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An obscure IRS shift could be bad news for Las Vegas

Bulls bet big on gaming stock
Bulls bet big on gaming stock

When a gambler wins $1,000 on a pull of the slot machine, it's customary for her to yell "Jackpot!"

Soon, he or she may be forced to add another exclamation: "Paperwork!"

The IRS has proposed a rule that would reduce the size of the winning that would lead to the immediate filing of a tax form (called a W-2G) from $1,200 to $600. That may not sound like a big deal, but the prospect has the casino industry up in arms, with analysts and consultants warning it could put a serious damper on gambling profits.

"I think it would have a big effect on the overall experience for slot players, as it's very common to have jackpots over $600, and now they'll actually have to stop play and wait for the attendant to come over," said Chad Beynon, who covers gaming stocks for Macquarie.

"That does a few things. First of all, it's just a pause in the game that causes people to lose their momentum and maybe decide to go home," he added.

"Second, people want to walk away after what they consider to be a big jackpot," Beyon said. "Whereas before they would have played a couple more hours and not left until they hit a bigger jackpot, this is kind of the government telling you that you just won a lot of money."

Beynon added that the first companies it will hit are the casino operators like Penn and Boyd, although game suppliers like Scientific Games could also be impacted. The 3 percent to 5 percent reduction in profits Beynon believes is a potential outcome would also lead to a reduction in capital expenditures.

Of course, this assumes that the plan will actually pass. Thus far, the IRS has only proposed the move, and the response of the gambling industry has been vociferous.

The American Gaming Association warned in a news release that the threshold reduction would "lead to a decrease in state gaming revenues and harm the customer experience." The trade group also collected more than 10,000 signatures on a petition opposing the change.

"It just seems like cooler heads will prevail here," said Anthony Curtis, the publisher of the "Las Vegas Advisor" newsletter. "It's going to affect everyone adversely to some degree, if you're just talking about inconvenience, and I'm dubious about what it's going to accomplish for the IRS."

Save that paperwork for the taxman

Noel Hendrickson | Blend Images | Getty Images

The inconvenience factor could indeed be severe. Since gambling losses can be counted against gambling wins, and almost no slot machine gambler is a net winner over the course of a year, filling out more W-2Gs will simply mean that those casino customers will need to keep good records of their losses for tax purposes.

(As a humorous aside, some have suggested that this itself will be a drag on gambling revenue, since it will force people to confront how much they are actually losing every year.)

"People don't go to a casino to increase their tax work," noted Jeffrey Compton, the publisher of "CDC Gaming Reports" and an occasional consultant to casino companies. And since $600-plus payouts are eight to 12 times more common than $1,200-plus payout, "the average player would get these things once a week, and have to keep track of them."

For this and other reasons, Compton predicts that "there would be a substantial drop in play—initially as high as 20 to 30 percent."

To Chris Jones, who covers casino companies for Union Gaming, the real problem is that a $600 threshold for W-2Gs will have the biggest effect on a casino's most profitable customers.

"Like in many businesses, there's an 80-20 rule," meaning that 80 percent of profits come from 20 percent of customers. "From that perspective, the high-limit slot room is certainly one of the most productive parts of your casino floor. And in a lot of these high-limit rooms, hitting a $600 to $1,200 jackpot is not that infrequent. That's the bigger issue, and where the biggest risk lies."

Yet not everyone is up in arms about the proposal.

"These people dream up everything," said Nomura analyst Harry Curtis. "If you want to go gamble, you're going to go gamble, because you've got that itch to gamble. And if it's $1,200 or $600, that's not going to change your decision tree. That's nonsense"