As the Trump administration’s tax bill heads into the reconciliation process, it could spark a new era of fiscal responsibility. That’s if corporations behave as they are predicted to do in this analysis. It forecasts that, with the slashing of the top corporate rate from 35% to 20%, companies will use the windfall to buy back shares (good for investors) and pay down debt, something that ought to be a priority at heavily leveraged MGM Resorts International, Caesars Entertainment and at Wynn Resorts. (All those profits made overseas in Macao and elsewhere will be taxed at a bargain-rate 10%.) However, judging by its recent actions, Caesars CEO Mark Frissora is already spending his new largesse before it’s arrived. Abolition of estate taxes could create new classes of “whales” and trust fund babies, something the industry will welcome.
On the downside, Baby Boomers on fixed incomes will be squeezed — a possible concern for locals- and regional casinos. According to the Congressional Budget Office, “People with incomes less than $30,000 would ostensibly pay more in taxes when compared to the benefits they receive under the bill, the CBO found, due in part to reduced government outlays to support health care for such low-income individuals. Those earning less than $30,000 would be worse off under the plan by 2019, given the decrease in benefits versus their tax contributions, while those earning less than $40,000 would join the group of people who are worse off by 2021 and those earning less than $75,000 by 2027, the analysis estimates.” By 2027, whales will be taking home nearly $6 billion extra while those in the $40,000-$50,000 bracket will be paying Uncle Sam $5 billion more, and deductions for state and local income taxes will go bye-bye.
This latter provision will fall hardest both on states where gaming is already strong (Pennsylvania, California, Ohio, etc.) and on ones where it’s been struggling (New Jersey, Illinois). As for the squeeze being put on Baby Boomers, AARP — of which I am a member — writes, “Today, the average senior has an annual income of under $25,000 and already spends one out of every six dollars on health care.” AARP’s main concern is potential cuts to Medicare, but it almost goes without saying that any increase in health costs is money taken away from discretionary income that might be spent at the casino.
One of the companies that stands to both benefit and lose from the new tax bill, Station Casinos, met with JP Morgan analysts recently. Station expects to achieve an approximately 15% ROI on its $485 million re-do of the Palms and see slot revenue superior to that of the average Las Vegas Strip casino. What it calls its new strategy for the property is actually the same formula with which George Maloof launched the Palms in 2001: “[Station] aims to transform Palms into a ‘unique space,’ with weekday business driven by locals and weekend skewing to the of town/leisure guest, the latter segment driven by meaningful improvements in non-gaming offerings.” The company is also booking conventions into the Palms as far ahead as 2019. Of the potential tax-revision implications, analyst Joseph Greff writes that Station, “could also benefit re: SALT deductibility if people move from California (high state/local taxes) to Nevada (low state/local taxes).”
That’s not such a big “if,” as we saw yesterday in this space. Station “specifically highlighted a growing retiree population and strong demand for construction workers (jobs increasing ~18% y/y) as key drivers, and while the labor market is tight and higher wages have been a modest headwind (RRR has ~13K employees), the company stands to be a net beneficiary given the area’s broader wage growth.” I wouldn’t count on those retirees if I were Frank Fertitta III. Besides, those Californians were always were always a keystone of the Palms’ business, so Station has to be hoping that they keep coming, especially if it’s to meet its investment-return targets.
