The shake up of the Victorian poker machine industry looks set to deliver the state Government a windfall to fund its 2010 election campaign promises. From 2012, gaming venues will be entitled to operate and own their own pokies, so that the present three way split of revenue between Government, venue and gaming operator will end.

Late last year the Government revealed its new pokie tax regime, which provides a progressive rate of tax depending on average net gaming revenue at each venue. For example, clubs earning up an average $2,666 per machine per month won’t pay any state tax. Hotels in that category (and they are few and far between, since most earn far more) would pay 8.33% state gaming tax. GST will continue to be payable, of course. The top marginal rate, 58.33%, will apply to Hotels earning more than an average $12,500 per machine per month.

The Government didn’t bother to provide any modelling of the impact of these changes on revenue flows when it called for public comment on 11 December last year (submissions were required by yesterday). Fortunately, in preparing a submission on the proposed legislation, I was able to draw on previously published data that colleagues and I had utilised for a 2006 study of the Victorian gaming machine industry and produced my own model, using a sample of venues from 10 Victorian local government areas. A little more than 25% of the state’s pokies were present in this sample, so it provides a reasonably robust basis to work out the distributional effects of the tax changes.

Overall, the venues would do remarkably well out of the changes. Average venue retained earnings would more than double, to an average annual level of more than $64,000 per poker machine in hotels and nearly $47,000 per machine in clubs. Overall, venue retained earnings would increase by about $750 million p.a. State tax would actually fall under the proposed system, by about 15% to a modest $922 million or so (2007-08 values). High performing venues — the sort owned by chains like those controlled by the Mathieson/Woolworths group — will earn more per machine on average and seem likely to retain an average of at least $67,000 per machine. If they owned 35% of the State’s total, permitted under the proposed legislation, they would retain revenue of more than $306 million p.a. Not a bad little earner.

Why has the Government decided to moderate its share of the tax take and boost that of the venues? Under the new system, gaming machine entitlements — the actual licence to print money — will be auctioned. The Government admitted yesterday that it wants to hold these auctions in 2010, even though the system won’t operate until 2012. If venue operators value the ten year entitlement at the equivalent of one year’s retained earnings, the Government will make about $1.5 billion from the auctions. If they’re valued higher, say at two year’s retained earnings, the Government will have a handy $3 billion to take into account in its 2010 electioneering.

If a chain operator wanted to buy the maximum 35%, they’d have to find between $300 and $600 million, but would be looking at ten year revenue of more than $3 billion to compensate for the outlay. To make it even easier, the Government is selling the entitlements on easy terms — 10% within seven days of the auction, 10% just before start up, and the balance in quarterly instalments over four years. The total number of entitlements will be capped, and those in the highest earning local government areas are also subject to “regional caps”. These entitlements could be expected to go at a premium.

Of course, the venues will have some costs they didn’t previously have to meet — monitoring costs to ensure compliance, and the purchase and maintenance of machines, which cost around $10,000 each. Of course there is an ample stock in Victoria belonging to Tattersall’s and Tabcorp, many of which they won’t need after 2012 even if they bid for entitlements themselves.

The other big winners are likely to be large clubs such as AFL clubs who are already jockeying for prime venues in outer suburbs. The proposed legislation imposes a ceiling of 35% of total hotel pokies on any one operator or associated operators, but no such limits apply to clubs, so cashed up organisations, or organisations with ample financial backing, will be in a good position to acquire enough entitlements to stock multiple venues.

The proposed tax regime represents a seriously squandered opportunity to get on top of Victoria’s gambling problem. Between 42% and 53% of the revenue that goes through the pokies comes from problem gamblers or those at risk, depending on whether you believe the Productivity Commission or my colleague Richard Woolley and me. Either way, it’s a lot. The break up of the duopoly provided an opportunity for government to retain its own and the venue operators’ revenue share, but introduce some effective harm reduction and product safety measures to massively reduce or eliminate problem gambling on pokies — such as compulsory smart cards or machine re-configuration, already underway overseas.

Instead, the State government has opted for a system in which the incentives will all be pitched towards maximising revenue, and increasing problem gambling rates.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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