Cities no longer have to bet on gambling revenue

Follow the money — Montana’s annual gambling revenue stream of nearly $400 million — and you will find that the money leads directly to Helena, where the state claims 15 percent for its video gaming tax.

Some of that money comes back to local jurisdictions such as Kalispell and Flathead County, leading to the supposition that municipalities benefit directly from licensing more and more gambling parlors.

But that’s not the case and hasn’t been for years.

While Kalispell casinos churn out millions of dollars in gambling tax money, it’s not directly turned back to the city. The addition of the incoming casino at a northside Town Pump, for instance, won’t directly pad the city budget.

That model is long gone. The addition of casinos may still mean an incremental boost in revenue, but not necessarily a significant one. 

“Fifteen years ago, I could have told you with some assuredness that yes, it is” going to have a significant impact, said Rick Ask, administrator for the gambling control division of the Montana Department of Justice.

The trail of video gambling machine tax money through local and state governments is, like most tax structures, governed by mathematical factors and dense legislative language. That could be why many still believe that city budgets are tied to casino revenue. Tax policy laws aren’t exactly page-turners.

What’s key is that the whole process changed in 2001, when the state Legislature passed a bill that aimed at simplifying the distribution process for state taxes owed to local governments. That included the ever-lucrative video-gambling tax.

Columbia Falls City Manager Susan Nicosia was part of that effort. She said that a primary benefit was to insulate cities and counties from making decisions based on the tax impact.

“It did get cities out of the gambling business,” Nicosia said. “There was a perception in some circles that cities approved casinos because it put money in their fund.”

VIDEO GAMBLING is still a huge business in Montana. Those little keno and poker machines raked in $379 million in the 2014 fiscal year, according to the gambling control division. The state commandeers 15 percent of that for its video-gambling tax, meaning that more than $56 million was collected in that same fiscal year.

Kalispell is among the top five cities to generate that tax revenue. Since October, it has contributed $1.3 million in that regard, coming in higher than Bozeman but just below Helena.

By comparison, Columbia Falls has generated $335,000 in video gambling machine tax in the same time period. About $250,000 has come out of Whitefish.

As a separate jurisdiction outside of the three cities, Flathead County has generated $2.45 million since October.

But that doesn’t mean that those governments keep that money.

For years, cities and counties would consistently rake in millions from video-gambling taxes. The state collected its 15 percent of gross income and then kicked two-thirds of that back to local governments. It was a direct impact from casino development to local money, and those governments came to expect that.

“Back under the old way of doing it, you’d certainly be getting the two-thirds,” Ask said.

That started to change in 2000, when the Legislature appointed a task force to look at tax revenue distribution to local governments. Nicosia, a Columbia Falls city councilwoman at the time, was part of the team alongside state politicians, agency heads and other local officials.

Gambling tax revenue was just part of the concern, Nicosia said. The task force identified lots of state collections that were sent to Helena and shuffled through various agencies before being kicked back.

“We looked at revenue streams and you had one dime moved around five times,” she said.

Another driving concern, according to Nicosia, was that some of those revenue streams were prone to unpredictable swings. Video gambling taxes fell under that category.

After 18 months of work, the “Big Bill” was introduced in 2001. It was a 246-page document that contained the blood, sweat and tears of the task force, Nicosia said.

On its face, the idea was simple. Instead of collecting and distributing gambling taxes, vehicle fees and other revenues separately, the state decided to pool those resources. The resulting disbursement would come to local governments in one system, not several.

House Bill 124, the Big Bill, passed the legislature in 2001 and created the current model for certain types of tax collection and distribution. It’s known as the entitlement share payment system.

“The Big Bill — the entitlement program — bundled up all these revenues, including gambling, and put them all in a big pot,” Nicosia said.

Various revenue streams, generated at the local level, are now collected and pooled together by the state. Those streams include motor vehicle fees, alcohol taxes, financial institutions taxes and, yes, video-gambling taxes.

That money is then redistributed to cities and counties based on a variety of factors.

“It’s a complicated formula,” Ask said.

According to the state department of revenue, the formula calculates a growth rate within a city or county to determine the yearly entitlement payout. It gauges the trends in things like income tax, population and property values over three years. The payable growth rate is also capped by the state statute.

Kalispell is set to receive nearly $3 million in entitlement payments over the 2015 fiscal year, which is based on all of the aforementioned factors. It’s more than the direct gambling tax contributions of yesteryear, but it also draws from a variety of sources.

“Directly, we don’t get money from gambling through the entitlement fund,” said Kalispell City Manager Doug Russell.

SO HOW does this affect cities and casinos? If the number of casinos rises or falls, the entitlement share is not necessarily going to follow suit, because so many factors play into the entitlement share formula. It helps create a buffer in case one revenue source takes a sharp downturn.

It isn’t a perfect system, either. It can also deprive cities from benefiting from a sharp increase in one stream. Nicosia said that the Big Bill drew some criticism from those who thought that they would be better off with direct casino contributions. Kalispell was in that camp, betting that gaming revenue would be stable.

“Kalispell had argued way back when the Big Bill was drafted that they would get more money” under the old system, Nicosia said.

The key benefit, however, was stability in annual payments to make budget planning easier, she added.

Kalispell and other municipalities do still receive one small direct benefit from adding casinos. That’s through a special fee assessed by the state for each machine. Out of every $240 fee per machine, $100 is sent back to the local government.

That means that with 30 casinos in Kalispell, which are all capped at 20 machines each by state law, the city could have received a maximum of $60,000 over time, or $2,000 maximum for each new casino. It’s a relative drop in the bucket compared to millions of dollars in tax money generated.

There’s also some money made from the liquor licenses that are required of casinos. But as most of them are transferred these days rather than purchased new, the effect is limited.

So while casinos continue to make millions and can be a boon to their owners, cities are no longer direct recipients of those proceeds. A city is no more or less eligible for its entitlement share based on the number of keno or poker machines within its borders.

Nicosia said that this has been an ethical win for local officials, as it establishes that a vote for a casino isn’t a money grab. Casinos can be viewed like any other business by councils which are voting on planning and permits. 

That could be why this latest debate over casinos in Kalispell has taken a moral tone, with the opposition voicing concern for the well-being of residents. The financial factor isn’t quite an afterthought, but it’s not as immediate as it once was.

“You don’t hear about it very much anymore,” Nicosia said, “because your council doesn’t make a decision based on machines.”

Reporter Matt Hudson may be reached at 758-4459 or by email at mhudson@dailyinterlake.com.