditures to the person or entity spending the money as opposed to the business collecting the tax. For example, gaming taxes are assumed to be generated by all industries when a nurse, an auto mechanic or a building inspector spends a share of their annual income on gaming activities. In much the same way, business-to-business transactions are allocated to the business making the purchase as opposed to the business making the sale. Taxable inputs, such as the nails and lumber used to construct a home or the metal used to manufacture industrial equipment (both subject to Nevada’s retail sales and use tax), are assumed to be paid by the manufacturer as they are generated by a whole separate transaction independent of whether the final end product is sold. Finally, taxes paid by employees and patrons of an industry are attributed to that industry. For example, visitor’s retail spending is attributed to the leisure and hospitality industry.

The analysis is summarized in Exhibit 1 (above) and a breakout of major tax payments by industry is provided in Exhibit 2 immediately following this text summary. The analysis indicates that Nevada generated $5,970 in major tax payments per employee during FY 2008. The leisure and hospitality, construction, utilities, and manufacturing industries all account for higher-than-average major tax and fee collections, with the balance of sectors reporting yields below the overall average.

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Although these results are compelling, they are not surprising. Nevada’s business tax climate is among the nation’s most favorable,1 as the tax system is designed to be heavily dependent on visitor and spending and development activity. Notably, leisure and hospitality and construction rank among the region’s largest sectors and account for a higher-than-average share of employment, wage payments and economic output.

This analysis suggests the leisure and hospitality industry, its employees and its patrons account for roughly 37 percent of Nevada’s major tax collections, or $2.7 billion out of $7.4 billion. The second ranked industry is construction, which accounts for roughly $1.0 billion annually. Combined these two industries account for 38 percent of the state’s employment and 51 percent of its major tax collections. Leisure and hospitality alone accounts for 28 percent of total employment.

Analysis of Specific Taxes

The analysis above provides a general framework for analyzing the source of major tax payments. That said, the supersector-based analysis (e.g., looking at major industry categories) stops short of answering some of the key questions that are often asked about who pays what taxes. These questions include, but are not limited to:

• What share of the sales tax is contributed by visitor spending? • What share of southern Nevada’s assessed value is attributable to

hotels and hotel casinos? • What are the levies actually imposed on hotel and hotel casino

operators and how much money do they generate each year?

In this section, we address these questions.

Retail Sales and Use Tax: What Share of the Sales Tax is Contributed by Visitors?

In Issue I of this series, Tax Contributions of Southern Nevada Visitors, we estimated visitor spending at approximately $715 per trip or $28.0 billion annually (FY 2008). A breakdown of these expenditures is summarized on the following page (Exhibit 3). Although visitors spend a significant amount of money while in southern Nevada, not all of their expenditures are subject to the state’s retail sales and use tax, which is applied only to the sale of

1 See, e.g., The Tax Foundation, 2009 State Business Tax Climate Index. October 2008, Number 58 (ranking Nevada 3rd nationally, behind only Wyoming and South Dakota).

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tangible personal property purchased for use or consumption.2 Nevada’s sales tax also has some exemptions, including, for example, food purchased for home consumption (e.g., most food purchased at a grocery store). While this analysis assumes relatively few visitors purchase food that they intend to prepare themselves, assuming that 100 percent of visitor food and beverage expenditures are taxable would be overly aggressive. For purposes of this analysis we conservatively assume that 90 percent of visitor’s “eating and drinking” expenditures are taxable and 85 percent of visitor’s “shopping” expenditures are taxable. Other traveler expenditures may be subject to some other form of taxation (e.g., hotel room expenditures are subject to Nevada’s transient tax) but are not assumed to generate retail sales and use tax collections.

Exhibit 3 Las Vegas Visitor Spending Profile

In total, approximately $7.2 billion in visitor expenditures are assumed to be subject to Nevada’s retail sales and use tax. During FY 2008, total taxable sales in Nevada were $35.9 billion, suggesting that just over 20 percent of Clark County’s taxable retail sales receipts are attributable to visitor expenditures. Please see Exhibit 4 on the following page.

2 Nevada Revised Statutes, Sections 372, 374, 377, 377A, 377B, and 543.600 et seq. 3 Estimate based on taxable lodging tax expenditures for Clark County (approximately $4.6 billion), discounted for visitor spending out of the Las Vegas valley and for the share of lodging expenditures attributable to locals. 4 Estimates based data reported by the Nevada Department of Taxation, the Nevada Gaming Control Board, and GLS Research, 2007 Las Vegas Visitor Profile Study. Page 9. 5 See, GLS Research, 2007 Las Vegas Visitor Profile Study. Page 9. 6 Analysis is based on total gross gaming revenue and assumes that visitors account for approximately 75.3 percent of total gaming spending, a factor that reflects discounts for visitor spending and gaming revenue in outlying markets. 7 Analysis assumes that eight percent of visitor spending is not captured by the other major categories. Other items would include, but not be limited to, personal and professional services, admissions charges to shows, exhibits, meetings and conventions, and non-transportation leases and rentals.

Visitor Spending

Per Visit Annual Total Lodging3 $111.83 $4,372,850,000 Eating and Drinking4 $96.49 $3,772,684,348 Shopping5 $114.50 $4,477,063,126 Transportation5 $62.66 $2,450,067,908 Shows5 $47.87 $1,871,764,296 Sightseeing5 $8.31 $324,929,210 Gambling6 $203.64 $7,962,482,595 Other7 $69.86 $2,731,595,022 Total $715.16 $27,963,436,505

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Property Tax: What Share of Southern Nevada’s Assessed Value is Attributable to Hotels and Hotel-Casinos?

Nevada’s property tax has three components, a tax on land, a tax on improvements and a tax on personal property.8 For taxation purposes, land is assessed at its full cash value, improvements are valued at replacement cost less a depreciation factor of 1.5 percent per year up to 50 years, and personal property is valued at replacement cost less an appropriate depreciation factor. In 2005, the Nevada State Legislature passed a property tax cap measure that created a disconnect between the assessed valuation formula and real property tax collections.9 As such, property taxes are calculated by applying the appropriate tax rate to each $100 of assessed value (35 percent of taxable value) adjusted, as necessary, for the tax cap limitations. To ensure both concepts are captured in this analysis, AA obtained data on property valuation from the Clark County Assessor’s Office and data on calculated property tax liability from the Office of the Clark County Treasurer.

Excluding vacant property holdings, Clark County has nearly $282 billion of taxable property value,10 which generates $2.1 billion in tax collections annually.11 Hotels and casino hotels account for less than 1.6 percent of all improved acreage (3,700 acres), but 13.4 percent of all taxable value ($37.9 billion) and 12.6 percent of all real and personal property tax collections ($269 million). As Exhibit 5 on the following page demonstrates, an average hotel/hotel-casino acre generates $10.1 million in taxable value 8 Nevada Revised Statutes, Section 361; Nevada Constitution, Article 10. 9 See, Nevada State Legislature A.B. 489 (2005). 10 Based on an analysis of the Clark County Assessor’s parcel database, December 2008. AOEXTRACT and supporting files. 11 Based on an analysis of the Clark County Treasurer’s tax roll database, December 2008.

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and $72,400 in property tax payments, roughly 10 times the value reported for all other uses land uses (approximately $1.0 million in taxable value per acre). Focusing only on nonresidential uses, Clark County’s hotels and hotel casinos account for 2.8 percent of all improved acreage, 38 percent of all taxable value and 42 percent of all property tax liability. Exhibit 6 at the end of this text overview provides a more detailed summary of land use, taxable value and property tax liability by major land use.

Exhibit 5 Taxable Property Value and Property Tax Liability Per Acre

By Land Use, 2008

Land Use

Average Taxable Value

Per Acre

Tax Liability

Per Acre

Hotels and Hotel Casinos $ 10,191,968 $ 72,365

Residential $ 1,726,241 $ 14,032

Other Commercial $ 1,065,747 $ 9,032

Industrial $ 637,978 $ 5,466

Non-Profit Community Facilities $ 322,809 $ 119

Trans., Communication, and Utilities $ 221,011 $ 201

Minor Improvements $ 121,765 $ 472 Ag., Ranching, Wildlife, and Natural Resources $ 8,111 $ 66

Overall Average $ 1,184,652 $ 8,936

Average Excluding Hotel/Hotel Casino $ 1,041,727 $ 7,930

It is also worth noting that hotel and hotel-casino companies make up the majority of Clark County’s largest taxpayers. Six of the top 10 property taxpayers are gaming operators and the majority of the 25 largest taxpayers are linked either directly or indirectly to southern Nevada’s tourism industry. It is no small point that one out of every five dollars paid in property taxes comes from the taxpayers tabled below.

Exhibit 7 Clark County’s 25 Largest Property Taxpayers

As of October 2008

Taxpayer Taxable Value Rank

MGM MIRAGE $ 17,235,002,589 1

Harrah's Entertainment Incorporated $ 7,308,105,831 2

General Growth Properties $ 5,097,707,840 3

Las Vegas Sands Corporation $ 3,309,844,343 4

Nevada Power Company $ 2,993,184,129 5

Wynn Las Vegas Limited Liability Company $ 2,722,923,334 6

Boyd Gaming Corporation $ 2,669,236,257 7

Station Casinos Incorporated $ 2,515,737,217 8

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Exhibit 7 Clark County’s 25 Largest Property Taxpayers

As of October 2008

Taxpayer Taxable Value Rank

Focus Property Group $ 1,842,491,577 9

Olympia Group Limited Liability Company $ 1,638,068,949 10

Planet Hollywood International Incorporated $ 1,069,011,260 11

Turnberry Associates $ 1,060,406,334 12

Columbia Sussex $ 950,571,323 13

Basic Management Incorporated $ 732,705,769 14

Trump International Hotel & Tower Las Vegas $ 671,581,646 15

Greenspun Corporation $ 662,649,134 16

Gaughan South Limited Liability Company $ 651,220,166 17

World Market Center Las Vegas $ 650,292,394 18

Fiesta Palms Limited Liability Company $ 649,885,677 19

Pardee Homes $ 647,687,409 20

Camden Property Trust $ 645,261,306 21

Triple Five Nevada Development $ 634,461,063 22

Goldman-Sachs Group Incorporated $ 616,165,157 23

Marriott International $ 613,944,631 24

McCarran Center Limited Corporation $ 601,416,371 25

Total $ 58,189,561,706

Gaming Taxes: What Taxes Do Hotels and Hotel-Casinos Pay? There are two misconceptions commonly underlying this somewhat innocuous question. First, it tends to gloss over the simple fact that tourism companies pay all of the taxes, fees and charges imposed on Nevada businesses generally. This includes, without limitation, the modified business tax (payroll taxes), local business licenses fees, Secretary of State filing fees, property taxes, sales taxes and franchise taxes. The second misconception is that the percentage fees imposed on gross gaming win are the only “gaming” taxes imposed on the industry. Although percentage fees are the largest single levy imposed on hotel-casino operators, they are one of several taxes, fees and charges imposed specifically on hospitality business purveyors. Exhibit 8, on the following page, provides a summary of the taxes imposed specifically on hotel and hotel casino operators.

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Exhibit 8 Industry Specific Taxes Imposed on Hotels & Hotel Casinos

FY 2008

Tax or Fee Total Collections

Gaming Percentage Fees $771,324,301

Transient Lodging Taxes $462,922,509

Entertainment Tax $121,638,259

Quarterly Non-restricted Slot Tax $12,771,871

Quarterly Games Tax $6,990,365

Quarterly Restricted Slot Tax $9,507,690

Annual Slot Tax $49,931,555

Annual Games Tax $2,732,000

Other Collections $5,156,386

Total $1,442,974,936

Beyond the levies outlined above, there are also a number of taxes imposed on the industry by local governments. Calculating the total payments generated by these taxes is difficult because information is collected and reported differently by the various jurisdictions. That said, Nevada Revised Statutes specifically provides for city-county gaming taxes12 and county gaming fees13 that take the form of simple flat charges imposed on each slot machine and table game versus the more complicated gross receipts taxes imposed on Clark County’s largest gaming operators.

What About Other Taxes? It is beyond the scope of this briefing to analyze and allocate smaller, general levies imposed on business or consumption in Nevada. That said, it is worth noting that Nevada’s modified business tax is estimated to have generated $264 million during FY 2008, and the tourism industry is the state’s largest single employer and largest generator of wage and salary payments. Similar analyses could be undertaken relative to insurance premium taxes, which generate $257 million annually or franchise fees which generate tens of millions of dollars for local governments each year. Visitors account for roughly 17 percent of southern Nevada’s full-time equivalent population, and certainly contribute at least proportionally to the state’s liquor and cigarette taxes (generating $39 million and $110 million in FY 2008, respectively).

Southern Nevada’s hotel and hotel casino operators also account for a large share of the state’s development activity. Recently-completed projects

12 See, Nevada Revised Statutes, Section 463.395. 13 See, Nevada Revised Statutes, Section 463.390 and 463.323.

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such as Las Vegas Sand’s The Palazzo, Wynn’s Encore, Palm’s Place, Trump’s International Hotel and Tower, Station Casino’s Aliante Station, and the Eastside Cannery generated substantial sums in taxable construction materials as well as building fees, exactions and real property transfer taxes. The same can certainly be said of the $8.9 billion CityCenter and the multi-billion dollar Fontainebleau and Cosmopolitan projects now under-construction. Engaging in further study to estimate the value of these smaller but significant contributions to state and local coffers would only serve to add to the estimates provided in earlier sections of this analysis.

METHODOLOGY

General information on taxes, tax rates and historical collection data were obtained from the Nevada Department of Taxation, Nevada Legislative Counsel Bureau, the Nevada Commission on Tourism, the Nevada Gaming Control Board, the Nevada Taxpayers Association, the Clark County Assessor’s Office, the Office of the Clark County Treasurer and various local government publications. Industry-level employment data were obtained from the Nevada Department of Employment, Training and Rehabilitation. Finally, data on visitor estimates and spending was obtained from the Las Vegas Convention and Visitor Authority’s and its annual Visitor Profile Study prepared by GLS Research.

Tax allocations were made based on an industry-to-industry purchase matrix derived from the IMPLAN economic input-output model. An industry-to-land use matrix was also developed to allocate total square footage for businesses and residents, and these factors were tied back to total property values and land usage reported in the Clark County Assessor’s Office AOEXTRACT database. Consumer spending was estimated using the U.S. Bureau of Labor Statistics Consumer Expenditure Survey.

Where assumptions were required (e.g., the percentage of visitor eating and drinking expenditures subject to Nevada’s retail sales and use tax) we attempted to err in favor of being conservative.

ANALYSIS LIMITATIONS

This analysis used the best available data to estimate the share of various major tax payments attributable to the tourism industry, its employees and its patrons. It relies heavily on data reported by third-party data providers; and, although we have no reason to doubt the accuracy of these data, they have not been subjected to any auditing or review procedures by AA.

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In some cases data were either incomplete or inconsistent. Efforts were taken to minimize the impacts of these challenges, and we believe the analysis provides a fair and reasonable response to the fundamental question presented.

This analysis includes an estimate of major tax collections attributable to industries, their employees and their patrons. In doing so, it calculates the relative tax burden on a per employee basis. Such an analysis implicitly assumes that the level of public service demand for each category of business, worker or patron will be the same. Additional research would be required to refine this analysis to reflect higher or lower service demands created by any single industry or group.

Finally, it is important to note that this is a preliminary undertaking that will be supplemented by on-going and future analyses. This report is not intended to be comprehensive and may not be appropriate for all purposes.

The Tourism Industry’s Contribution to Major Public Revenues

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Exhibit 2 Estimated Tax Payments by Major Employment Sectors Includes Statewide Payments Allocated to the Businesses, Their Employees and Their Patrons

Sector

Gaming Percentage

Fees Retail Sales

and Use Taxes Property Taxes Total Major

Tax Payments Sector

Employment Major Taxes

Per Employee Natural Resources and Mining $ 1,700,000 $ 33,200,000 $ 42,100,000 $ 77,000,000 14,465 $ 5,323 Construction $ 16,400,000 $ 708,800,000 $ 320,000,000 $ 1,045,200,000 133,830 $ 7,810 Manufacturing $ 6,200,000 $ 149,400,000 $ 151,400,000 $ 307,000,000 50,347 $ 6,098 Transportation and Warehousing $ 4,200,000 $ 54,200,000 $ 112,800,000 $ 171,200,000 34,653 $ 4,940 Utilities $ 700,000 $ 16,600,000 $ 21,700,000 $ 39,000,000 5,794 $ 6,731 Information $ 2,100,000 $ 33,800,000 $ 40,000,000 $ 75,900,000 16,836 $ 4,508 Retail Trade $ 11,400,000 $ 201,800,000 $ 236,300,000 $ 449,500,000 93,426 $ 4,811 Wholesale Trade $ 4,800,000 $ 70,900,000 $ 126,300,000 $ 202,000,000 39,546 $ 5,108 Finance and Insurance $ 4,600,000 $ 69,700,000 $ 103,500,000 $ 177,800,000 37,422 $ 4,751 Real Estate, Rental and Leasing $ 6,400,000 $ 95,900,000 $ 106,500,000 $ 208,800,000 50,821 $ 4,109 Professional & Business Services $ 19,500,000 $ 305,100,000 $ 477,700,000 $ 802,300,000 159,436 $ 5,032 Leisure and Hospitality $ 664,700,000 $ 1,340,400,000 $ 722,700,000 $ 2,727,800,000 341,164 $ 7,996 Education and Health Services $ 20,800,000 $ 286,000,000 $ 384,700,000 $ 691,500,000 169,663 $ 4,076 Other Services $ 3,600,000 $ 38,900,000 $ 52,900,000 $ 95,400,000 29,170 $ 3,270

Government $ 7,900,000 $ 146,300,000 $ 178,400,000 $ 332,600,000 63,923 $ 5,203 Total $775,000,000 $ 3,551,000,000 $ 3,077,000,000 $ 7,403,000,000 1,240,496 $ 5,968

Source: Applied Analysis based on information provided by Nevada Department of Taxation; the Nevada Department of Employment, Training and Rehabilitation; Nevada Legislative Counsel Bureau; the Nevada Commission on Tourism; the Nevada Gaming Control Board; the Nevada Taxpayers Association; and various local government publications.

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