Sin Tax Error: resisting reasonable gambling taxes risks a much worse outcome

By Paul Leyland - Principal Consultant, Regulus Partners

“Friends and neighbours complain taxes are indeed very heavy and if those laid on by government were the only ones we had to pay we might more easily discharge them; but we have many others and much more grievous to some of us: we are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.” Benjamin Franklin

The Gibraltar Betting and Gaming Association, having failed to overturn the UK remote Gambling (Licensing and Advertising) Act, is now attempting a Judicial Review of the forthcoming remote Point of Consumption taxes through the Finance Act.

I think this is a mistake for pretty much the same reasons as those articulated in a previous blog: http://regulusp.blogspot.co.uk/2014/09/point-of-consumption-licensing-beware.html. However, there is a deeper industry issue here which needs to be addressed if it is to be listened to.

The gambling industry at various points supports two conflicting and often almost disingenuous lobbying positions:

·         We pay a lot of tax, therefore we should not be over-regulated

·         We are in a highly competitive sector so we cannot support any/more tax

There is an obvious confusion here to lawmakers and other outsiders, that one part of the industry pushes that paying taxes provides lobbying power, while another part is determined to avoid any material tax footprint. The confusion is added to when both views are expressed by the same company depending upon which division is speaking.

Businesses are not necessarily consistent and they rarely claim to be philosophers. However, in attempting to be pragmatic they open up a very significant practical problem…

In the first instance is it logical that any company has a de minimis tax footprint? Certainly it maximises profit but it is highly unfashionable among government and voters (not to say ethically questionable). If a company busily manufactures widgets, or even financial products, then it might take the view that ‘as a company like any other’; it will take its chances unless or until tax law catches up with it. From a purely corporate governance perspective, this a reasonable risk to run so long as it is disclosed and transparent.

But gambling companies are not like other companies. And not for any moral reason. Or even because they are especially esoteric. But because they are specifically regulated.

The problem for gambling companies is that the same governments that regulate gambling businesses also set the tax for them (increasingly online as well as land-based).

Like it or not, governments can, should, and do regulate gambling.

All gambling companies; black, white or ‘grey’, exist somewhere in a legal, regulatory and fiscal matrix. If they try too hard to avoid tax and regulation they will simply invite governments to ensure that they fail. If the fight becomes public, it is likely to become political. If it becomes political, there will a premium on the politicians becoming vindictive – with the blessing of the voting public.

As Professor Peter Collins put it: "Almost everywhere in the world, where gambling is not primarily an export business, gambling - like alcohol and tobacco - is subject to abnormal rates of taxation, so that government itself has a substantial economic interest in a profitable gambling industry."  

But surely taxes mustn’t be too high?

Undoubtedly, but when making this argument, gambling companies would do well to understand the tax footprint of ordinary companies, rather than assuming that paying a specialist tax gives them a special lobbying position: contrary to some industry assertions, most forms of UK gambling are not materially more heavily taxed than the wider corporate economy, and are much more lightly taxed than most ‘sin’ excises (tobacco, alcohol, fuel).

Moreover, the role of regulated gambling needs to go beyond paying tax to form an effective lobby; Collins again: “Throughout the United States and almost everywhere else in the world, the gambling industry is expected to contribute special economic benefits to the jurisdictions in which it operates. This may consist of promoting earnings from tourism, funding good causes, or paying abnormally high taxes over and above normal corporate, personal, and property taxes.”

More specifically, ‘tax lobbying’ is only logical if at least two of these four statements are true (and probably all four if anyone is to listen in a politicised environment as we currently have in the UK):

1.       Gambling taxes have a higher tax footprint than that of the ordinary consumer pound (including net VAT and factoring in heavily sin-taxed products such as tobacco and alcohol)

2.       There is a material risk that high taxes will create a significant black market which regulation cannot mitigate

3.       Sensible tax rates are driving investment, employment and providing a safe public utility

4.       The taxes generated are more valuable from an economic perspective than the social harm and/or political pressure caused by allowing the activity in the first place

The problem that the UK gambling industry faces (including its offshore remote sector) is that, on the whole, it does not score well on any of the above points, and is (very) poor at communicating when it does get it right.

More profoundly, lobbying should be designed to persuade, not to negotiate: gambling’s negotiating position with government is very weak indeed (small, limited popularity, controversial). More dangerously, overstating its negotiating position can become counterproductive.

The gambling industry needs to show that it is prepared to pull its weight both fiscally and socially if it is to have a voice with its most important stakeholder: the government of its customers. The GBGA might not be overly concerned that there is a contemporaneous review of UK gaming machine regulation in betting shops. It might be equally unmoved by the fact that next May there is a UK General Election, in which two major parties are already setting their stall in a manner not exactly friendly to gambling. But then the GBGA is not directly responsible to the UK government. Many UK-facing operators are (or soon will be), however. Those operators may look at 2014 not as some annus horribilis but as the last of the good old days and a chance to build bridges wasted… If they keep supporting attacks on the hand that feeds them they may very well deserve it.