Effective Gaming Policy Requires Focus on Capital Investment

The business of gaming is one that requires sound policy in order to succeed and benefit all parties. One of the biggest factors lawmakers should consider in their analyses is how the regulatory structure may impact the level of capital investment the industry could generate.

Effective Gaming Policy Requires Focus on Capital Investment

The singular goal of any elected official is quite simple: Get re-elected. That motivation can – and should – mean advancing policies that make the lives of their constituents better. Advancing gaming policy is generally low on the list of priorities, and is often entirely absent.

But when lawmakers do cast votes on gaming policy, such as setting tax rates or expanding the forms of legalized gaming, such votes are generally made in a very basic political calculus, and that is hardly a new phenomenon.

In 1978, New Jersey became the first state outside Nevada to authorize casinos, and it did so with a tax rate that seems remarkably low: 8 percent of gross gaming revenue. Why so low? In the 1970s, 8 percent was not only higher than the rate in Nevada, it was the highest in the world.

Then, now and in the future, politicians have made, and will continue to make decisions based on political considerations, and it has always been assumed that advocating lower tax rates would be viewed as politically costly, i.e., elected officials would be leaving tax money on the table.

When reviewing the political history of legalized gaming, such policy patterns may seem immutable, but that is not the lesson to be learned. Rather, the core lesson is to absorb and follow what our predecessors did right, and to emulate those actions. With that in mind, the core lesson that all lawmakers must follow is that a gaming license is a privilege to be granted to those who affirmatively demonstrate that they possess the requisite good, character, honesty and integrity to participate in this regulated industry.

That privilege is the policy foundation that many states – including New Jersey and West Virginia – have adopted. These states carefully allocate licenses, limiting them by location or by number. That approach helps advance a larger, more significant policy goal: Seeking significant capital investment.

Such investments, which can range from hundreds of millions to billions of dollars, are the literal foundation for multiple gaming policies that state policymakers need to consider. Such policies can range from increasing employment to promoting tourism to redeveloping urban centers. The most significant policy goal, which is often the most overlooked, is that capital investment can fuel multiple fiscal streams for states, including increases in sales taxes, employment taxes, and yes, the tax on gross gaming revenue.

When the private sector determines how and where to invest capital, it does so through clear-eyed, quantitative analyses that identify which investments will generate the best returns. Those analyses start with projections of potential revenue and profits, and consider a host of other considerations. A core question that investors consider: What are the risks of cannibalization? Will more licenses be issued at a later date that could cannibalize a licensee’s future market share?

For example, when a state that has brick-and-mortar casino gaming considers expanding into digital gaming, policymakers need to consider such policy questions as: Which entities should get those new licenses, and will those new licensees be required to meet the same standards of integrity? Should brick-and-mortar licensees be given exclusivity or primacy when it comes to digital operations?

And, most importantly, will the expansion of digital gaming lead to advancement of the state’s broader policy goals, including creating new economic and fiscal benefits?

Not every state will – or should – reach the same conclusions, but they should all commit to a thorough examination in advance. Once those dice –whether metaphorical or real – begin to roll, there is no turning back. Such examinations should be the rule in determining all aspects of gaming, ranging from an examination of tax rates to an assessment of allowing retail establishments to offer gaming products.

How will one policy vs. another impact capital investment, and how might that in turn impact employment or tourism? How will gaming policy affect lottery plans, and vice versa? And how might either one of them affect urban policy? You cannot achieve the right policies without asking the right questions for your state and district.

Quite notably, the political risks that once accompanied any consideration of authorizing or expanding gaming have clearly dissipated. The data and evidence compiled over the past several decades in market after market show economic growth when sensible policies are pursued. That is a legacy from the elected officials who came before us, and who focused on asking the right questions, and who focused on maintaining the integrity of gaming.

Elected officials of all political stripes will continue to pursue the singular goal of getting re-elected. That is as it should be, but imagine a political calculus in which getting re-elected meant a careful assessment of all the permutations of gaming policy. Different? Yes. Difficult? Perhaps, but hardly impossible.

Articles by Author: Shawn Fluharty and Michael Pollock

Shawn Fluharty is President of the National Council of Legislators from Gaming States (NCLGS) and serves as the Minority Whip in the state of West Virginia where he has led gaming expansion legislation. He also is Head of Government Affairs at Play’n GO. 
Michael Pollock is Senior Policy Advisor to Spectrum Gaming Group, which serves as Executive Director of NCLGS. He is a former New Jersey regulator, and award-winning journalist who has been studying the social and economic impacts of gaming for more than four decades.