When breaking a monopoly is appalling public policy

 

AT least we now know the excuse for the delay with Future Gaming Markets reform.

Minister Michael Ferguson in Talking Point said the release of the reform package followed “an extensive body of work, with licence fees and tax rates that apply for Far North Queensland casinos (a comparable market) used as a benchmark” (“Delivering best policy on gaming,” July 9).

It might be a coincidence, but the concept of this benchmark to justify low tax rates for casinos was first floated by Federal Hotels in December 2016 and again jointly with the Tasmanian Hospitality Association in 2017. The nature of the extensive body of work undertaken since is not evident. Nothing has changed.

There are three principal reasons why governments fiddle with tax rates and tax concessions. Firstly to raise more revenue or hand some back if they’ve got too much. Secondly to encourage activity if desirable, or to discourage if deemed undesirable. And thirdly as a reward for services or deeds, past, present or future.

Clearly the first reason does not apply in this instance.

The government has tried to pretend the second reason is why the North Queensland benchmark is being adopted. Yet there is no sound public policy basis why casinos in regional areas currently need assistance. The benchmark rationale is a cut-and-paste from the Handbook of Self Interest. We don’t need to attract more capital for new casinos packed with electronic gaming machines as they’re prohibited. Tourists don’t come to Tassie to play the pokies. Even if they did, the tax rate is irrelevant. “Let’s go to Tassie ’cos the EGM rates are lower” is not a marketing slogan you’re likely to hear. It’s the locals who play casino EGMs. Any concessions to Federal Hotels simply gives them an unfair advantage over other accommodation providers.

Which leaves us with the third reason for granting a tax concession, namely an ex-gratia reward.

The tax rate for EGMs in casinos will fall, which will open a wider gap with EGMs in pubs and clubs. This concession for Federal Hotels will be $15 million per year based on 2018-19 figures. To paraphrase Minister Ferguson, that’s a lot of money over 20 years that could be spent on essential services such as health and education, already hamstrung by projected cash deficits for the foreseeable future. Perhaps even more for tourism promotion to benefit the wider hospitality industry.

The government also decided to forgo more revenue by handing out free EGM licences to existing operators, rather than putting them out to tender.

To be fair, once it was decided to guarantee licences to existing operators, a tender system became pointless. This should have triggered a system of stepped tax rates to claw back the super profits that would have been received with a bona fide tender. South Australia has such a system. Another $20 million could easily be extracted each year, still leaving operators better off than the rest of the hospitality industry. Federal Hotels via ownership of 12 of the top-performing EGM venues would be about $5 million poorer. Extra income to pubs and clubs of $20 million a year means the capital value of venues rises by $150 million. That’s the minimum value of the gift the government is bestowing on pubs.

Paradoxically, the government is proposing a system of stepped rates for Mona’s high-roller casino. What’s good for the goose may eminently suit the gander.

The rationale for the gift to pubs and club is that they will invest more. To give businesses untied handouts in the hope they may oblige is reckless public policy, especially given budget difficulties.

There’s nothing to prevent the cashing of windfall gains, calculated from the amount of expected future profits, and exiting the gaming industry.

All pub owners, including Federal Hotels, will be considering this possibility.

The forgotten ones are the players. Future Gaming Markets policy specifically referred to sharing the spoils equitably among the industry, the government/community, and players. The draft proposals totally ignore the latter. The way to distribute more to them is to slow down the amounts removed from their wallets, with lower bet limits, slower machine speeds and a lower house percentage. A regimen of lower stepped tax rates for lower-impact machines would encourage the transition and lead to a more equitable distribution. All the focus is on how much is being taken from Federal Hotels, not on how much is being left on the table for a privileged few. And not on how difficult and costly it will be for government to regulate almost 100 licensed operators instead of one.

Smaller lower-turnover venues may get more revenue, but will face higher fixed costs and more uncertainty, contrary to what Minister Ferguson says. The proposed legislation, however, gives them an exit plan.

It paves the way for outsourcing pokies to larger operators. It’s bound to happen.

Breaking up a monopoly is a smokescreen for what is appalling public policy. There’s still time to fix it.

(Published in The Mercury 17^th July 2021)

Disclosure:The writer is a non-executive director of a tourism business with EGMs