Local gambling establishments are getting closer to a reprieve on the taxes they pay to Federal Way.

The city council’s Finance, Economic, Development, Regional Affairs Committee (FEDRAC) met Tuesday about lowering the tax rate on cardrooms and pull-tabs.

The issue came to light after PJ Pockets Casino closed its doors.

The casino, located at South 324th Street and Pacific Highway, closed May 3 and laid off all 85 employees. The casino had been tightening expenses the past couple of years amid the economic downturn, said co-owner Steve Griffiths.

Although the main reason for closing was the downturned economy and loss of discretionary spending, Griffiths said another reason behind the closure was the city’s 20 percent tax rate on the casino’s gross gambling receipts. Twenty percent is the maximum allowed by the state, and was levied when the city was trying to slow down the growth of gambling activities and establishments in 1998.

“Virtually no one was succeeded in that kind of tax environment,” Griffiths said. “It only works in the best of situations.”

City staff is recommending that the cardroom tax be dropped from 20 percent to 10 percent, and the pull-tab tax be dropped from 5 percent to 4 percent. The council also has the option of issuing an emergency ordinance to expedite the process, which would mean the lower tax rate could go into effect on June 6. With the standard ordinance process, the tax rate wouldn’t officially drop until Aug. 1.

If the tax were lowered by June 6, Griffiths said the goal would be to reopen PJ Pockets on Aug. 1. The casino would need 30-40 days to rehire staff, train any new staff and work with the gambling commission to reopen, he said.

Pull-tabs

The owners of Time Out Tavern, which sells pull-tabs (gaming tickets that pay cash to winners), asked the council to go one step farther and to drop the pull-tab tax to 3 percent of the gross profits.

Foley said with pull-tabs, the city taxes on the gross receipts, which means a higher rate of their net receipts — in many cases more than 20 percent. For example if Foley’s gross receipt is $100,000 and the payout is 80 percent then he has a net receipt of $20,000. The city charges five percent of the gross, which in this case would be $5,000. $5,000 of his net of $20,000 means he is getting really getting taxed 25 percent on the net.

“If you tax me on the gross that’s fine but just understand my net,” Foley said.

Depending on the pay out percentage, a tax of five percent means a tax on the Time Out’s net of mid to high twenties. A four percent tax would mean low to mid 20s and a three percent tax would mean a tax on the net of the mid to high teens.

“Mid teens is fair, it’s good for both parties,” Foley said.

According to Tho Kraus, acting city manager for Federal Way, each 1 percent reduction in pull-tab taxes works out to about $55,000 less for the city. However, Foley said that the number is somewhat misleading because if the tax were dropped to 3 percent, his business would likely be able to increase its pull-tab business — and therefore bring in more taxable money.

The committee meeting, of which city council members Mike Park, Linda Kochmar, Jeanne Burbidge and Dini Duclos attended, looked to go in favor of lowering the gambling tax. The motion has been sent to the full council for its June 1 meeting. However all council members present expressed their support of the motion.

There was some dissent on how much to lower the pull-tab tax should go. Park, Duclos and Kochmar all spoke in favor of lowering the tax to 3 percent to stimulate growth for the current local businesses.

“I’d rather take 3 percent,” Park said. “They’d like to maintain a business.”

Duclos and Kochmar agreed. Kochmar added that if the 3 percent didn’t work for the city, they could always revisit the issue after trying it.

Burbidge wanted to only lower the tax rate to 4 percent, to avoid bringing in any new establishments.

“My preference is to move to only 4 percent. I think that’s a substantial change,” Burbidge said. “I would prefer to be closer to the prominent rate.”

Park and Burbidge are the only two members on the committee and therefore able to vote. They chose to forward the issue to the full council with no recommendation on the tax rate, but recommended using the expedited process.

FYI

A total of 80 licensed cardrooms reported $25,534,116 to the local jurisdictions in gambling taxes for fiscal year ending June 2009, according to the commission.

In Federal Way, 18 establishments contribute to the gambling tax revenue, which was budgeted at about $1.1 million for 2010, said city manager Brian Wilson. PJ Pockets is the largest contributor to this revenue stream.