Raises the monthly gross receipts tax rate on legal gambling establishments, increases the number of allowed card tables and adds a new tax on gross revenues for businesses that provide banking services to cardrooms.
What the Measure Would Do
Measure H would do three things: 1) authorize the city to increase the total number of card tables by 30 (a 30% increase), split evenly between the city’s two cardrooms; 2) increase the city’s cardroom tax from 15% to 16.5% of monthly gross receipts; and 3) create a new monthly gross receipts tax on third-party businesses that provide banking services for these cardrooms. The third-party businesses would pay the tax on monthly gross receipts at the rate of:
- 5% for annual gross receipts between $10,000 and $25,000,000
- 7.5% for annual gross receipts between $25,000,001 and $30,000,000
- 10% for annual gross receipts over $30,000,000
The proposed tax increase and expansion would take effect on January 1, 2021. City staff expects Measure H to produce about $15 million annually for San José’s General Fund, to be used for broad governmental purposes. However, actual revenues could be significantly lower during the COVID-19 pandemic due to cardroom closures and social distancing protocols.
San José’s two authorized cardrooms, Bay 101 and Casino M8trix, are currently permitted 49 card tables each, generating millions for the city through the current 15% cardroom tax on monthly gross revenues, approved by voters in 2010.
In fiscal year 2018–2019, the cardroom tax raised about $18.9 million. For the fiscal year 2019–2020, however, the COVID-19 shelter-in-place order will likely result in about $13.5 million in cardroom tax revenue, a 28% drop. The city's 2020-2021 budget estimates $17.1 million in cardroom tax revenues, but that number could change because of the uncertainty around reopening cardrooms and the impact of social distancing.
State of California gaming regulations and the San José Municipal Code require voter approval for an expansion of gaming in the city. They also bar cardrooms from serving as the bank, or “the house,” for their customers. Therefore, cardrooms must use separate businesses known as third-party proposition player services. These third-party businesses do not currently pay taxes on their cardroom revenues to the City of San José.
On June 27, 2018, the City Council directed staff to develop recommendations for taxing the two cardroom banking services businesses operating in San José. Measure H proposes that they pay a tax on their total monthly gross revenues, expected to result in an estimated $4 million annually for the city.
Past City Council Actions
In 1992, the San José City Council first approved a cardroom ordinance that contained the provision for a cardroom tax. The council later increased the tax rate schedule and expanded the games authorized. The council then established a monthly tax schedule with taxes ranging from 1% to 13% of gross revenues. In 1994, the council approved another revision to the cardroom ordinance, instituting a flat 13% gross revenues tax for all cardrooms located in the city with annual gross revenues exceeding $10,000.
Past Ballot Measures
In 2010, San José voters approved Measure K, which increased the cardroom tax from 13% to 15% and increased the maximum number of card tables from 40 to 49 per cardroom. The council voted 6–5 to place the measure on the ballot, and more than 76% of voters approved it. In 2012, Measure E, an initiative ordinance that would have increased the number of card tables from 49 to 69 without increasing taxes, lost at the polls. SPUR did not weigh in on those measures.
During the August 4, 2020, City Council discussion of this item, Mayor Sam Liccardo argued that proximity to gambling institutions is a factor in problem and pathological gambling and cited studies considering the social costs of problem gambling. He said he supports the increase in the cardroom tax but not the expansion of tables, and cast the lone “no” vote to place Measure H on the ballot.
Measure H is the result of negotiations with city staff, and the cardrooms support it.
This measure requires a simple majority (50% plus one vote) to pass.
Recovering from gambling losses and debt is more difficult for lower-income individuals; however, lower-income individuals, households and disadvantaged neighborhoods are also much less able to insulate themselves from the effects of reduced city services due to budget deficits. This measure would increase revenue to bolster city services.
- Measure H would raise additional revenue in the midst of a sharp economic downturn and budget shortfalls.
- Allowing for an expansion of card tables would help San José’s cardrooms compete with other venues in the region and continue to generate tax revenues for the city.
- The San José Police Department predicted no increase in crime or additional calls for service as a result of the expansion.
- Physical proximity to gaming establishments may increase the prevalence of problem and pathological gambling.
- Problem gambling is associated with negative personal and social outcomes such as economic distress and bankruptcies, which may in turn lead to other problems such as depression, divorce, job loss and crime in order to pay debts.
SPUR acknowledges the concerns around cardrooms and gambling and the potential for addiction and financial hardship that can result, particularly for lower-income households. However, those interested in gambling could engage in online or other unsanctioned options or travel elsewhere in the region. SPUR believes it is better for these activities to be well-regulated and contribute to the fiscal health of the city.
Measure H would increase the volume of an existing legal business activity that the city and voters have authorized, regulated and allowed to expand incrementally for nearly three decades. The revenues generated from this measure will help to shore up the city’s General Fund in a very challenging budget climate without creating a strain on public safety resources.