Gaming Grows Up

Mature gaming markets demand mature gaming policies. There are many long-established gaming jurisdictions that fall prey to politics and back-room deals to increase competition, taxes or fees. Here’s how to combat that creeping profit eater.

I recently gave a speech to a room full of legislators from across the United States in which I invoked the name of that pioneering gaming analyst: Capt. Louis Renault of “Casablanca” fame. That fictional figure was forced to find a pretext for closing a café, and noted that he was “shocked, shocked” to find that gambling was taking place. He promptly pocketed his winnings, and left the building.

I told the assembled legislators that, in my career as a gaming analyst, I had been “shocked, shocked” to learn that elected officials had established gaming policies—including the all-important tax rate on gross gaming revenue—for political purposes.

At my company, Spectrum Gaming Group, we have the advantage of having played a role in the emergence and expansion of gaming over a span of decades, and we also hold the critical perspective of having observed this process unfold around the world.

Indeed, a common thread is that gaming is initially approved under rules that are the most politically palatable. This can range from requiring casinos to “float” on rivers or moats to setting tax rates that are higher than those established in neighboring states.

Indeed, that is the case even in my home state of New Jersey, which established the decidedly “low” (by 2017 standards) tax rate of 8 percent on gaming revenue. Why so low? The truth, according to the original sponsor of legalized gaming in New Jersey in 1977 is that Nevada—the only state in the nation at the time with legal casinos—had a tax rate of less than 7 percent. New Jersey wanted the highest tax rate, and came up with the simple figure of 8 percent.

Such political calculations may have been effective and, indeed, necessary when states were giving birth to an industry, but that industry is now mature. Tax rates and other policies that made sense in infancy have to be reconsidered.

Policies that range from tax rates to the number of licensees to the overall regulatory framework must keep pace with change, and those policies need to adapt to these changes to ensure that gaming continues to serve the public interest. Moreover, this is valid for local, state and national governments.

A December 2016 report that Spectrum prepared for the Casino Association of Indiana is emblematic of this service. The report was prepared, in large measure, to analyze the impact that a planned Indian casino would have on the commercial casino industry, as well as to examine what should be done to ensure that Indiana’s commercial casino industry would thrive.

That Indiana report notes in its preamble:

• Indiana’s casinos are no longer in a startup phase. The gaming industry is mature, and mature industries cannot be expected to operate efficiently – nor can they be expected to fully operate in the public interest – with rules that might have made sense for an emerging industry but which are stifling and counter-productive to the goals and needs of today and tomorrow.

• Rules and requirements that need to be addressed and updated should include all gaming-related taxes, including the tax on promotional spending (i.e., free play), as well as overall gaming taxes.

Recommendations made in Indiana are not necessarily relevant or helpful in all markets. Each market must be analyzed based on its own economic and political realities. However, a common theme courses through all gaming markets: Policies established in an industry’s infancy demand to be re-examined as the industry matures. This is particularly true when such policies were established for political reasons, not on an economic rationale.

One critical corollary to that rule is: Governments that seek to reinvigorate their industry should not simply lower tax rates, then sit back and wait for positive outcomes. Gaming operators in mature markets often need to refine their business models, investing more capital into new attractions that will expand their geographic and demographic reach. A 1980’s business model will not work effectively in 2017, a statement that would cover nearly every B2C industry, gaming included.

With that in mind, governments that are considering lowering their tax rates or providing other forms of regulatory relief require a concomitant commitment from their licensees: Operators must commit to leveraging that relief into developing new attractions and broadening their appeal.

Such pacts between operators and their states will provide the most effective means of generating employment, promoting tourism, growing tax revenue and advancing other public policy goals. With that in mind, the time is now for states and their licensees to re-examine policies established a long time ago, and to bring those policies—and this industry—into the future.

Articles by Author: Michael Pollock

Michael Pollock is managing director of Spectrum Gaming Group, an independent research and professional services firm that also serves as executive director of the National Council of Legislators from Gaming States. He has served as an expert witness in multiple states on the issue of unregulated slot machines. He previously served as a senior regulator with the New Jersey Casino Control Commission.