Analysis: The great Tasmanian gambling tax giveaway

Under the Gutwein government’s proposed gambling legislation, Tasmania will have the lowest casino tax rates in the nation.

Poker machine taxes are to be cut from 25.88 per cent of gross profit to 10.91 per cent (with an additional three per cent community support levy) and Keno tax will be reduced from 5.88 per cent to less than 1 per cent – the same token level that will apply to table games.

The government’s determination to deliver unprecedented tax concessions to the casino owners, a Farrell family private business trading as Federal Group, can only be fully comprehended by considering the policy “process” it undertook.

How we got here

In September 2015, Peter Gutwein, then just the Treasurer, was set to sign off on another extension to Federal Group’s monopoly statewide poker machine licence. Days before the contract was to be signed, David Walsh – whose desire for a small high-roller, pokies-free casino at his Museum of Old and New Art was being used as the excuse for a contract extension – went public with his concerns.

It forced the government to establish a parliamentary committee to consider the future gaming market. The core principles to guide reform were set out by the treasurer in a ministerial statement to parliament on 17 March, 2016, that said the tax rates and licence fees for casino gaming and Keno would be reviewed against “the broader Australian market” while hotel poker machines would be “allocated and priced by a market-based mechanism such as a tender”.

Large hotel chains, represented by the Tasmanian Hospitality Association (THA), saw the reform process as an opportunity to achieve outright ownership of machines through direct licencing.

Federal Group unsurprisingly argued for an extension of the exclusive licence that it had received for free for nearly three decades. However, it soon became clear that  – given the government’s policy commitment to achieving a market-based return for the highly profitable licences on offer  – the company was faced with two unpalatable options. It could bid hundreds of millions to retain its monopoly through an open tender process or surrender ownership of pub pokies altogether when the current contract expired.

It was therefore not surprising when Federal Group struck a deal with the THA. The compromise between the company and the big pub owners was set out in a joint submission to the parliamentary committee on the last day of public hearings in August 2017. It is this internal industry deal, including the proposed casino and hotel poker machine tax rates, that is now set to become Tasmanian law.

How long-established Tasmanian casinos with business models based on collecting losses from local poker machine players would face competitive pressure from venues at the other end of the continent has never been explained.

The agreement negotiated between Federal Group and the THA gave hotel owners direct licencing of pokies at their venues. The industry submission noted that this would immediately increase the value of pokie pubs by an average of $1.5 million each.

It proposed compensating Federal Group by slashing the casino pokies tax rate from 25.88 per cent of gross profits to 10 per cent. The state would be quarantined from an overall loss of revenue by increasing the total hotel pokie tax rate to 39 per cent.

Dressing a win up as a loss

The problem for the poker machine industry in selling their mutually beneficial deal was how to justify such a massive tax cut. Pokies in casinos are the least-cost and most profitable in the state due to economies of scale and because they face less regulation than those in hotels. Historically, they account for nearly half of all poker machine losses, a higher proportion than in any other jurisdiction.

Casino poker machines are so profitable that since the mid-1990s they have accounted for more than 90 per cent of casino gambling losses. On what basis, then, could it be argued that taxes on these machines should be set at a lower level than those in hotels?

The industry’s argument was that a lower casino tax was necessary to make Tasmanian casinos “competitive” with those in Cairns and Townsville, where taxes had been set low from the outset as part of deals to ensure the construction of these facilities oriented to tourism from overseas. How long-established Tasmanian casinos with business models based on collecting losses from local poker machine players would face competitive pressure from venues at the other end of the continent has never been explained.

The industry reform proposal was submitted so late in the parliamentary inquiry process that it could not be considered by the committee. However, in documents attached to its final report, the proposal was criticised by the committee’s advisers, Synergies Economic Consultants, and the Tasmanian Liquor and Gaming Commission, which believed it ignored the core principle of delivering a market based financial return and was likely to increase social harm.

Despite this criticism from the body with a statutory responsibility to provide independent advice to the government on gambling policy, the Liberal Party abandoned its previous reform principles and adopted the industry agenda as its election policy. The poker machine industry then financed the Liberal election campaign and ran a saturation anti-Labor advertising blitz from Boxing Day 2017 until the March 2018 poll.

While the Liberal Party’s election policy copied the industry submission in almost every respect, one critical question was not spelt out – the exact level of the casino taxes. These were to be benchmarked against casino operations interstate “to ensure that the returns are competitive and fair for the community, players and the casino operator”.

The reason the tax cut was kept secret appears obvious – prioritising a public subsidy to wealthy Liberal donors who own the casinos over health, housing and education spending would not have been popular with the electorate.

The Liberals poker industry reforms were not presented to parliament during the next term of government. The government knew that if the ALP was to vote with independents in the Legislative Council the legislation could be scrutinised by a parliamentary committee, which could propose amendments – a highly risky scenario for the Liberal party and its patrons.

This risk was significantly reduced following the final capitulation of the Labor Party in February 2021, when the party leadership – facing a repeat of the 2018 funding bonanza for their political opponents in the next election – signed a secret memorandum of understanding with the THA that essentially committed the ALP to the industry agenda.

Both major parties were determined to not discuss pokies during the 2021 election campaign, called a year early by the premier to take advantage of his COVID-related popularity, but this consensus was interrupted when the ALP-THA agreement was leaked.

The premier was repeatedly asked during the election campaign whether there would be a casino tax cut, but refused to answer questions on the issue. A subsequent right-to-information request by an independent Legislative Council MP, Meg Webb, confirmed that while the Tasmanian people had been kept in the dark, the Federal Group had not. Gutwein had written to Farrell on 9 December, 2020, setting out the “the tax rates and licence fees that the government intends to apply from 1 January, 2023”. The Federal Group signed off on the tax rates on 23 December.

The subsequent justification for this secrecy – that it was not yet government policy – was contradicted in the correspondence itself. Farrell acknowledged “that it is the intention of the Tasmanian Government to introduce legislation in 2021 to give effect to… these amended arrangements for Federal Group’s casino and Keno licences” and that these “will be the subject of approval by the Tasmanian Parliament”. This was not a draft proposal subject to Cabinet approval – but the actual tax rates the Government would include in forthcoming legislation.

The reason the tax cut was kept secret appears obvious – prioritising a public subsidy to wealthy Liberal donors who own the casinos over health, housing and education spending would not have been popular with the electorate.

A  giveaway of hundreds of millions of dollars

When I wrote for the Tasmanian Inquirer on this issue early in 2020, I assumed that it would be politically impossible for the Tasmanian Government to cut casino taxes so dramatically. Setting casino taxes at exactly the low level proposed by the casino owners, would surely be politically impossible given the gambling industry’s overt role in the election campaign. In the wake of the post-COVID budget crisis, and given public concern about the crisis in health funding, the political dangers of heading down this path had only become stronger.

The government’s recently released legislation thus came as a shock. With the small exception of the government delivering on a 2018 election promise of imposing a community support levy on casino pokies, and a need to adjust for a GST accounting error in the original industry submission (which meant Townsville and North Queensland state tax are actually 10.9% not 10%), the poker machine industry got the tax rates it asked for.

According to the government’s own figures, the casino tax cuts will cost the state budget $11.22 million a year, or about $225 million over the life of the agreement.

No reason has been provided to explain why the tax rates for casino poker machines and Keno in casinos should be so much lower than the taxes for gaming in hotels. Compensation cannot be the answer: not even the government pretends Federal Group is owed redress for the expiry of a time limited contract.

Nor is the government arguing that these concessions will deliver an investment return. Unlike previous tax concessions granted to Federal Group over the past half century, this time there is not even a token contractual requirement that it invest in a run-down facility in the hope it might become attractive to tourists. The company’s long promised “Casino Royale” – first announced in 2015 – now seems as distant a likelihood as its proposed Port Arthur Hotel, which was first announced back in 2007.

It also needs to be remembered that the tax rate for hotel poker machines has been set below the market-based level the government originally promised. The industry’s boast of an imminent $150 million capital gain windfall made this clear. Other modelling puts the figure at $250 million.

On casino taxes, if the rates applied to poker machine were to truly reflect the principle that excess or super profits should be returned to the Tasmanian people rather than the licence holder, they would be set close to the Adelaide casino rate of 41 per cent of gambling revenue rather than being locked in for 20 years at a quarter of that level.

Setting properly benchmarked and market-related tax rates, would be a significant step towards addressing the structural crisis in health funding set out by the Treasury in its recent Fiscal Sustainability Report. Every dollar of foregone revenue transferred to the Farrell family is literally one less dollar available to reduce the time thousands of Tasmanians spend in pain on elective surgery, dental, mental health and emergency waiting lists.

If the poker machine industry had not financed at least one, and probably two, Liberal election campaigns… poker machine and casino taxes would have delivered about half a billion dollars in extra revenue for the people of the poorest, sickest and most disadvantaged state in the commonwealth.

That the government is aware of its vulnerability on this issue is evident in its marketing, which emphasises a reduction in revenue Federal Group will face. But the truth is the Farrell family would have suffered a “hit” to its profits under any scenario as its existing extraordinarily generous monopoly contract with the government expired. The alternative – an extension of the status quo – has been publicly ruled out since David Walsh exposed the close relationship between the government and the Farrells in September 2015.

The enormity of the family’s long-running subsidy has now been confirmed by the government’s spin. Pokie taxes in hotels are set to increase, but the revenue of hotel operators will still go up by $17.3 million. Hotel Keno taxes will quadruple – but Federal Group still does not want its licence to go to tender. In this extraordinary context – which includes Greg Farrell having accumulated personal wealth of over half a billion dollars –  a change that increases public revenue by just $8.5 million while redistributing some pokies super profits between major industry players is no kind of policy achievement.

Given the premier refused to answer questions about casino tax rates during the recent election campaign, and the Liberal party has broken an election commitment to properly benchmark casino taxes against casinos interstate, the government has no mandate for its proposed legislation.

In a recent article in The Mercury, Finance Minister Michael Ferguson claimed casino taxes had been set “following an extensive body of work”. But it is patently obvious that this work involved nothing more than doing what the industry itself had called for.

If the poker machine industry had not financed at least one, and probably two, Liberal election campaigns, all gambling taxes could have been set to ensure super-profits were taxed properly. Poker machine and casino taxes would have delivered about half a billion dollars in extra revenue for the people of the poorest, sickest and most disadvantaged state in the commonwealth.

Meanwhile, Treasury’s Fiscal Sustainability Report predicts structural fiscal deficits of between $1.8 billion and 3.7 billion by 2034, and net debt of between $20 billion and $30 billion. It is reasonable to assume the officers of Treasury and the Tasmanian Liquor and Gaming Commission would be horrified at what is occurring.

The whole process raises such concerning questions that detailed examination of the policy itself is no longer enough.

If the Tasmanian parliament is to secure this desperately needed revenue and protect the state’s fragile democracy, it should not just fully scrutinise the government’s gambling bill. It must also conduct a serious investigation into how it ever came to be proposed.

Dr James Boyce is the author of Losing Streak: How Tasmania was Gamed by the Gambling Industry, which was long listed for the Walkley Book Award, shortlisted for the Ashurst Business Literature Prize and won the People’s Choice Award in the Premier’s Literary Prizes. His previous article for Tasmanian Inquirer on gambling policy won a Tasmanian Media Award for the best feature, documentary or current affairs reporting of 2020.