There is almost always a disconnect between expertise and action, between the knower and the doer. The science of a thing is more advanced than the real-world aspect; the experts are rarely the practitioners, lawmakers or regulators. Gaming is no exception. Lawmakers and regulators are not, on the whole, well-versed in the operations of gaming. This gap can create serious problems for the industry.
The Winter Meeting of the National Council of Legislators from Gaming States was held recently in San Diego. The conference was attended by state legislators from gaming states looking to gain some insight into gaming in the middle of another round of dramatic expansion. More than 40 legislators from 20 states were onsite, along with some 200 gaming operators, suppliers, sports executives, attorneys, analysts, regulators, public officials, and others with a stake in legalized gambling.
One of the speakers at NCLGS was former Nevada Governor Brian Sandoval. Sandoval now works for MGM Resorts International. He has been on all sides of the gaming industry, working as both a legislator and a regulator before becoming Governor. He is now the president of global gaming development at MGM Resorts. Sandoval says that he has learned perspective from his experience with MGM. In his public capacities, Sandoval has been a friend of gaming; at the same time, he was a bureaucrat, and so necessarily had that mindset.
As governor, he might have supported gaming tax increases, like the one currently being proposed by the teachers’ union. His concerns were the needs of government, not those of business. But now, Sandoval says that he understands that companies, regardless of the industry, need to make a profit to survive. In his presentation in San Diego, Sandoval gave other states some advice about taxation: “It’s a symbiotic relationship. State lawmakers don’t want to overtax, because you want to be able to have the finest amenities and finest meeting spaces. I now have the ability to see things from both sides.”
Casino gaming, state regulators and state governments do have a symbiotic relationship. Casinos cannot exist without the permission of government and the regulations imposed and enforced by state agencies. The state government can exist without gaming, but as we are witnessing now in the ongoing rush to legalize sports betting, the taxes provided by gaming can be very important to the funding of public services. The tax rate is the crucial issue. A high tax rate, like those in Illinois and Pennsylvania, can, in the short term, be very beneficial to the state. Over time, though, the benefits become less significant as state expenses expand and inflation eats into the value of the dollar.
Pennsylvania takes great pride in collecting the most casino tax of any state. State government wanted money from its legalized casinos, starting with hefty licensing fees, significant investment requirements and a tax rate that was meant to lessen the individual tax burden of the state’s citizens. It was a successful strategy; in the short term, it worked. Pennsylvania’s first casinos opened in 2007. Thirteen years later, there are now twelve casinos in the state, which in 2019 generated $3.4 billion in revenue, including sports betting and fantasy sports. The gaming industry paid $1.4 billion in taxes. Nevada casinos, by contrast, paid less than $1 billion on more than $12 billion in revenue.
The Pennsylvania example sounds like a success story, except that it really isn’t. The proof of that came when the state authorized more casinos. In 2018, under a new gaming law, Pennsylvania began taking bids for ten new mini casinos, which would offer between 300 and 750 slot machines and up to 30 table games. Five of the licenses have been sold by auction to this point for prices ranging from $50 million to $7.5 million. Tellingly, the sale price for each has decreased significantly. Of those five, four have designated a location. No action has been taken on the remaining five after three attempts to auction them off. No one is interested. After twelve years of operating under that tax burden, the state’s operators are not enthusiastic about new opportunities to continue to operate under the conditions. And the tax is not even successful by the state’s standards. When the initial legislation passed in 2004, it had a goal of $1.7 billion a year in tax revenue from slot machines only. Since then, Pennsylvania has added table games, fantasy sports, online gaming and sports betting to its gaming offerings, and it is still falling short of the 2004 goal.
Illinois is experiencing a bit of that lack of interest itself. Last year, the legislature passed a law authorizing a major expansion of gaming in the state that included sports betting, additional VLTs and seven new casinos. Several locations have generated considerable interest from potential developers. The major exception is Chicago, which should logically be the best and most desirable location. That is until a market study done after the law passed indicated that, at the proposed tax rate, no investor would be interested. And, indeed, no one had since stepped forward with a proposal. The city has gone back to the legislature to ask that the tax rate be reduced enough to potentially attract bidders. The 2019 legislature failed to find an acceptable compromise. Possibly the 2020 session will have more luck.
Brian Sandoval knows, as all casino operators know, why no investor is interested in either a Chicago license or the ones remaining in Pennsylvania. A casino is a business, and to remain viable it must make a profit and have enough free cash to reinvest in the business. The casino industry is dynamic and ever-changing. Keeping with the trends and competition is expensive. Compared to Las Vegas, the reinvestment in Pennsylvania and Illinois has been minimal, and it shows. By way of contrast, the casinos on the Strip in Las Vegas spend billions to remain competitive. It is true that Nevada might have gotten more revenue in taxes, but it would have come at a price, one that likely would have truncated further investment, employment and peripheral spending. In the twelve years casinos have been operating in Pennsylvania, the total reinvestment is less than has been spent on any one casino on the Strip.
As Sandoval said, it is a symbiotic relationship: both parties must benefit from the partnership, or it is unsustainable. Pennsylvania had a good year on paper, but remove sports betting, fantasy sports and online gaming from the ledger, and it all begins to look a bit hollow. Online gambling and mobile sports betting will hide a lot in the short-term, but every year the casinos in Pennsylvania get farther out of sync with new developments in the industry. Maybe in two or three years, lawmakers in Illinois, Pennsylvania and other states will be ready to listen to Brian Sandoval. He has been on both sides and understands better than most the need for reason and cooperation in creating a viable, and symbiotic, relationship.
