Legislature(2003 - 2004)
03/31/2003 03:17 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 169-CHARITABLE GAMING REVENUE Number 1051 CHAIR ANDERSON announced that the final order of business would be HOUSE BILL NO. 169, "An Act increasing the amount of revenue received by the state from charitable gaming activities; and providing for an effective date." Number 0987 LARRY PERSILY, Deputy Commissioner, Office of the Commissioner, Department of Revenue, presented HB 169 on behalf of the administration. He noted that the committee members' packets contain amendments proposed by the administration. The amendments insure that the bill fulfills its intent - to hold the charities harmless from the additional tax. The amendment limits the payout on pull-tabs to no more than 72 percent; currently pull-tabs in Alaska are limited to a 78 percent payout. By reducing the prize payout, additional revenue is available to flow through to charities so they can pay the increased tax and be held harmless. In most cases, according to the department's calculations, the charities would receive more revenue for their charitable purposes than they do now under the existing law. Number 0885 MR. PERSILY testified that the bill, with the proposed amendments, increases the amount that goes to charities from operators. Currently 30 percent of adjusted gross income goes to charities; under this amended bill, it would be 35 percent. In an operator-run game, 35 percent of the adjusted gross income would go to charities, minus prizes and federal taxes. The amended bill would also change the amount that goes to charities from vendor-operated games. Right now, vendors can retain 30 percent of the ideal gross, which is the amount of money that would come from selling all the pull-tabs in the box minus the prizes. Under this legislation, vendors could retain 25 percent, thereby increasing the money going to charities. MR. PERSILY noted that there is opposition to HB 169, as there is to any change in charitable gaming and to any increase in the tax that goes to the state. There is concern in the industry that if the prize payout is reduced, people will game less, and there will be less revenue. He testified that if this legislation is adopted with a prize payout limit of 72 percent, Alaska would be competitive with the national average. Number 0786 REPRESENTATIVE GUTTENBERG asked whether there's a fixed payout with any box of pull-tabs. MR. PERSILY replied that all boxes of pull-tabs are sold with a fixed return. The buyer specifies the desired return: 70 percent, 72 percent, 75 percent or 80 percent payout. Its up to the purchaser to identify the desired rate of payout. CHAIR ANDERSON noted that he and many committee members sit on the boards of charities that rely on charitable gaming to partially fund their organizations. He said he didn't think that a person playing pull-tabs would notice that the payout was lower or would chose not to play for that reason. He asked whether the amendments to HB 169 would give more money to charity and raise state revenues. Number 0650 MR. PERSILY responded that by lowering the prize payout, it's the players who are picking up the tab for the tax. He said out of a $1,000 worth of pull-tabs, instead of $780 in prizes, there would be $720 in prizes. In one sense, it's a user fee - the player is the one paying the tax, he said. The charity writes the check, but it's the player receiving the lower prize payout that allows the money to flow through to the charity to cover the tax. This assumes that the amount of gaming activity stays the same, and all other revenue stays the same. CHAIR ANDERSON disclosed that he is on the board of the {Anchorage] Big Brothers, Big Sisters organization, which depends on charitable gaming. He said he is a strong advocate for charities getting a good return. Number 579 MR. PERSILY, replying to a question from Representative Crawford, noted that a 2001 report from the National Association of Fundraising Ticket Manufacturers showed 73 percent as the average payout for prizes on charitable gaming. REPRESENTATIVE CRAWFORD mentioned that casino slot machines in Las Vegas typically pay out 89 percent, and that if that payout is lowered, people don't play it nearly as much. He said that there's a point [in gaming, in general] where if people don't get that return, they stop playing. He asked why casinos aren't lowering their payout rates if they could do it. CHAIR ANDERSON noted that casinos have a higher payout rate because they are for-profit operations, as opposed to the gaming in Alaska, which benefits charities. MR. PERSILY responded that in Las Vegas, it's a matter of competition. In Alaska, there are no casinos and no competition. He said the administration believes that if the law says the maximum prize payout is 72 percent, the games are not going to lose business to a competitor down the street. Number 0311 JAMES REID, Administrator, Juneau Moose Lodge, said HB 169 is a bad bill. Charity organizations of all kinds rely on revenue from the gaming industry, although it's not sufficient to completely support the charities. He described the lodge's three most popular games out of the five games they carry: Criss-Cross with a gross profit of $514, Razzle with $464 gross profit and payout of 84 percent; and Mumbo with a gross profit of $439 and an 82 percent payout. If the payout on a game is reduced by 14 percent to 72 percent, he questioned whether patrons are going to continue to play it. Of the $514 received from the [Criss-Cross] game, he said, $141.06 goes to the charity after he pays sales tax, the cost of the game, mortgage, utilities, supplies, and payroll. MR. REID explained that the Moose Lodge supports numerous charities in Juneau including Moose Heart, Moose Haven, Big Brothers, Big Sisters, Glacier Swim Club, youth football, baseball, and others. He said that if the state wants to take 5 percent, he will therefore pay the state an additional $124.45 in taxes, leaving $16.61 for charities. He said as a charity, the Moose Lodge will not be making more money under this bill. TAPE 03-26, SIDE A Number 0012 MR. REID testified that he favored the bill not passing, thereby avoiding a flood of requests from charities to the state for lost revenue. He explained how his money is tied up from several days to a month while he sells his boxes of games. He noted that the bill addresses pull-tab operators [for-profit businesses that contract with charities to sell their pull-tabs] but it doesn't address permit-holders [charities that sell their own pull-tabs]. MR. REID explained at the request of Chair Anderson that an operator sells pull-tabs out of a pull-tab parlor for various charities. The Juneau Moose Lodge, the Eagles, the VFW, and the American Legion are all fraternal organizations that sell pull- tabs out of their own establishments and can only sell to their members. Anyone can go into a pull-tab parlor or bar and buy pull-tabs, he said. Therefore, the revenue for a fraternal organization [called a permit-holder or a permittee] is limited to gaming by its members. If the state doesn't [send] back to the charities the [money] they will be losing under this bill, HB 169 is not a good [idea], he said. Number 0339 DAVID SANDEN, General Manager, Multiple-beneficiary permittee (MBP), Juneau Montessori Center, Southeast Alaska Friends of Montessori, and Juneau Dance Unlimited, said the governor made a mistake by not consulting the gaming industry when developing HB 169. He said the governor should raise the $12.5 million by using a different approach. He described the three types of gaming operations in Alaska. Operators post a bond with the state and sell pull-tabs; their objective is profit, and the state forces them to give money to charity. An MBP consists of several nonprofits who get together and hire a manager who reports directly to the charities' boards. The third type is the self-directed permittee like the Moose Lodge in Juneau; it sells its own pull-tabs and is accountable to its members. The other party is the vendor, for example, a bar owner or liquor license owner, who buys a box of pull-tabs from a nonprofit group, and then sells the pull-tabs and takes all the risk of theft. MR. SANDEN said he believes there can be a sustainable gaming tax. The governor's proposed 5 percent tax sounds like a small number, but it's a huge increase. He suggested staying with the current 3 percent tax on the ideal net that is paid up front when buying pull-tab games. He proposed increasing that 3 percent tax to 20 percent, having the state collect it and then distribute back 50 percent to the municipalities where it is raised [instead of having local governments collect their own sales tax on pull-tabs]. He did support strengthening the regulations about who can participate in charitable gaming. He said some legal permittees are really ghost charities. Number 0678 REPRESENTATIVE CRAWFORD recalled that last year the committee defeated a bill which was a gross receipts tax on all businesses. He said HB 169 looks like another gross receipts tax bill rather than a tax on the profits of gaming. Number 0695 BOB LOESCHER, President, Juneau Tlingit & Haida Community Council; Advisor, Alaska Native Brotherhood [ANB] Grand Camp, explained that these organizations are self-directed social organizations that have permits for pull-tabs and some raffles. He described the bill as ill conceived. He said there's a difference between social organizations and commercial operators [for-profit businesses that contract with a charity], especially in motivation. He said his organization uses the funds to operate the community council buildings, to pay death benefits, and to fund youth and cultural programs. Many of these projects involve no state funding, and there is a real need for this money. MR. LOESCHER said he believes that gaming is a state concern, and that municipalities should not be collecting a sales tax. He said his groups could handle the [increase in the] proposed state tax if there was not already a Juneau sales tax of 5 percent. If the state caps the winnings at 72 percent, the market will be substantially depressed, he predicted. He warned that his groups will be driven out of business, having to pay the city sales tax, an increased state tax, and loosing customers because of the 72 percent cap on prize payout. He explained that they use the pull-tabs as draw for their bingo games, which doesn't make much money either. He urged the committee to kill this bill. Number 943 TED BROWN, Alaska Indoor Sports, explained that his company is a pull-tab distributor. He said he sells pull-tab games around the state at different payout rates, and he does not believe the 72 percent payout will work. Such a dramatic change [dropping the payout rate] at once will cause a downturn in playing, he predicted. He noted that people get used to a particular game, for example, Criss Cross, and they will notice [if there's a different rate or a different game being offered]. He suggested that players be taxed on their winnings rather than the gross for all the cards they play. MR. BROWN said there's no room to increase taxes on charitable gaming. After expenses are backed out, what's left goes to charities; an [increased] tax depletes that even further. To increase gaming revenues to the state from $2 million to $12.5 million won't work, he predicted. The current formula is 3 percent of the ideal net or adjusted gross. He described that as fair and equitable and asked the point of changing a formula that works. The change from 3 percent of the ideal net to 5 percent of the gross on the average game represents 37 percent of the profit dollars generated, and he questioned how anyone can take a 37 percent hit and survive. Charities are not well organized, but they are starting to respond to problems raised by this bill, he added. Number 1190 MR. BROWN, responding to a question from Chair Anderson, explained that the eight most popular games being played in Juneau, for example, will have to be replaced with new games that have a lower payout of 72 percent. He said players will notice the change [in their favorite games] and will not participate. 1275 CHAIR ANDERSON noted that he will hold the bill in committee and will keep public testimony open. Number 1300 DWIGHT McBRIDE, Operator, testified that he has been in business since 1989 and currently operates 13 permits. He noted that people are trying to grasp what HB 169 will do to the charities. He predicted that he would have to close three of his four stores. He said this bill will ruin gaming. Number 1488 LEONARD WELLS introduced himself as a pull-tab vendor at a bar and also as an employee who sells pull-tabs for the American Legion. He said that the majority of the [witnesses] at the Senate hearing [on a similar bill] could not testify because there also was not enough time. Regarding HB 169, he pointed out that the 72 versus the 78 percent [payout] is very important to the [serious] players [who take some of their winnings as more pull-tabs or buy-backs]. He said for the people who only buy a few pull-tabs, the payoff doesn't make much difference. He opposed HB 169 as written. Number 1584 TIM SMITH, Nome Fisherman's Association, explained that there is [already] a 4 percent city sales tax on gross receipts for pull- tabs; an additional 5 percent state tax on the gross would take nearly half (indisc.). With this [proposed] ideal net, the cost of the games, accounting, equipment, supplies, and postage doesn't leave a lot for the charities. The state can't take [an additional] $12 million out of charitable gaming without it impacting the charities, he reasoned. There's only so much discretionary [money available for charitable games]. In rural Alaska, many villages use pull-tab sales to fund their government operations because they don't have a big tax base. This is a painless tax that provides for rural governance. The state will have to make that up somehow if the [villages] lose the pull-tab revenue. MR. SMITH said that currently, some vendors are working for 30 percent. If it is cut back to 25 percent, that's not a very good deal for the vendors, he said, and it's [already] difficult to talk some of these vendors into running pull-tabs now. Their share of the ideal net is 30 percent. They pay for the pull- tabs up front. They're responsible for the any losses from fraud, theft, or errors, and those losses come out of their share. If you reduce their share to 25 percent of the ideal net, a lot of them won't vend pull-tabs. MR. SMITH commented that everyone appreciates the need to raise more revenues for the state. He proposed removing the prohibition on electronic gaming machines; they would provide more revenue for the state as well as more revenue for the charities. His organization opposes HB 169 as written. Number 1744 DAVID LAMBERT testified that he runs a fundraising business that represents 17 nonprofits. He said that this business put about $1 million into the Fairbanks economy last year. With a five percent [increase, his business] would have lost $88,500 dollars, 28 [of his employees] would have lost their jobs and 17 nonprofits would have received $0. He said that it's getting tougher to operate a business. Rent and payroll costs are going up every year; there's no room for a 5 percent increase. Most manufacturers make 72 percent payoff games. The Department of Revenue is giving out false information. The players are very aware of the percentage [of payout]. His fastest moving games are the ones that pay out at 85 percent; there's entertainment value in them. He asked how many people [actually] support this bill. He said it would be good to have hearings where everyone who wanted to testify could testify. Number 1867 JESSE VANDERZANDER, Alaska Outdoor Council; Alaska Fish & Wildlife Conservation Fund, explained that about 12,000 people are members of thee two groups. The two organizations fund college scholarships for fish and wildlife management and for women in outdoor management, the collection of oral histories of hunting and trapping tales, and hunter education, all programs that rely on gaming. He said HB 169 would cripple their operations. Their groups have two sources of these funds -- through vendors and operators. If HB 169 passes, the groups' vendor said he would not run any more games if his margin was reduced; it's just barely worth it to him now. Mr. Vanderzander said he has to plead with this vendor to run the games. Regarding the operator, if he was cut 50 percent, 5 of his 10 stores would shut down. When one store shuts down, an entire charity could shut down because that charity receives 100 percent of its cut from that one store. If the groups' operator goes out of business, their gaming is totally gone. He said his organizations have very serious concerns about this legislation. Last year their vendor paid $933 in taxes; this bill would increase it to $7,200. His organizations oppose HB 169. Number 2001 WAYNE STEVENS, Executive Director, Kodiak Chamber of Commerce, stated that the governor proposes to hold harmless the nonprofits in [changes to the] charitable gaming [statute]. The transmittal letter for HB 169 describes problems with operators and references placing the same restrictions on vendors. The City of Kodiak disallowed pull-tab operators many years ago, therefore only nonprofits and vendors are allowed to run charitable gaming in Kodiak. Reducing payout to players will reduce participation. While the bill's [proponents] claim to offset increases in taxes by raising the amounts paid to nonprofits, less [playing] will mean less money for the nonprofits. Mr. Stevens predicted that players will move to on- line computer gaming, a serious competitor to pull-tabs in Alaska. The drafters of this bill failed to understand the psychology of gaming; passage of this bill will drive players away. He urged the committee not to pass HB 169. Number 2025 DEBBIE BUSSDIEKER, Alaska Indoor Sports Distributing; Kenai Peninsula Aerie 3525 Auxiliary, noted that of the $274 million generated by pull-tab gaming [last year], $214 million was paid out in prizes, leaving $60 million. She asked committee members to consider what portion of the $274 million currently generated by pull-tab gaming was generated by 28 percent profit games. She testified that she has repeatedly heard from many players that they won't be able to play 28 percent profit games. She noted that the players are intelligent people; they play for the odds. The number one game currently sold is a 15 percent profit game. This bill will decrease [pull-tab] sales dramatically, she warned. Number 2165 RICKY GEASE, Executive Director, Kenai Convention and Visitors Bureau, testified that his group runs a multiple-beneficiary permittee with the Peninsula Oilers. He sits on the board of directors of the Kenai Chamber of Commerce and the Kenai Tourism Marketing Council, all of which depend on charitable gaming to run their operations. He said nonprofits exist and are not taxed for a good reason -- they fill a vital void between government and business. He said it's horrible to solve a budget crisis on the backs of nonprofits; it takes valuable money out of [Alaskan] communities. He said he doesn't believe the state should set price limits on the free market [of pull- tab payouts]. He described a payout of 72 percent as an inane idea. The 'ideal gross' in this bill is monopoly money, he said. He doesn't agree that by changing the current gaming, another $17 million will flow into the state. He said it's a matter of putting out an inferior product and expecting people to pay more for it. The bill is calculated on the assumption that gaming expenses will drop 13 percent. Last year, his organizations paid $3,000 in taxes, calculated on the net; if HB 169 passes, they will pay $30,000 more taxes based on the ideal net. He said that $30,000 will come out of his facilities and out of scholarships. His groups are adamantly opposed to HB 169. Number 2296 JOHN LOPEZ, Denali Gaming Supply, stated that the governor has received erroneous advice on HB 169. He said he believes there will be economic consequences. He said it's not true that gaming operates in a vacuum; players will not continue to play with the same frequency when the prizes are reduced. He believes the economic burden will be higher than the tax benefits gained: loss of jobs, real estate vacancies, and loss of services to the community by nonprofits. There are no provisions [in HB 169] for rising expenses in gaming operations and the mandated net proceeds associated with compliance. In a gaming environment where overhead is heavily regulated, HB 169 will make certain gaming operations noncompliant or insolvent. He cited the Department of Revenue's information from the National Association of Fundraising Ticket Manufacturers; the total national average prize payout of 73 percent includes pull- tabs as well as bingo, raffles, and state lotteries. TAPE 03-26, SIDE B Number 2375 MR. LOPEZ continued that Alaska has donated large sums of money to charities by using high percentage payout games. He said that charitable gaming is shrinking nationwide. This bill gives no consideration to the amount of prizes that a player gives back. Number 2275 JIM PEOT, General Manager, Whaler Casino Supply, stated that he distributes pull-tab supplies to people who vend them throughout the state. He said he is vehemently opposed to HB 169. He agreed with earlier comments that the market is dictated by the players. The average profit on pull-tabs is far less than 28 percent. He disagreed with earlier testimony that proposed a 20 percent tax on ideal net tax instead of a 5 percent gross; that would be the equivalent of a 650 percent tax increase for the charities. If HB 169 passes, Mr. Peot predicted that there will be a lot less money for charities and for operators. He said that players are not going to pay more money for the pull-tabs. Players have a fixed amount of money that is either gone in 20 minutes or an hour; they won't be coming in with more money. The whole premise of [HB 169] that players will come up with extra money for the [lower payout] games is way off the mark. Number 2157 GENE HANSEN, Alaska State Fraternal Order of Eagles; Aerie 1037 Far North Eagles, noted that the state Eagles have one permit with one vendor, which produces $11,000 to $15,000 gross income per year. He listed the numerous causes that would receive less money [if HB 169 passes]. Many people, such as families whose houses burn down, have no other source of assistance. He asked the committee not to pass HB 169. Number 2080 GREG PETERSON, employee, Alaska Indoor Sports Distributing, commented that he is offended that the administration so quickly dismisses the grass roots, genuine public outcry against this bill. He said [opponents of HB 169] are people who know what harm this legislation will bring on their communities and on their charities. He urged the committee to hold the bill. [HB 169 was held over.]
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