This article was written by Heather J. Carlson and originally appeared in the Rochester Post Bulletin on Aug. 9, 2017. View the original article here.
As gambling manager of Rochester Juvenile Hockey Association, Mark Hickey has watched as state taxes continue to take a bigger bite out of the charity's profits.
In fact, the group spends far more on taxes than it does on its charitable mission, which includes helping pay for the Graham 4 hockey arena. From July 1, 2016, to June 30, 2017, the nonprofit donated $178,000 raised from paper and electronic pull-tabs. It paid out $461,000 in state taxes.
"We're just trying to do our part, but the taxes are overwhelming," said Hickey, who also serves on the Rochester City Council.
Charitable gambling groups are sounding the alarm over what they see as an unfair tax system. Allied Charities Executive Director Al Lund went so far as to pen a tongue-in-cheek obituary for charitable gambling in the state, writing "charitable gambling will now be known as The State of Minnesota Charity. Details are yet to be worked out, but beneficiaries of past charitable donations will need to go to St. Paul to ask for help."
Lund said that based on preliminary estimates he expects Minnesota charitable gambling groups in 2017 will — for the first time — pay more in state taxes than they donate to their causes.
"What I keep telling the Legislature is you are strangling the goose," Lund said. "At some point, the groups are going to say en masse, 'We're done.'"
Allied Charities has organized meetings across the state to talk about the issue, including one at 5:30 p.m. Aug. 17 at American Legion Post No. 92 in Rochester. The group wants state law changed so organizations' charitable donations are no longer taxed.
Sen. Carla Nelson, R-Rochester, is sponsoring a bill to do just that. She said it is time that these groups raising money for local charities get some tax relief.
"It's not fair. That's the only business in our state that has to pay taxes on its charitable donations," she said.
A tough sell with a big price tag
But efforts to pass the bill stalled last session, despite bipartisan support. One major reason is the bill's cost. The Minnesota Department of Revenue estimates the charitable tax exemption would cost the state upwards of $28 million per year. House Taxes Committee Chairman Greg Davids said there is another roadblock charities face in convincing lawmakers to get on board.
"There are some folks that say, 'This is supposed to be a revenue raiser for the state,'" Davids said.
The Preston Republican lawmaker wants to see charitable gambling taxes lowered, but said it has been a tough sell in St. Paul.
Too soon to know
So will charitable gambling groups have paid out more in state taxes than donations in fiscal year 2017? Gary Danger, a compliance officer with the Minnesota Gambling Control Board, said it is too early to know for sure. Final numbers will not be available until October or November.
"We know that sales far exceed anything that we've seen in 30 years. But there's a lot of other things that have to be factored in yet before we can find out the rest of the story," Danger said.
Preliminary numbers show charitable gambling groups had sales of $1.72 billion for fiscal year 2017. That's up from $1.5 billion the year before. Of that money, more than 83 percent was paid out in prize money. So far, Danger said he hasn't seen a drop in the number of groups doing charitable gambling. It has held fairly steady at about 1,100.
'Hurting the charities'
Roughly 92 percent of all charitable gambling in the state is in the form of paper or electronic pull tabs. In 2012, lawmakers overhauled the state's charitable tax system to help pay for the Minnesota Vikings stadium. Under state law, charities pay taxes on money raised minus prizes paid — called net receipts. The tax rate climbs as profits' net receipts increase from a low of 9 percent to a high of 36 percent. All tax revenues above $36.9 million are automatically deposited into the stadium reserve fund.
Rod Toomey, gambling manager for the Rochester Eagles Club, said it's frustrating to see more and more money going to the state for taxes. In fiscal year 2016, the club donated $61,100 to charities but paid nearly twice that amount in taxes. Luckily for the Eagles, sales have continued to climb. But Toomey worries what happens if sales stagnate or decline.
"At some point, this unfair tax structure is really hurting the charities," Toomey said.
As for Hickey, he said he would be happy to see any sort of a tax break to enable charities to donate more. Even dropping the top tax rate from 36 percent to 27 percent would be a big help.
He added, "It would just really help our bottom line. We'd have more money to contribute to our charitable purpose."