When Mercedes Stephens recently hit a jackpot at SugarHouse Casino, her slot machine flashed the faces of 12 cartoon buffaloes - and then it locked up.
Stephens, 47, had won more than $1,200, which meant she had to stop playing and sign an IRS tax form that reports her winnings.
The process took about five minutes, she said. But the gaming industry warns that the interruption could soon eat away at casino profits and - ironically - billions in gambling tax revenue that flow into Pennsylvania and New Jersey.
That's because the Internal Revenue Service wants to lower the reporting threshold on slot winnings from $1,200 to $600. If that happens, casino industry supporters say, gamblers will spend more time filling out W2 forms and less time playing.
"Not only is the casino not earning revenue, but the state is losing money, and so are local governments," said Chris Moyer, a spokesman for the American Gaming Association. "It would be detrimental to local and state governments and the revenues they receive from the gaming industry."
Analysts agree the proposed rule would affect casino profits in states with casinos, including New Jersey and Pennsylvania, which leads the country in gambling tax revenue. But experts and casino owners have predicted varying degrees of impact.
For instance, a spokesman at Penn National, owner of the Hollywood Casino in Dauphin County, told The Inquirer it would suffer a five percent - or $6.5 million loss - in local and state tax revenue.
But Alex Bumazhny of Fitch Ratings said casinos would take only a fraction of the hit that smoking bans have taken on profits, which can be as much as 10 percent.
Analyst Cory Morowitz of Morowitz Gaming Advisors L.L.C. said the proposal "will have real costs to the gaming industry."
"Slot revenues are already declining across most markets and properties," Morowitz said. "This will only make matters worse."
Pennsylvania casinos took in $2.3 billion in slot revenue in fiscal year 2013-14, according to the Pennsylvania Gaming Control Board. Slightly more than half of it - 55 percent - was taxed.
The biggest chunk, 34 percent, or nearly $800 million, went to the state and was mostly dedicated to property-tax relief. Four percent, or about $92 million, went to towns and counties that have casinos. For instance, SugarHouse paid about $7 million to Philadelphia, which spends that money on wage-tax reduction.
At SugarHouse, about 1,700 people each month fill out W2 forms after winning $1,200 or more. Under the proposed rule, that number would grow to 10,000 a month, said Wendy Hamilton, SugarHouse general manager.
She said it often takes eight to 10 minutes for someone to complete a tax form before getting back to playing.
"We think it's a horrible idea," she said. "We'd need to hire a couple more people and buy more equipment."
The current reporting threshold for slots has been in effect since 1977, when $1,200 was more like $4,700, accounting for inflation. The IRS has proposed the $600 threshold to bring slot winnings in line with the reporting requirements of business and trade revenue and because technological advances have made tracking winnings easier.
But Frank Fantini, publisher of Fantini's Gaming Report, an industry newsletter, said slots players lose most of their winnings back to the casinos anyway.
"It's a lot of work for very little purpose," he said of the proposed threshold. "And if the players don't feel entertained anymore because they're filling out tax forms, are they going to do something else on a Friday night?"
Gaming companies have sent out a petition to casinos and their patrons across the country, and an American Gaming Association official will speak at an IRS hearing on the matter June 17. The federal agency is also collecting public comments on the proposed change until June 2.
Stephens, who won that jackpot at SugarHouse, said the proposed IRS rule would cause some players to bet less money to avoid the lower threshold.
"Everything else is already taxed enough," she said. "Give people a break."
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@Ben_Finley
This is a corrected version of an earlier article.
Read more at http://www.philly.com/philly/news/20150523_Gambling_tax_proposal_would_affect_casinos_and_governments.html#tJbzkXCD8Q5R1URU.99
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