Key Takeaways
- States relying on in-person casino gaming activity collected nearly no related taxes from April through June.
- Nevada, the state most reliant on gaming activity, saw some gains in June and July as casinos began to reopen, but faces headwinds from a disrupted travel industry and canceled conventions.
- In the Northeast, casino tax collections varied widely from March to August with New Jersey's revenue decline only 23% compared to 78% for New York State, due to New York's casinos being closed for nearly the entire period.
- Future sports betting revenue growth remains uncertain as events are canceled or scaled back, but some states may look to it as new source of incremental revenue.
To mitigate the spread of COVID-19, most states restricted large gatherings and closed commercial casinos beginning in March. Throughout the spring and summer, S&P Global Ratings observed significant declines in tax revenues tied to casino gaming activities. States relying solely on in-person wagers collected nearly no related taxes from April through June of 2020. However, as restrictions on economic and social activities gradually lift, mobility is on the rise and we are beginning to observe a recovery in casino gaming tax revenues, albeit from severely depressed levels.
All states that permit commercial casino gaming levy some form of wagering tax on adjusted gross receipts or gross gaming receipts less any payout for prizes. Across the country, most commercial casinos were shuttered in April and May with some gradual easing of restrictions starting in June. Casinos able to use online gaming platforms were able to soften their revenue losses. When comparing commercial gaming receipts nationally, we saw a historic contraction in gaming activity. From January to July, casino revenues were down 43% in 2020 compared to last year and down 79% from April to June, the height of national casino closures.
Chart 1
Nevada (AA+/Negative), the state most reliant on gaming activity, shuttered casinos statewide for nearly three months and collected virtually no taxes tied to gross casino gaming revenues during that time. Similar actions also occurred in the Northeast, where limited gaming tax revenues were collected.
As we look beyond the closures, S&P Global Ratings expects regional gaming markets will likely be the first to recover because customers typically live within driving distance of the properties, particularly if other available entertainment offerings are limited. However, Las Vegas will likely be slow to recover because it relies heavily on air travel, international visitation, and conventions or group meetings (see "U.S. Lodging, Leisure, And Gaming Sectors Face Rocky Road To Recovery," published June 30, 2020, on RatingsDirect).
S&P Global Economics now expects the recovery to enter a slower growth phase heading into 2021, and forecasts the U.S. economy won't get back to its pre-pandemic levels (real GDP of fourth-quarter 2019) until late 2021, with an annual GDP growth rate for next year at 3.9% (it was 5.2% in June). The unemployment rate is not expected to reach pre-crisis levels until third-quarter 2024 (see "The U.S. Economy Reboots, With Obstacles Ahead," published Sept. 24, 2020). In our opinion, persistent levels of high unemployment and a sluggish recovery will add to casino gaming tax unpredictability, making it a vulnerable source of state revenues.
Nevada Casino Gaming Tax Collections Started To Recover In August
Nevada's annual casino revenues accounted for 26.5% of the national total in 2019 compared to New Jersey (A-/Negative) and Pennsylvania (A+/Negative), who tied for second place at 8%. Based on this concentration, Nevada is the state most reliant on gaming activity. For fiscal 2019, approximately 18% of its general fund revenue was derived from gaming taxes, fees, and licenses and 25% of employment is concentrated in the leisure and hospitality sector (see "Tourism-Dependent U.S. States Could Face Credit Pressure From COVID-19's Outsized Effects On The Industry," published April 27, 2020).
Prior to the pandemic, January and February casino gaming revenues were 5.5% and 3% ahead of last year's monthly totals. However, on March 17, the governor of Nevada ordered a statewide shutdown of casinos and all other nonessential businesses to mitigate health and safety risks of coronavirus. As a result, there was nearly no gaming revenues for April and May or related tax collections for the state. Nearly three months later, casinos began to reopen on June 4 with safety measures in place.
Chart 2
When looking at the state's collections of percentage fees on gross gaming activity, it is important to note that collections lag a month behind when the activity occurred. For April collections (which reflect March gaming activity), tax revenues were down 54% compared to a year earlier. From May to July, nearly no gaming taxes were collected. The state started its recovery of gaming taxes with August collections, albeit with revenue down 56% for the month compared to the prior year.
As the country's largest casino gaming destination, Nevada faces continued headwinds from a disrupted travel industry and cancelation of large-scale indoor events (like conventions). Social distancing and other health and safety measures will likely hurt the comprehensive experience in Las Vegas and could make it less desirable to visit for some time. In S&P Global Economics' baseline scenario, a COVID-19 vaccine is assumed to be widely available in mid-2021, with some modest upside potential that it could be earlier. Until a vaccine or effective treatment becomes widely available, we expect casino gaming activity and travel to be suppressed, limiting the speed of casino gaming tax revenue recovery.
Northeast Casino Gaming Tax Collection Declines Vary, Offset By Online Gaming
The Northeast is a heavily saturated casino gaming market with a mix of tribal and commercial casino gaming facilities (see "Betting Against Yourself: Northeast States Expand Casino Gaming Despite Weak Demographics," published July 31, 2017). Within the region, Massachusetts (AA/Stable), New York (AA+/Stable), and Pennsylvania significantly expanded commercial casino gaming over the past five years to boost economic development and provide new incremental revenues to state coffers.
Among these states, casino tax collections varied widely from March to August. New Jersey's revenue decline was only 23% compared to 78% for New York State. The variation is largely due to New Jersey adopting online gaming and sports betting, which have offset revenue declines for in-person gaming. Conversely, neighboring New York only allows in-door commercial casino gaming and reopening to start in September. While the declines in gaming revenues are dramatic, they represents a small portion of these states' budgets.
Chart 3
New York State received $162 million in revenues from commercial gaming in fiscal 2020 and estimates a 45% decline to $89 million in fiscal 2021 (ending March 31) before gradually increasing in subsequent years. Unique to New York, all of the state's commercial casino revenues are used for school aid and if casino revenues drop below estimated levels, the general fund is expected to absorb the shortfall. In its fiscal 2021 first-quarter update, estimates for video lottery and commercial gaming revenues were lowered by $288 million, which, in turn, increased general fund school aid support (see, "New York State Fiscal 2021 Revenues Fall Short, Increasing The Likelihood Of Expenditure Cuts," published Aug. 27, 2020).
Sports Betting May Provide States A New Incremental Revenue Source
In May 2018, the U.S. Supreme Court removed barriers for states to legalize sports betting. In the year that followed, initiatives to examine the issue moved through statehouses. In the Northeast, New Jersey was first to expand, followed by Pennsylvania and Rhode Island (AA/Stable) (see "Northeast States Gamble On Expanded Sports Betting And Casinos, But Are Unlikely To See Tax Revenue Windfall," published July 31, 2018). This November, three states--Louisiana (AA-/Stable), Maryland (AAA/Stable), and South Dakota (AA+/Stable)--will have ballot measures before voters on whether to authorize some form of legalized sports betting within the state. In the near term, states with significant revenue shortfalls may consider sports betting as an incremental revenue source to offset potential tax increases or expenditure cuts.
New Jersey benefited from sports betting in fiscal 2019, earning $23 million in tax revenue with on-site sports wagers starting June 2018. Sports betting was expanded shortly thereafter to online formats, which also includes a higher tax rate. Fiscal year 2020 collections show New Jersey exceeding sports betting tax revenues compared to the prior year. The growth is in part due to a revenue spike in January, coinciding with the Super Bowl. (For more information see, "U.S. States Legalizing Sports Betting Look To Cash In On Super Bowl 53," published Jan. 22, 2019.)
Chart 4
However, future sports betting revenue growth remains uncertain as sporting events are canceled or scaled back to comply with social distancing measures (see, "Changing Landscape Threatens Credit Quality Of U.S. Convention Centers, Arenas, And Stadiums," published July 27, 2020). Continued closures or reduced operations at casinos and racetracks are also expected to affect future revenue growth. Nonetheless, New Jersey has seen sports gaming revenue collections surpass those of last year for July and August. While not a significant source of state revenue, continued loss of even a minor revenue source will need to be offset elsewhere in the budget, further adding to budgetary stress (see "COVID-19 Induced Recession Throws Curveball To U.S. State Budgets," published May 21, 2020.)
Casino Gaming Tax Revenue Collections May Be A Useful Indicator Of Economic Activity
A lack of mobility among consumers resulted in a sudden stop to the country's economic trajectory. Increasingly, new electronic mobility sources are being used to gauge the economy's recovery. Still, activities directly affected by social distancing--retail, recreation, leisure, travel, restaurants, and hospitality--are rising from their lows, but have improved only modestly (see "U.S. Real-Time Economic Data Shows A Mixed Picture As Lockdowns Ease," published June 11, 2020).
Commercial and tribal casino gaming venues began to open in June at limited capacity in Connecticut and Rhode Island, with New Jersey casinos in Atlantic City allowed to resume operations July 2 at 25% capacity. Some tribal casinos in New York restarted some operations early and commercial casinos could do so in September if they meet certain health and safety requirements. As restrictions on economic and social activities continue to loosen, state revenues should start to grow from the historic contractions they saw over the past few months.
Related Research
- The U.S. Economy Reboots, With Obstacles Ahead, Sept. 24, 2020
- U.S. Lodging, Leisure, And Gaming Sectors Face Rocky Road To Recovery, June 30, 2020
- Rebooting The U.S. Media Sector In A Post COVID-19 World, June 10, 2020
- COVID-19 Induced Recession Throws Curveball To U.S. State Budgets, May 21, 2020
- Tourism-Dependent U.S. States Could Face Credit Pressure From COVID-19's Outsized Effects On The Industry, April 27, 2020
- The COVID-19 Outbreak Weakens U.S. State And Local Government Credit Conditions, April 2, 2020
- U.S. States Legalizing Sports Betting Look To Cash In On Super Bowl 53, published Jan. 22, 2019
- Northeast States Gamble On Expanded Sports Betting And Casinos, But Are Unlikely To See Tax Revenue Windfall, July 31, 2018
- Betting Against Yourself: Northeast States Expand Casino Gaming Despite Weak Demographics, July 31, 2017
This report does not constitute a rating action.
| Primary Credit Analyst: | Timothy W Little, New York + 1 (212) 438 7999; timothy.little@spglobal.com |
| Secondary Contacts: | David G Hitchcock, New York (1) 212-438-2022; david.hitchcock@spglobal.com |
| Ladunni M Okolo, Farmers Branch (1) 212-438-1208; ladunni.okolo@spglobal.com |
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