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Act now to expand gaming in Maryland

State can't afford to wait any longer to become competitive with our neighbors

July 04, 2012|By Martin G. Knott Jr

Maryland's high tax rate was part of a legislative compromise to win gaming approval in 2007, and not as a result of thoughtful business judgment on how to maximize investment and quality for the state. Maryland's video lottery terminal (slot machine) tax rate is nearly nine times higher than the rate in New Jersey or Nevada, and more than double the tax rates of 14 of the 22 states that offer gaming. The operators of the world's highest-quality entertainment resorts know the direct correlation between competitive tax rates, debt capacity and quality investment.

It's easy to understand why the political system would produce high slots tax rates, but in financial markets, this does not result in high-quality investment. Instead, it has led to the investments of limited quality and scope that Maryland has experienced to date.

The Sun correctly pointed out one obvious problem: the dynamic of having slots tax rates set by state legislative bodies. These are complex decisions that involve an analysis of market factors, investment and economics that is more suited to regulatory bodies like state public service commissions. (Imagine if your state legislature was setting electric rates for your local public utility.)

Gaming tax rates must strike a complicated balance that should encourage rather than discourage large capital investment. A jurisdiction's gaming tax policy should have the twin goals of attracting investment and maximizing state revenue.

Having adopted the nation's second-highest tax rates, Maryland now faces a different set of challenges that we need to clearly recognize. We now see another market dynamic, the incentive for existing licensees to defend a very high tax rate as a barrier to new entry into the market. It is well known that Maryland's high rate has discouraged investment. But there is also the danger that existing licensees, who enjoy a favored market position, may view high tax rates as a protective barrier, shielding the state from those who seek to offer a higher-quality gaming experience.

Legislative bodies are not equipped to perform complex regulatory functions, such as assessing capital investment and imposing tax rates. That's why Maryland might consider utilizing an independent, professional regulatory commission to make these complex decisions. This structure would ensure a professionally staffed, independent analysis of potential investment and state benefit. It would also insulate the tax-setting process from intense industry lobbying associated with legislative bodies everywhere.

Maryland probably has the highest unrealized potential of any state with authorized gaming, especially at the very high end of the market. But the state will need to apply well-recognized business and market principles to its decision if seeks to offer more than slot machines for day trippers. If Maryland decides to simply continue political infighting, this will be good news for Pennsylvania, Delaware and West Virginia, but bad news for Maryland taxpayers. The time to take our state's gaming program to another level is now.

Martin G. Knott Jr., the co-owner of Maryland-based companies Knott Mechanical Inc. and Wye River Technologies, is the newly elected chairman of the Maryland Economic Development Corporation (MEDCO). His email is mknott@knottmechanical.com.

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