Fitzgerald, Michael, Iowa Treasurer v. Racing Association of Central Iowa, et al. (06/09/2003)

Questions presented: Can the state of Iowa tax the revenue from slot machines at parimutuel racetracks and the revenue from all casino games on riverboats, including slot machines, at different rates without violating the Equal Protection Clause?

BY: DAN SILVER, MEDILL NEWS SERVICE

Ask an Iowan legislator and a die-hard gambler about the difference between a riverboat casino and a racetrack and you will get two entirely different answers.

In the eyes of Iowa lawmakers, the difference is large enough to justify taxing the two types of casinos in different manners.

"We are talking about completely dissimilar types of business operations," said Assistant Iowa Attorney General Jean Davis.

"The State contends riverboats and racetracks are different classes simply because one is land-based whereas the other floats on water," wrote Iowa Supreme Court Judge Michael Streit in reflecting on the state's position.

For gamblers, that notion doesnt carry much weight.

"The idea that the riverboat casinos are substantively different than land-based casinos is a joke," said Rich Zito, 27, a New Jersey native who gambles periodically. "The boats are land casinos that are suspended in a couple of feet of mud."

You wont find much disagreement with Zito among the gambling community.

"I don't really care where I gamble, on land, on the water, in the air," said Mike Mansi, 23, from Maryland, and a frequenter of casinos. "Location means nothing to me."

The debate began in 1994.

Iowa racetracks and riverboat casinos were having difficulty generating profit, so they sought help with the state.

In order to help the struggling industry generate more revenue, the state enacted legislation permitting racetracks to operate slot machines. The new laws also eliminated the wager and loss limits to assist in increasing revenue.

In addition to those changes, the legislature adopted different wagering tax rates on the two entities.

The rate was set at 20 percent for riverboats, but for racetracks, it was much higher.

Beginning in 1997, the rate for racetracks was set at 22 percent, and was scheduled to increase by 2 percent each year until it reached 36 percent.

When the racetracks once again began having financial difficulties, they decided to take the State of Iowa to court.

The tracks argued that the taxing statute violates the equal protection clauses of both the state and federal constitutions.

State and federal equal protection laws require that similarly situated individuals and groups be treated similarly.

Despite the racetracks contention that they are similarly situated with riverboats, the Iowa district court found for the state. The judge ruled that the racetracks failed to negate every conceivable basis for upholding the taxing statute, specifically that the state had a legitimate interest in promoting the riverboat industry and the economy of river towns.

On June 12, 2002, however, the Iowa Supreme Court reversed and found for the racetracks in a close 4-3 vote.

The state argued that racetracks and riverboats should be in different tax classes mainly because the racetracks are land-based while the riverboats float on water.

The court agreed that there are some differences between the two facilities, but that in order to justify taxing them differently, the dissimilarities "must be relevant or pertinent as well as rational."

And in this case, the court found that none of the differences put forth by the state were "sufficiently compelling" to result in riverboats and racetracks being placed in different tax classes.

In essence, the court agreed with many of the gamblers out there that the most significant and important aspect of the two places has nothing to do with their location.

"I'd gamble underwater; its the same thing. A full house still beats three-of-a-kind, no matter where you are," said Zito.

The Iowa Supreme Court agreed with Zito in its majority opinion: "The heart of the tax statute is in its disparate treatment of the main activity taking place at both riverboats and racetracks."

The "main activity" the court refers to is, of course, gambling.

Furthermore, according to the court, the disparate tax rates fly directly in the face of the original purpose of the 1994 legislation.

"Though allegedly the legislation including the differential tax was designed to help the racetracks, eventually the 36 percent tax on gross receipts will seriously jeopardize the racetracks viability," the opinion stated.

"Because the stated purpose of the legislation is frustrated by the legislation itself, it is impossible to conclude the legislature actually had its alleged purpose in mind when enacting this taxing statute."

In a five-paragraph dissent, Judge Linda Neuman wrote for the minority, "One slot machine may be the same as the next. But the legislature was looking at the bigger picture, and so must we."

That bigger picture, the dissent argued, is the "diversity in cultural attractions for its citizens and tourists" and "rightly or wrongly, a legislative majority could rationally determine that a riverboat casino holds more romantic tourist appeal than a casino stuck in a dog track."

The dissent noted that the legislature may also have been acting on the pragmatic belief that if the economic climate turns unfavorable in Iowa, "a riverboat merely unties its lines and sails elsewhere." Therefore, the dissenters reason, "it is not unreasonable for the legislature to create economic incentives to develop or retain riverboat gambling while maintaining the status quo with respect to other forms of the sport."

On Jan. 17, 2003, the U.S. Supreme Court accepted review in the case.

The ruling could have a major impact on the Iowa economy.

As a result of the Iowa Supreme Courts decision, the state will not receive the estimated $40 million in 2003 from racetracks they had been expecting. The state may also be liable for $100 million in back taxes to the racetracks.

Because of this, the state has been investigating new methods of increasing tax revenue. Iowa Gov. Tom Vilsack created a special gaming task force to examine ways the state can offset the lack of gambling tax revenue.

In January 2003, the task force rejected a plan recommended by the Iowa Gaming Association to allow for gaming in more communities.

That plan had reported that, "respected gaming analysts have identified the potential for over $150 million a year in additional gaming revenue in the Iowa market."

The Iowa legislature, however, currently has a moratorium in place on new casino licenses, and a majority of state legislators oppose the expansion of legal gambling.

So instead, Gov. Vilsacks task force approved a recommendation that would exempt a portion of revenue from table games, effectively shifting a greater tax burden back to the racetrack casinos.

On June 9, 2003, the Court unanimously sided with Iowa, holding that Iowa's differential tax rate did not violate the federal Equal Protection Clause.

Writing for the Court, Justice Stephen Breyer said the law, subject to rational-basis review, did what the Iowa Supreme Court said it sought to do, namely, advance the racetracks' economic interests.

Once one realizes that not every provision in a single law must share a single objective, Breyer reasoned, one has no difficulty finding the necessary rational support for the difference in tax rate.