DANIEL D. KUESTER* ABSTRACT:

Transcription

1 BETTING ON PROSPERITY: REVISITING THE EFFECTS OF EXPANSION OF CORPORATE AND NATIVE AMERICAN GAMING ON THE TOURISM INDUSTRY AND OVERALL ECONOMIC HEALTH OF ARID STATES. DANIEL D. KUESTER* ABSTRACT: During the past twelve months the gaming industry has continued to flourish. The recent mergers of MGM Mirage/Mandalay and Harrah s Entertainment/Caesars have added even more profit potential to a rapidly growing industry. Throughout the past decade many humid states have implemented or expanded legalized gaming as a source of state funding, while most arid/semi arid states either have no legal gaming or Native American casinos that are taxed at a very low rate by the arid state. The author re-examines the conclusions reached in a previous paper and includes an analysis of recent tax policies implemented by states to gain revenue from both corporate and Native American casinos. Special attention is paid to the idea of an optimal tax policy a state might implement to maximize revenues from gaming (at some point the demand for casino taxes becomes elastic). Attention is also focused on the growth and impact of gaming revenues in Nevada (where corporate gaming is dominant) and in the Native American Gaming Industry. KEY WORDS: Gambling, probability, tourism, economic impact on arid states INTRODUCTION: Many humid states have concluded that legalized gambling provides a necessary source of tax revenue. While 11 arid/semi arid states have some form of legalized casino gaming (referred to as gambling for the rest of this paper) only three arid states have legalized corporate gambling. Other arid states allow Native American casinos that are not a significant source of tax revenues for the state. Two arid states have expanded their lottery operations to include state run video lottery terminals that are more like slot machines and appear to be a significant source of revenue for the state. * The introduction of a new casino affects the home state (where the casino is located) and neighboring states tremendously. States that legalized gambling in the 1990s rely on corporate casinos as a source of substantial tax revenues. Many humid states have legalized gambling in order to prevent their citizens from gambling in other states. This rationale for legalizing gambling has not been accepted in arid states. HISTORY OF GAMBLING IN THE UNITED STATES: Nevada legalized casino gambling in its present form in In the late 1960s, restrictions on casino ownership in Nevada were loosened so corporations could own casinos. This led to rapid change in the Nevada gambling industry. Legalized gambling was introduced in Atlantic City in Several other (mostly humid) states legalized gambling in the early 1990s. * Department of Economics, Kansas State University, Manhattan KS

2 In 1988, The Indian Gaming Regulatory Act (Public Law ) was passed to allow Indian Tribes to operate legal casinos on their reservations. As a general rule, tax revenues for the state where a Native American casino is located in are much lower than corporate casinos would generate. One exception to this is in Connecticut where Fox Woods and Mohegan Sun Casinos pay taxes in line with many corporate casinos. (Kuester, 2005). In exchange for this tax revenue, the state of Connecticut has granted Fox Woods and Mohegan Sun a monopoly on legalized casino gambling in the state. Native American Casinos are regulated by tribal gaming laws and are outside of the jurisdiction of the state they are located in. In most arid states where Native American Casinos exist the state they are located in does not formally allow legalized casino gambling. In the past five years ten states have allowed video lottery terminals which closely resemble casino slot machines. Most of these states have not legalized corporate casinos. There has been considerable debate about whether states should endorse legalized gambling to this degree. According to the Wall Street Journal (Bulkeley) Iowa will remove all VLT s from the state this year because of concerns about problem gambling. COMPARISON OF TRENDS IN CASINO LOCATION IN ARID AS OPPOSED TO HUMID STATES: Today there is some form of legalized casino gambling in 29 states (35 if you consider video lottery terminals as casino gambling). Gambling is currently legal in 11 of the 14 arid/semi arid states (Appendix: Table One) and in 18 of the 36 humid/semi humid states (Appendix: Table Two). In 1988, gambling was only legal in one arid/semi arid and one humid/semi humid state. In arid states, it has been much more likely that the casinos would be Indian casinos as opposed to corporate casinos. The tax revenues collected from corporate casinos and from video lottery terminals are significant. There is wide variation in the tax revenues collected by states on casinos (Appendix: Table 3). While Nevada collects only 7% of casino profits in taxes, Illinois highest marginal tax rate is 50% of casino profits. Corporate casinos have become more aggressive in combating what they feel are unreasonable taxes by states. In Illinois the highest tax rate has been recently lowered from 70% of profits to 50% of profits. This has lead to the elimination of admittance fees in Illinois casinos and appears to actually be increasing tax revenue for Illinois. Higher tax rates on casinos also were recently considered and not passed in Louisiana and Missouri. Mergers of the four largest gaming corporations (MGM/Mirage/Mandalay and Harrah s/ Caesars) in Nevada were allowed with very few restrictions. The Federal Trade Commission does not appear to be concerned about an increasing lack of competition in the gaming industry. There appears to be increasing profit potential in this industry. COSTS AND BENEFITS OF GAMING: The author has previously examined the effects of gambling on society (Kuester, 2005). While there is no consensus opinion on the effects of gambling on a state s economy the general public appears to be more willing to accept legalized gambling. 2

3 According to independent studies commissioned by the American Gaming Association, 81% of Americans think that casino gambling is acceptable for themselves or for others and 79% of elected community leaders where gambling has been legalized think that the impact of casinos has been positive. The travel and tourism industry in a state is tremendously influenced by the existence of casino gambling. Many humid and semi humid states collect significant tax revenues from casino gambling and many of their customers are from arid states. Gaming tax revenues exceed 8% of total tax revenues in Indiana, Iowa, Louisiana, Mississippi, Nevada (42.6%) and New Jersey. Lottery revenue (mainly VLT revenue) exceed 8% of total revenues in Delaware, Oregon, Rhode Island, South Dakota and West Virginia. South Dakota is the only arid state to collect significant revenues from corporate gambling and VLT s. Tax rates and revenues collected from corporate casinos vary widely from state to state (Appendix: Table 3) but these taxes are a significant portion of total revenues in every state where corporate casinos are legal. FUTURE TRENDS IN GAMBLING: It is expected that gambling profits will continue to increase at an impressive rate. According to a study by Price Waterhouse Coopers cited in the Las Vegas Review Journal (Stutz) profits in Nevada Casinos will increase to nearly $16 Billion by the end of the decade. (Appendix: Table 4) The growth rate in Nevada is expected to outpace both regional casinos and Atlantic City because of increased competition from Native American Casinos and State Lotteries affecting casinos outside of Las Vegas. There is significant evidence (Kuester, 2005) that suggests that the increased availability of gambling elsewhere helps the Las Vegas gambling market. On-line gambling profits have continued to increase rapidly. There is proposed legislation in the Congress to formally ban online gambling. It is believed that even if this legislation passes it will be ineffective and online gambling will continue to increase at a rapid pace. OPTIMAL STRATIGIES AND FUTURE TRENDS ON GAMBLING IN ARID STATES: Native American Gambling is legal in ten of the fourteen arid states. Corporate casinos are legal in only three arid states because of resistance on the part of most arid states to endorse legalized gambling. It appears that corporate casino gambling will not be legalized in any new arid/semi arid states in the near future. Recent legislation to legalize corporate casino gambling in Kansas addressed the obvious concerns about losing tax revenues to neighboring states. Legalized casino gambling was proposed in Kansas City, KS and in Southeast Kansas on the Oklahoma border. The expressed intent of this legislation was to prevent Kansans from gambling in Missouri (where there are corporate casinos) and in Oklahoma (where there are VLT s and Native American Casinos). This legislation was defeated in the Kansas Senate. The recent trends in allowing Video Lottery Terminals would appear be the most likely new form of legalized gambling in arid/semi arid states. While there is significant resistance to corporate gambling in most arid states, lotteries are allowed in most arid states. 3

4 CONCLUSION: Corporate casinos have been a strong source of tax revenues for many humid/semi humid states since their introduction in the early 90s. Most Corporate Casinos are taxed by states at a 20 to 25 percent rate on their profits. This provides significant revenues for a state struggling to balance its budget. Most arid/semi arid states refuse to legalize corporate casinos and are unable to significantly benefit from Indian casinos that exist legally in their states. If this continues arid states will not benefit in the same way may humid/semi humid states have from gambling revenues. It is our belief that arid states will continue to resist legalizing corporate gambling but several of these states will operate video lottery terminals as a significant source of revenue instead. The South Dakota mixture of legalized corporate gambling, Native American gambling and legal video lottery terminals appears to be the most lucrative solution from a tax revenue perspective. REFERENCES: American Gaming Association, 2005 State of the States: The AGA Survey of Casino Entertainment, Bulkeley, William, Playing the Odds: To Boost Revenues, State Lotteries Wager on Slots. Wall Street Journal, March 30, 2006 p. A1-A12. Butterfield, Fox, As Gambling Grows, States Depend on Their Cut to Bolster Revenues. New York Times, March 31, 2005 p. 24 Curtis, Anthony, 2005, Las Vegas Advisor, 2005 Eadington, William, 1999, The Economics of Casino Gambling The Journal of Economic Perspectives, 13 (3): Garrett, Thomas A., 2004, Casino Gambling and Unemployment Trends Federal Reserve of Bank of St. Louis Review, 86 (1): 9-22 Kuester, Daniel D., 2005, Betting on the Come: What the Expansion of Native American Gaming Means to the Travel and Tourism Industries of the Arid/Semi Arid States. Forum of the Association For Arid Lands Studies, XVI p Stutz, Howard, Gambling Study: Projected Revenue: $100 Billion. Las Vegas Review Journal, June 22, 2005 Bartlett, Donald, and Steele, James, Playing the Political Slots: How Indian Casino Interests have Learned the Art of Buying Influence in Washington. Time, December 23, 2002 p Bourie, Steve, 2006, American Casino Guide, Casino Vacations, Dania, Florida. 4

5 Appendix: Table One Availability of Gaming in Arid/Semi Arid States State Type of Non Lottery Gaming Types of Casinos None Limited Full Indian Corporate Both VLT s AZ X X CO X X ID X X KS X X MT X X ND X X NE X NM X X NV* X X OK X*** X X SD X X X TX** X UT X WY X*** X*** Total * Nevada only has one Indian casino and therefore is classified as having corporate casinos. ** Texas has one Indian casino that is allowed to operate on a limited basis. The author has chosen to classify Texas as a non-gaming state to keep things as simple as possible. *** Denotes a change from 2005 paper 5

6 Appendix: Table Two Availability of Gaming in Humid/Semi Humid States State Type of Non Lottery Gaming Type of Casinos None Limited Full Indian Corporate Both VLT s AK X* X AL X* X AR X CA X X CT X X DE X X FL X X GA X HI X IA X X X IL X X IN X X KY X LA X X MA X MD X ME X X MI X X MN X X MO X X MS X X NC X X NH X NJ X X NY X X X OH X OR X X X PA X* X X RI X X SC X TN X VA X VT X WA X X WI X X WV X X Total Denotes a change from 2005 paper 6

7 Appendix: Table Three 2004 Tax Rates and Revenues from Corporate Casinos State Total Tax Revenues from Casinos Highest Tax Rate # of Casinos Colorado $100 Million 20% 46 Illinois $801 Million 50% 9 Indiana $760 Million 35% 10 Iowa $252 Million 24% 10 Louisiana $437 Million 21.5% 15 Michigan $279 Million 24% 3 Mississippi $333 Million 12% 29 Missouri $403 Million 20% 11 Nevada $887 Million 7% 258 New Jersey $470 Million 9% 12 South Dakota $12 Million 8% 36 Source American Gaming Association, 2005 State of the States 7

8 Appendix: Table Four Annual Growth of Casino Profits (Revenues) (Billions of Dollars) Sector Growth Rate 2009 Projected Growth Rate (Projected) Native 15.7% American Casinos $6.7 $18.5 (10% from 2003) $ % Regional Casinos N/A $13.4 N/A $ % Nevada Casinos* $ data $ % (9.9%% from 2003) $ % Atlantic City Casinos $4 $ % (7.1% from 2003) $ % Total N/A $80,000 N/A $ % * The author uses 2001 data in Nevada because of the abnormally large impact of 9/11 on the gaming industry in Nevada. Revenue actually fell from 2000 to 2001 in Nevada and the market has recovered since Sources Las Vegas Review Journal using Price Waterhouse Coopers Report for Projections, past data from Eadington and the Las Vegas Advisor. 8