Ruling Worth $17M to Prairie Meadows in 2002

by Dan Johnson

Prairie Meadows stands to save $17 million in gaming tax payments this year and $23 million by 2004 after the Iowa Supreme Court ruled June 12 that it was unconstitutional to charge a higher tax rate for slot machines at racetracks than those on riverboats.

The 4-3 ruling means Prairie Meadows stands to pay $17.4 million less in taxes this year, and $23.2 million less in 2004. Prairie Meadows is also seeking to recover nearly $50 million in overpaid state taxes since 1997.

Iowa riverboat casinos pay a 20% gaming tax. For racetracks with slot machines -- Prairie Meadows and the Dubuque and Bluffs Run Greyhound tracks -- the rate started at 20% and has been climbing 2% points per year, to 36% in 2004.

The tax rate is currently at 32%. Based on $145 million in annual slots betting, Prairie Meadows would pay $46.4 million in taxes at that rate versus $28 million at the 20% rate. In 2004, Prairie Meadows' taxes would have totaled $52.2 million.

Prairie Meadows had lost its case at the district court level before the appeal before the Iowa Supreme Court.

"I'm pleasantly surprised," Prairie Meadows attorney Tom Flynn said. "I always thought that we had a very good case, but I also fully understand that you don't overturn statutes on the grounds of constitutionally very often."

However, the ruling comes at a time when Iowa is in a fiscal crunch, so the state could simply raise the gaming tax rate for riverboats and racetracks next year.

"That shouldn't shock anybody if that would happen," Flynn said.

Justice Michael Streit wrote in his ruling that the state failed to show why riverboats and racetracks should be taxed differently.

"Where the same activity is being taxed at significantly different rates, a mere difference in location is not sufficient to uphold the discriminatory tax," Streit wrote. "Unless we recognize he desire to discriminately tax one business for the purpose of supporting another similarly situated business as a legitimate government interest, we can find no other basis for upholding this law."

Justice Linda Neuman wrote a dissenting opinion. "There are a number of rational reasons why the legislature might tax land-based casinos differently from river-based ones," Neuman wrote. "A legislative majority could rationally determine that a riverboat casino holds more romantic tourist appeal than a casino stuck in a dog track. The legislature could also recognize riverboats are mobile and could sail elsewhere if the economic climate turns unfavorable here."

A share of whatever Prairie Meadows saves will go to Polk County, which is the track's landlord. Under a lease agreement approved last month, the county will get half of whatever lump sum in overpaid taxes that Prairie Meadows recovers, as well as one-third of the future tax savings.

How the rest of the money will be spent is unclear. The Racing Association of Central Iowa, which operates Prairie Meadows, is a not-for-profit group, meaning the money has to go to charity or expenses. Whether some projects that had been scrapped, such as adding a turf course, will be looked at again is unknown.

"It is way too early to know that," said Daryl Lewis, Prairie Meadows' director of community relations. "We have no idea. We have to sit down and where we're at."

Prairie Meadows already has a three-year contract in place with horsemen that will pay $15 million per year in Thoroughbred and Quarter Horse purses. Dick Clark, president of the Iowa Horsemen's Benevolent and Protective Association, said the tax break wouldn't affect the purse contract.

However, Clark said horsemen might ask for more racing days in 2003. The 2003 racing format is under negotiation, and talks had centered on cutting the season from 98 days to 75 or 80 days.

The state has 14 days to seek a re-hearing before the Iowa Supreme Court. Assuming there is no change, the next step would be to return to district court to argue what the damages should be for the past overpaid taxes. Then either party could appeal to the federal level.