VGT operators making push in Pennsylvania

As Pennsylvania lawmakers study whether to approve iGaming and Daily Fantasy Sports to generate more tax revenue, supporters of allowing slot machines in bars, restaurants and private clubs are stepping up their campaign as well.

Their arguments echo those made by backers of making Pennsylvania the fourth state to regulate Internet gaming. At a March 7 legislative hearing, senators and representatives heard many witnesses cite these reasons for iGaming: legalization would bring in millions of dollars of revenue without raising property or income taxes; such gambling already occurs at unregulated and unlicensed sites throughout the state; and this form of gambling appeals primarily to people who don’t patronize casinos now.

“When I was watching testimony on iGaming, I said, ‘he’s making the argument for VGTs,’” said state Rep. Mark Mustio, R-Allegheny County, who sponsored a 2016 bill that failed in the House and plans to introduce a similar measure soon for the 2017-18 legislative session.

Pennsylvania, the No. 2 state in casino gaming revenue, is considering numerous changes to its gambling laws as it looks for ways to cover a budget shortfall and to bolster an industry that is increasingly important to the state. The 12 Pennsylvania casinos employ more than 18,000 people and spent more than $400 million on goods and services from other state business in 2016, according to the Gaming Control Board.

Several factors contribute to the push for the first major gambling expansion since table games were added in 2010. In addition to the state’s projected $3 billion state budget shortfall, Pennsylvania slot revenues have been flat for the past three years; casinos face increasing competition from neighboring states; and a 2016 court ruling endangers millions of dollars in annual casino payments to their host communities.

VGT proponents say their measure, modeled after the Illinois law, would help significantly. In a memorandum to fellow lawmakers, Mustio and co-sponsor P. Michael Sturla, D-Lancaster County, said allowing VGTs at establishments holding liquor licenses would generate $1 billion in gross revenue when fully implemented. Mustio says terminal operators would pay taxes of 30 percent to 35 percent on that. The state imposes a 54 percent rate on gross slot revenue in casinos.

“But remember,” Mustio said, “the casinos are open 24 hours, the casinos have the ability to have smoking, the casinos have the ability to have unlimited pots, the casinos have the ability to offer free play and incentives, while VGT (operators) will not.”

Mustio said each establishment would be allowed up to five terminals, and all terminals would be connected to the Gaming Control Board central computer system, as casino slots are. Maximum bets and payouts would be limited. Richard Teitelbaum, president of the Pennsylvania Video Gaming Association, said the maximum payout would be less than $1,200, the trigger point for issuing an IRS form to the winner.

Teitelbaum said that of the 12,000 liquor license holders across the state, perhaps 7,000 to 8,000 would add VGTs. That would mean up to 40,000 licensed machines; Mustio said State Police estimate that about 40,000 untaxed, unregulated machines operate across the state already.

The state’s 12 casinos had 26,254 slot machines at the end of February, Gaming Control reported.

Teitelbaum said terminal operators, who would provide the machines to bars, restaurants and clubs, would pay a licensing fee of about $25,000 plus an annual renewal fee of about $5,000.

Gov. Tom Wolf and key lawmakers have emphasized that any change in gambling regulations must not harm casinos.

Allowing VGTs would reduce casino slot revenue by as much as $674 million in 2020 and lead to the loss of 1,750 casino jobs, according to a May 2016 study done by The Innovation Group of New Orleans for seven Pennsylvania casinos. The study examined the effect of VGT operations on traditional casinos in Illinois, Louisiana and West Virginia.

The study found that in Illinois, which allows communities the choice of prohibiting VGTs, slot revenues at casinos declined as much as 25 percent in areas where VGTs are widespread.

The Innovation Group found clear evidence of a cross-over between VGT players and casino patrons. Casinos with the most VGTs in their local markets experienced greater cannibalization than casinos in comparable markets without VGTs, the study said.

In Louisiana, which permits only video poker machines in non-casino locations, the study found that VGTs reduced casino slot revenue by 13.5 percent. In West Virginia, the study said, VGTs cut into casino slot revenue but the amount could not be quantified.

The report said Lady Luck Nemacolin resort casino in Fayette County is particularly vulnerable to VGT competition because of its remote location. During the March 7 iGaming hearing, Donn Mitchell, chief administrative officer for Isle of Capri Casinos, which operates Lady Luck, said the casino has lost $1 million to $2 million per year since opening in July 2013.

Mustio said VGTs would give Pennsylvania “diversification” in gaming. “Casinos have been cannibalizing themselves by opening up casinos in neighboring states, which has had a direct impact on the growth of slot revenues in our state,” he said.

Teitelbaum said the impact of VGTs goes beyond the gambling revenue.

“It’s not just about the win per day for the state,” he said. If each license holder that installs VGTs hires one or two extra workers to monitor the machines and keep underage patrons from playing, “that spurs the economy in Pennsylvania in other ways.” In addition, setting up VGTs would trigger numerous construction projects, even though they might be minor, such as adding camera and alarms or remodeling areas for gaming. In Illinois, he said, many VGT sites put substantial amounts of money back into their businesses after a couple of years.

“It’s a trickle-down effect,” Teitelbuam said. “It’s not just the money from gaming. It goes way beyond that in the long run.”