The Delaware Dilemma

The lotteries may be able to change the rules, but casinos can’t;  when casinos become overwhelmed by the economy, competition and taxes they are left with few options.  One of those options is going to the capitol to ask for tax relief, as the casinos in Indiana did recently; the casinos in Indiana, as everyone knows by now, have been serious wounded by the opening of casinos in Ohio.  The Indiana casinos would like lower tax rates, to be able to abandon the riverboats and move on land; they believe it would help them compete with the casinos in Ohio.  The lawmakers listened patiently and did offer some token relief; no moving on land and no lower taxes, but they don’t have to pay gaming taxes on free play.

The casinos in Delaware are in the same position – years ago they operated very successfully because they had very little competition, but those days are long gone.  Like the casinos in Indiana, the Delaware (racinos) casinos have gone to the capital to ask for tax relief.  So far they have had no success; the speaker of the house says it is impossible, the budget is done and the state needs those casino tax dollars to balance its budget.  The speaker of the house in Delaware is like lawmakers in other states, he does not believe the casinos cannot pay the taxes – everyone knows all casinos just rake in the dough, right?  He also does not imagine they are telling the truth and will be forced to cut jobs and make other drastic cuts without lower taxes.  Nor does he understand that the state will get less money than is budgeted if the casinos fail to make the revenue projections.  He somehow believes the budget is magic: “Print the budgeted number in ink and it is guaranteed to come back to the treasury in real dollars.”

Other states will be facing the same problem, some sooner than others.  Pennsylvania is likely to be right at the top of that list; up to this point the state has been very proud of having the highest tax rate and producing the most gaming tax revenue of any state in country, including Nevada.  For the moment that is true, but as casinos in Ohio, New York and other states take some of the Pennsylvania casinos’ market share, Pennsylvania gaming tax revenues are going to decline.  In fact, the slot revenues have already started to decline in the last year.  In time the impact of the competition will grow, because the casinos have less revenue they will reinvest less in their properties. And when then don’t reinvest, the revenues will decline even further and of course, so will the tax revenues.

I could say as I have said before, while Pennsylvania may generate more gaming tax revenue for the moment – its tax rate has a very high hidden cost in terms of investment, employment and the multiplier effect of both.  Nevada casinos employ hundreds of thousands of people; the casinos invested $25 billion on the Las Vegas Strip in the decade before the recession.  CityCenter alone cost more to build than all of the casinos in Pennsylvania combined.

All of those jobs and investment generate a great deal more revenue for the state of Nevada than Pennsylvania’s tax revenue generates for Pennsylvania.  Whether they like it or not, states that depend on gaming revenue have a symbiotic relationship with the gambling operators – they need each other.  States cannot expect to extract the greatest amount of tax and fees from the industry without eventually paying the cost in other ways.  In this brave new world of market saturation and intense competition the casinos are not the only ones that are going to have to rethink their basic theories.  Lawmakers too are going to have rethink things.

Even Ohio is going to be impacted; while the lawmakers in Delaware are discussing taxes and budgets so are the lawmakers in Ohio.  The lawmakers in Ohio are starting to get concerned about the lottery.  The Ohio lottery has traditionally given the state ¾ of a billion dollars a year.  But as the number of casinos and slot machines increases across the state the number of lottery players is diminishing; wow, what a surprise?  Who would have expected that?  Actually, anyone who has watched the spread of gaming over the last two decade expected it.

Nationally, gambling has become a commodity.  It is a commodity with a limited number of consumers.  Gaming has a fixed number of consumers.  When those consumers have lots and lots of options they choose; the ones they choose prosper and grow.  The options they do not choose suffer and sometimes even die.  Just ask Circuit City, Borders, Woolworths, Sprouse-Reitz, Kenney Shoes and dozens and dozens of regional food store chains.  When people shop for a commodity two things enter into the equation, price and location; the cheapest and closest always win out over the more expensive and more distant options. Brand loyalty, packaging and marketing hype have little impact when put up against price and location.

Regardless of how important the Delaware casinos may be to balancing the state’s budget, they are not in business because the state needs them for its budget.  They are in business because they have customers who like them.  However with added the competition, they may not have enough customers left to survive at the current tax rates.  For the sake of casino operators, the employees, the customers and the state’s budget, let’s hope the lawmakers figure it out before it is too late.

House speaker says tax cuts not coming: House Speaker Pete Schwartzkopf said casino executives lobbying for a tax cut are “out of luck” this year, despite threats of layoffs. Executives from Dover Downs Gaming & Entertainment Inc., one of Dover’s largest employers, have been meeting with lawmakers to request a tax break before the end of the legislative session on June 30.  Schwartzkopf said the state’s $3.7 billion budget depends on revenues from casinos, which could be dramatically affected if lawmakers alter tax rates.  “We got a budget done,” Schwartzkopf said, noting the General Assembly’s budget-writing Joint Finance Committee has completed markup of Gov. Jack Markell’s budget. “You don’t go back and open it back up.” Doug Denison/Jonathan Starkey, News Journal, 6-15-13


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