The Two-Sided Coin: Casino Future Casino Tax Yields: What Gaming and Casino Tax Recent Trends in Wagering Revenue in and Attendance Suggest INDIANAdemographic and economicBUSINESS perspectives, insights, andREVIEW analysis since 1926

Spring 2009 Volume 84, No. 1 Spring 2009 Volume 84, No. 1

Kelley School of Business Daniel C. Smith Table of Contents Dean

Frank Acito Associate Dean of The Two-Sided Coin: Casino Gaming and Academic Programs 1 Casino Tax Revenue in Indiana Patricia P. McDougall Jim Landers discusses the past thirteen years of riverboat casinos Associate Dean of in Indiana and growth in casino games statewide. He also Faculty and Research explains Indiana’s excise taxes imposed on casino owners and what these tax revenues have been used for. Philip L. Cochran Associate Dean of Programs Future Casino Tax Yields: What Recent Trends in Anne D. Auer Wagering and Attendance Suggest Director of Marketing 7 As a follow up to “The Two-Sided Coin: Casino Gaming and Casino Tax Revenue in Indiana,” Jim Landers investigates the Indiana Business future growth potential of Indiana’s wagering taxes. Research Center Jerry N. Conover Director and Publisher

Indiana Business Review Executive Editor Carol O. Rogers

Managing Editor Rachel M. Justis Almost everyone does it. Gambling, that is. According to the Pew Associate Editor Research Center, nearly everyone gambles to some extent or another. Molly A. Manns And nearly all states have legalized it, according to the American Gaming Association. A quick look at our back cover for this issue Quality Control shows us that nearly all states support gambling of one kind or Flora A. Lewis another. Why? To paraphrase a long-extinct presidential campaign Circulation (think 1990s), “it’s the economy, stupid!” Once that fi rst state took the Nikki J. Livingston gamble on legalized gaming, there was little doubt most states would jump into the river of chips (a look at the maps on the back cover show Utah and Hawaii as the only hold-outs against any form of legalized gaming).

As Dr. Landers points out for us in his fi rst of two articles in this issue, Indiana entered the gaming world twenty years ago with the lottery, followed soon by casinos, and gaming has provided Indiana with a rising stream of revenue ever since. The fi rst of Landers’ articles describes the structure of casino gaming, while the second considers

From the Editor the trends in gaming revenue and its prospects for the future, even during our current economic recession.

–COR

www.ibrc.indiana.edu The Two-Sided Coin: Casino Gaming and Casino Tax Revenue in Indiana

Jim Landers, Ph.D.: Senior Fiscal/Program Analyst, Offi ce of Fiscal and Management Analysis, Indiana Legislative Services Agency

egal prohibition on lott eries. At that time, was enacted authorizing nonprofi t Lcomprises various forms and Article 15, Section 8 of the Indiana organizations to conduct bingo, venues ranging from large- Constitution stated that, “[n]o lott ery raffl es, and other small stakes gaming scale commercial casinos with Vegas- shall be authorized, nor shall the sale oft en referred to as charity gaming. like slot machines and table games to of lott ery tickets be allowed.” While The legislature expanded the pari- small stakes gaming on bingo, raffl es, this provision specifi cally prohibited mutuel law in 1992 to allow off - and pull-tab ticket games conducted lott eries and lott ery ticket sales, it track bett ing facilities and, in 1993, by nonprofi t organizations. had been broadly interpreted over aft er several years of consideration, The array of legal gaming in the years to prohibit other forms of enacted legislation to allow gaming Indiana has grown to include lott o gaming.1 Thus, by repealing Article on riverboat casinos. drawings and instant ticket games 15, Section 8, the voters gave the In the years since, the legislature operated by the Hoosier Lott ery Indiana legislature the responsibility has augmented gaming laws at and pari-mutuel bett ing at horse for deciding what forms of gaming, various times for various reasons, racetracks and off -track bett ing if any, could be conducted legally in including allowing dockside and facilities. A mere twenty years Indiana. round-the-clock gaming at the ago, these forms of gambling were In 1989, legislation was enacted riverboat casinos, the Hoosier Lott ery illegal in Indiana. This changed on to legalize the Hoosier Lott ery and to participate in foreign lott eries, and November 8, 1988, when voters pari-mutuel bett ing on live horse to establish a casino at French Lick. repealed the state’s constitutional races. The following year, legislation In 2007, the legislature authorized

Racetrack Casinos The racetrack facilities began operations during the last month of The legislature legalized gaming on electronic gaming devices Fiscal Year 2008, with the Hoosier Park Casino opening on June 1 (EGDs) at Indiana’s two pari-mutuel horse racetracks in May 2007. and the Indiana Live Casino at Indiana Downs opening on June 9. The slot machine gaming law provides for only two such gaming The two facilities combined to generate approximately $28.9 million facilities, one located at Hoosier Park in Anderson and one at in win during June, with the wagering tax liability totaling about Indiana Downs in Shelbyville. The law limits each facility to 2,000 $6.5 million. EGDs and does not allow the facilities to operate table games. Both Two other wagering taxes are imposed by the slot machine gaming of the racetrack gaming facilities commenced operation in June law. A county wagering tax is imposed at the rate of 3 percent of 2008. the win generated at each facility, with the annual tax liability for The slot machine gaming law imposes an initial license fee on the each limited to $8 million. The revenue collected from each facility facility owners, a continuing annual license fee after the fi rst fi ve is distributed to local governments within Madison County and years of operation, state and county wagering taxes, and a funding Shelby County where the facilities are located. A third wagering requirement for certain horse racing purposes. The law requires tax is imposed at the rate of 1 percent of the win generated at each each racetrack owner to pay an initial license fee of $250 million to facility, with the revenue from this tax being distributed as a subsidy the state. The license fee was payable in two installments, with $150 to the French Lick Casino. The tax revenue generated from the June million due before November 1, 2007, and the balance due before 2008 win was about $195,000 for the county wagering tax, and November 1, 2008. The revenue from the initial license fee has been about $65,000 for the supplemental wagering tax. directed to property tax relief in 2007 and 2008. After the fi rst fi ve GRADUATED WAGERING TAX STRUCTURE FOR RACETRACK SLOT MACHINES years of operation, the facility owner must pay an annual license fee equal to $100 per EGD operated during the year. The revenue from Over $200 Million this annual license will also be directed to property tax relief.

The slot machine gaming law also established three wagering Over $100 Million up to $200 Million taxes to be paid on the win generated by the EGDs at the racetrack

facilities. However, the law does not require payment of an Win Casino

(July 1 to June 30) $100 Million or Less admission tax. The state wagering tax is imposed on the graduated rate structure specifi ed in the adjoining fi gure. All revenue from this Tax Rate on Win Increment: 20% 30% 35% tax is dedicated to property tax relief. Source: Indiana Revised Code Section 4-35-8-1(a)

Indiana Business Review, Spring 2009  1 slot machine gaming at the state’s ■ TABLE 1: Indiana Casino Locations and Opening Dates, 1995 to 2006 two horse racetracks (see Racetrack Opening Date at Casinos sidebar) and, in 2008, Current Casino Name City, County Location authorized small stakes gaming on Casino Aztar Evansville, Vanderburgh 12/8/95 pull-tabs and the like in bars and Majestic Star Casino I Gary, Lake 6/11/96 taverns around the state. 1 This article focuses on the thirteen Majestic Star Casino II Gary, Lake 6/11/96 years of operation of riverboat Horseshoe Casino—Hammond2 Hammond, Lake 6/29/96 casinos in Indiana and the growth in Grand Victoria Casino Rising Sun, Ohio 10/4/96 the supply of casino games statewide Argosy Casino Lawrenceburg, Dearborn 12/13/96 and explains the state excise taxes Ameristar Casino East Chicago3 East Chicago, Lake 4/18/97 imposed on the casino owners. It also Blue Chip Casino Michigan City, LaPorte 8/22/97 provides a history of the revenue 4 generated from these excise taxes Horseshoe Casino— Elizabeth, Harrison 11/20/98 and reports the purposes for which Belterra Casino Vevey, Switzerland 10/27/00 these revenues have been utilized. French Lick Casino French Lick, Orange 11/1/06

We pay particular att ention to the 1. Formerly the Trump Casino 2. Formerly the Empress Casino state’s riverboat wagering tax, which 3. Formerly the Resorts East Chicago, the Harrahs Casino and the Showboat Casino 4. Formerly Caesars Casino is imposed on the casino’s gaming Source: Indiana Gaming Commission win. The win comprises the wagering dollars retained by the casinos aft er prize amounts have been paid to operations of each licensee, and to 1 lists the state’s riverboat casinos by winning players. The other excise tax license and regulate the occupations location and opening date. imposed on the riverboat casinos is and suppliers serving the riverboat In December 1995, Casino Aztar the riverboat admission tax, a head casinos. opened with 1,267 electronic gaming tax based on the number of gamblers The 1993 riverboat gaming law devices (EGDs) and 70 table games. entering the casinos. Note that all as originally enacted required fi ve Since that fi rst riverboat casino, ten years referenced in this article are riverboat casinos to operate on Lake more casinos have opened, supplying fi scal years unless otherwise noted.2 Michigan, fi ve to operate on the almost 17,000 additional EGDs and The wagering tax is by far the , and one to operate on almost 600 additional table games. dominant revenue producer of the Patoka Lake in southern Indiana. However, nearly all of this supply two excise taxes: it yielded $729.8 The law also required that voters growth occurred between 1996 and million in total revenue during 2008, had to approve casino gaming at a 2001, with the opening of the Lake compared to $81.2 million for the referendum before a casino could be Michigan and Ohio River casinos. admission tax. More importantly, the licensed to operate in their county or Belterra Casino, the tenth riverboat wagering tax has become a major city. casino to open, began operating in source of funding for the state’s Casino Aztar, located in Evansville, October 2000 and registered its fi rst property tax relief program. In 2008, was the fi rst casino to begin operating full fi scal year of operations in 2002. about $486.3 million in wagering tax in December 1995. While the Lake Since 2002, however, the supply of revenue was directed to property tax Michigan and Ohio River licenses EGDs and table games statewide relief. What’s more, all wagering tax were fi led and operating by 2000, has remained relatively unchanged revenue from the two new racetrack the Patoka Lake license was never (see Figure 1). From 2002 to 2008, casinos is dedicated to property tax utilized because the Army Corps of only one new riverboat casino (the relief. The tax on the racetrack casinos Engineers would not allow a casino French Lick Casino) opened and only generated almost $5 million for to operate on the lake. As a result, one major expansion was completed property tax relief in 2008 based on the statutory authority for the Patoka when a new and larger facility was less than one month of operations. Lake license was repealed in 2003. In opened in 2006 by Blue Chip Casino its place, the legislature authorized a in Michigan City. Supply of Riverboat Gaming casino to operate in a special historic The number of EGDs supplied by The riverboat gaming law authorized district in French Lick. The French casinos in Indiana increased by an eleven casino licenses. The law Lick casino opened in November 2006 average of 6.7 percent per year from established the Indiana Gaming and represents the eleventh and last 1997 (the fi rst full fi scal year of casino Commission to approve license riverboat casino to open under the gaming) to 2008. During that time, applicants, to regulate the gaming current riverboat gaming law. Table the number of table games supplied

2 Indiana University Kelley School of Business, Indiana Business Research Center at casinos increased by about 3.2 ■ FIGURE 1: Casino Games in Indiana—Indexed to 1996, 1996 to 2008 percent annually. However, Figure 350 1 highlights the two distinct periods Electronic Gaming Devices Table Games of supply growth. While the supply 300 of EGDs grew by an average of 13.5 percent per year from 1997 to 2002, 250 17,998 EGD supply has increased by only 14,998 about 0.9 percent per year since 2003. 200 Table games show a similar change in annual supply, growing by about 150 7.2 percent annually through 2002, 715

Index (1996 =0) 654 but growing by only 0.1 percent per 100 year since 2003. Most of the post-2002 growth is att ributable to the French 50 Lick Casino opening, which added roughly 1,200 EGDs and 45 table 0 games to the state totals beginning 1997 2001 1999 1998 1996 2007 in 2007. To a much lesser extent, the 2002 2003 2005 2008 2004 2006 2000

Blue Chip expansion had an impact Note: Labels show total number of electronic gaming devices and table games on the state EGD totals by adding Source: Indiana Gaming Commission about 450 EGDs. Excluding French Lick, the supply of EGDs and table of regulatory restrictions and casinos are still permitt ed under games has actually declined slightly requirements on the riverboat the current law to conduct gaming since 2003, showing average declines casinos. Unlike neighboring states excursions if ownership so chooses. of about 0.5 percent and 1.1 percent with riverboat gaming, Indiana did per year, respectively. not impose regulatory restrictions Riverboat Admission Tax such as bett ing limits, loss limits, Under the gaming excursion regime, Riverboat Casino Taxes or gaming machine or position the admission tax is $3 per patron The riverboat gaming law imposes limits. Like other states, Indiana did admitt ed to a gaming excursion. two excise taxes on the casino impose an excursion requirement Thus, for every gaming excursion owners. The riverboat admission tax on the riverboat casinos. Under (depending on the excursion schedule generated $729.8 million in 2008 and the excursion requirement, the of the casino), the casino owner pays the admission tax generated $81.2 riverboat casinos had to leave the the $3 admission tax for each player million for state programs and local dock and cruise while gaming was on board the riverboat casino. The government units. The state share conducted on-board except when admissions comprise: (1) the turnstile of the two riverboat casino taxes water or weather conditions posed count refl ecting when patrons totaled about $616.1 million, with a danger for conducting the gaming initially enter the casino and embark about $486.3 million being directed excursions. The law provides for a on an excursion; and (2) additional or to property tax relief. The two maximum excursion length of four multiple excursions refl ecting patrons casino taxes have become the fi ft h hours but, as a practice, the casinos who have stayed on the riverboat for largest source of revenue to the state tended to operate two-hour excursion an additional gaming excursion. following the sales tax, the individual schedules. Dockside gaming was The tax regime for riverboat income tax, the motor fuel tax, and authorized in June 2002 to enable casinos that conduct dockside the corporate income tax. Moreover, the riverboat casinos to more fully gaming is markedly diff erent. since 1996, the riverboat casinos have utilize their existing capacity and While the casino owner continues paid about $5.9 billion in wagering tap their respective geographic to pay the $3 admission tax, the taxes and about $1.1 billion in markets. The dockside gaming tax is paid on a diff erent tax base. admission taxes. regime permits a riverboat casino to The tax base for dockside casinos The imposition of the taxes for remain permanently moored at the is only the turnstile count or the admission and wagering depends on dock, allowing continuous ingress number of patrons entering the whether the casino owner chooses and egress of gamblers to and from riverboat casino. Figure 2 shows to conduct gaming excursions or the casinos. While dockside gaming annual admission tax totals and the dockside gaming. The riverboat was implemented by all the riverboat amounts distributed to state and gaming law imposes a number casinos in August 2002, the riverboat local government. Local government

Indiana Business Review, Spring 2009  3 entities (cities, counties, and county ■ FIGURE 2: Annual Admission Tax Totals and Amounts Distributed to State and convention bureaus) where the Local Government, 1996 to 2008 riverboat casinos are docked receive Admission Tax Admission Tax Guarantee Payments 70 percent of the admission tax State State Agencies revenue. The remaining 30 percent Riverboat Communities Riverboat Communities of the admission tax is distributed to $140 the state for mental health programs, horse racing industry initiatives, and $120 the state fair. Admission tax collections declined $100 signifi cantly aft er 2002 when all of the riverboat casinos switched $80 from the excursion gaming to the dockside gaming regime, resulting $60 in an estimated permanent reduction of roughly 38 percent in the yield $40 of the admission tax. This drop occurred because about 52 percent Millions) (in Admission Tax of the admission tax base under $20 the excursion gaming regime was comprised of players admitt ed $0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 to multiple excursions. However, the base shrinkage was mitigated Source: Indiana Legislative Services Agency somewhat by the 20 percent to 30 percent increase in the number authorized and opened aft er the at Blue Chip Casino (down 25.7 of patrons entering the casinos dockside legislation was enacted. percent), Casino Aztar (down 14.5 (represented by the turnstile count) Thirty-eight percent of the admission percent), and Caesars (down 10.6 due to dockside gaming. With the tax revenue from the French Lick percent). The Blue Chip decline is a expected decline in admission tax Casino is distributed to the state for direct result of stiff competition from collections, the dockside gaming economic development initiatives in a new tribal casino that opened at the legislation guaranteed that each that region and for preservation of beginning of August 2007 only ten to entity receiving admission tax the West Baden Springs Hotel. The fi ft een miles away in New Buff alo, revenue would continue to receive its remainder is split between local units Michigan. Similarly, some of the 2002 yield. Thus, the state programs in Orange County, Crawford County, decline at Casino Aztar and Caesars and local units continue to receive the and Dubois County. could be att ributable to the same admission tax collected throughout Beyond the downward shift in phenomenon, as customers living the fi scal year, but each program admission tax collections wrought closer to French Lick shift their play and local unit also receives a transfer by dockside gaming, the yield from Casino Aztar and Caesars to the payment from the state to make-up from the tax rose only nominally French Lick Casino. the fi scal year shortage in collections. aft er dockside gaming was The guarantee payment for a fi scal implemented. From 2004 to 2007, Riverboat Wagering Tax year is made during the following the admission tax distributions Before July 2002, the riverboat casinos fi scal year from the state’s share of shown in Figure 2 grew by an annual paid a fl at rate wagering tax equal wagering tax revenue.3 The black and average of only 1.4 percent. More to 20 percent of the casino win. This gray bars fi rst appearing during 2004 importantly, distributions declined rate increased to 22.5 percent in July in Figure 2 describe the state and uncharacteristically in 2008 by about 2002 and remains the wagering tax local guarantee payments. 2.8 percent, even with a full year rate imposed on riverboat casinos The French Lick Casino admission of collections from the French Lick that conduct gaming excursions. The tax is higher and distributed Casino and its $4 admission tax. dockside gaming regime, which all diff erently. The tax is $4 per patron Admission tax yields were down at of the riverboat casinos switched to based on the turnstile count at that nine of eleven casinos in 2008, with in August 2002, requires the casino venue and there is no guarantee six casinos registering year-over-year owner to pay the wagering tax on a payment for entities receiving declines averaging 2.6 percent. More graduated rate schedule in lieu of the this revenue since the casino was notable were the declines registered

4 Indiana University Kelley School of Business, Indiana Business Research Center fl at rate tax. The current graduated ■ FIGURE 3: Graduated Rate Schedule for Wagering Taxes, 2008 rate schedule is specifi ed in Figure 3. The rate schedule implemented in More than $600 Million 2002 had fi ve tax brackets and topped out at 35 percent of the annual win Over $150 Million to $600 Million generated by a casino exceeding $150 million. The 40 percent tax bracket Over $75 Million to $150 Million was added by 2007 legislation. Figure 4 shows annual wagering tax totals and the amounts distributed to state Over $50 Million to $75 Million and local government. Until 2003, 25 percent of the Over $25 Million to $50 Million wagering tax was distributed to 30 June to 1 July Win, Casino the city or county where the casino $25 Million or Less was docked, with the balance going to the state. The state’s share was Tax Rate on Win Increment: 15% 20% 25% 30% 35% 40% used for capital projects and to Source: Indiana Revised Code Section 4-33-13-1.5(b) replace local motor vehicle excise taxes. However, the combination of ■ expanding the wagering tax base FIGURE 4: Annual Wagering Tax Totals and the Amounts Distributed to State and via dockside gaming and increasing Local Government, 1996 to 2008 the wagering tax rate resulted in a $900 substantial permanent increase in Local Revenue Sharing wagering tax revenue. These revenue $800 Other eff ects are discernible beginning in Admission Tax Guarantee Payments 2003, when the amount of wagering $700 State Property Tax Relief tax distributed jumped from Capital Projects/Vehicle $381.5 million to $561.1 million. It’s Excise Tax Replacement $600 estimated that dockside gaming led Riverboat Communities to a 12 percent to 13 percent average increase in the casino win, while the $500 wagering tax rate was, on average, increased by about 40 percent. $400 Together, these two changes increased collections during 2003 by about 55 $300 percent, with 2004 collections about Wagering (in Millions) Tax 73 percent higher than the 2002 $200 collection total.4 Since these revenue eff ects were anticipated, the dockside $100 gaming legislation capped the local wagering tax shares at the amount $0 each local government unit received 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 in 2002. This ensured that the Source: Indiana Legislative Services Agency additional yield from the wagering tax due to the base expansion and the rate increase would accrue to distribution was created for state wagering tax distributions grew the state. The legislation also limited property tax relief programs. by only 1.4 percent per year. It’s the annual amount of state revenue Similar to recent admission tax important to note that the distribution going to capital projects and local trends, the wagering tax has shown in 2004 is abnormally high because motor vehicle excise tax replacement. nominal growth since the upward the monthly distribution schedule A new revenue sharing program shift in 2003 and 2004 caused by for the wagering tax was accelerated. was established for non-gaming dockside gaming and the concurrent Prior to this time, there was a one- communities and a new and sizeable wagering tax increase. In particular, month lag in distributions, with the from 2004 to 2007, the annual wagering tax collected in one month

Indiana Business Review, Spring 2009  5 being distributed to state and local accounts the following month. The 2004 change involved distributing In 2008 alone, the wagering tax distribution to state revenue in the same month that it and local government in Indiana totaled $729.8 million. is collected, resulting in thirteen months of wagering tax collections being distributed to state and local accounts during 2004 and the “drop” tax going to property tax relief aft er Nonetheless, given the sizeable in 2005. From 2005 to 2007, revenue subtraction of the admission tax amount of riverboat wagering tax trended upward again—with the guarantee payments (see Figure that is being directed to property tax French Lick Casino helping to 2). Wagering tax revenue directed relief, it is essential that the growth generate fairly robust growth of to property tax relief rose rapidly potential of this tax be assessed. about 6 percent in 2007. French Lick from $294.7 million in 2003 to $464 This research should: (1) evaluate contributed about $13 million to the million in 2004. From that point, the the long-run growth potential of the total in 2007 and about $24 million in amount has been relatively stable, wagering tax and derive estimates 2008. Like the admission tax though, but registered a decline of about 6 of this expected growth rate; and 2008 wagering tax distributions percent from $486.3 million in 2007 (2) evaluate the extent to which the experienced a signifi cant decline of to $457.3 million in 2008. While the wagering tax is subject to short-run about 4.5 percent despite a full year French Lick Casino pays according to economic shocks—most importantly, of collections from the French Lick the graduated wagering tax schedule, the rate at which the wagering Casino. The 2008 wagering tax yields the revenue is distributed diff erently tax may decline during periods of were down at eight of the eleven than wagering tax revenue from the economic downturn. Also, since casinos, with fi ve casinos averaging other riverboat casinos. A total of 56.5 Kentucky and Ohio, which represent a decline of about 4.8 percent. What’s percent of the revenue is directed to signifi cant market areas for Indiana more, the decline in wagering tax the state, with two-thirds going to casinos, continue to consider the collections was quite severe at Blue property tax relief and the balance option of casino gaming, it is equally Chip Casino (down 31.8 percent) and going to preservation of the West as important to evaluate the potential Casino Aztar (down 13.3 percent), Baden Springs Hotel. The remainder impact of competition from casinos and less so at Caesars (down 5.6 is split between local units in Orange in these states on the revenue- percent). County. generating capacity of Indiana As to the state share of the casinos. wagering tax, it increased from a Conclusion fi xed 75 percent share each year The riverboat casino businesses have Notes to over 83 percent in 2003 and has paid a total of about $5.9 billion in 1. For instance, in State v. Nixon (1979), 270 Ind. 192, 384 N.E.2d 152, the Indiana Supreme hovered above 80 percent since. riverboat wagering tax and about Court held that pari-mutuel wagering on Part of the increase in 2003 was $1.1 billion in riverboat admission horse races was unconstitutional under the att ributable to the revenue sharing tax since 1996. In 2008 alone, the lott ery prohibition in Article 15, Section 8. 2. References the state fi scal year which begins program being delayed for one year wagering tax distribution to state and on July 1st and ends on June 30th of the year and the revenue sharing distribution local government in Indiana totaled denoted. being redirected to the state general $729.8 million, with the distribution 3. The guarantee payment for the 2003 shortage was made in 2004. This is why there is no fund. This impact is shown by the of riverboat admission taxes of $81.2 guarantee payment recorded for 2003. bulge in other state distributions in million. While both taxes experienced 4. Up until 2004, distributions lagged 2003. Nevertheless, the increased radical growth from 1996 through collections by one month. Thus, fi scal distributions and collections totals could state share is also att ributable to the 2004, revenue growth from 2004 to vary signifi cantly. The percentage increases cap placed on local distributions. 2007 was nominal at best. Moreover, reported are based on collections during Through 2007, the state share of admission tax and wagering tax the fi scal year and may vary somewhat from the changes in distributions. The 2004 the wagering tax yield increased distributions experienced marked distributions included thirteen months of steadily to almost 83 percent of the declines of 4.5 percent and 2.8 collections because the distribution schedule total, but then declined to about 81 percent, respectively, in 2008. These was changed to distributing a month’s collections at the end of the month rather percent in 2008 when wagering tax recent revenue patt erns are certainly than during the following month. revenue registered an annual decline. grist for additional research as to The property tax relief distribution the adequacy and future growth refl ects the net amount of wagering potential of both casino taxes.

6 Indiana University Kelley School of Business, Indiana Business Research Center Future Casino Tax Yields: What Recent Trends in Casino Wagering and Attendance Suggest

Jim Landers, Ph.D.: Senior Fiscal/Program Analyst, Offi ce of Fiscal and Management Analysis, Indiana Legislative Services Agency

his article considers and to income growth versus growth exhibiting a year-to-year patt ern Tinvestigates the future att ributable to capacity expansion similar to the growth patt erns for growth potential of the state’s and market share growth. This is electronic gaming devices (EGDs) wagering taxes. Gaming markets critical because if the markets in and table games discussed in the in many states that legalized casino Indiana have matured, the annual previous article (“The Two-Sided gaming in the 1990s have matured, growth in the wagering tax base will Coin: Casino Gaming and Casino Tax so the days of extremely robust come from the underlying growth in Revenue in Indiana”). While lagging annual revenue growth may be on the average win per gambling patron. the supply trends, the trajectory of the wane. Revenue growth looms In addition, this article examines the att endance and win series also large in Indiana as the wagering the response of the wagering tax exhibits a rapid leveling off in recent tax has become a major source of base to economic change and how years. From 1997 to 2008, the casinos funding for the state’s property casino gaming in bordering states registered average annual growth for tax relief program. In 2008, about could aff ect business at Indiana att endance and win of 9.2 percent and $486.3 million in revenue from the casinos. Both are critical issues in and 11.9 percent, respectively. However, riverboat wagering tax was directed of themselves relating to the future the annual growth rates for particular to property tax relief. What’s more, all growth in gaming revenue. years vary signifi cantly around revenue from the separate racetrack these averages. The leveling in the casino wagering tax is dedicated to Recent Patterns in Casino Win att endance series and the win series property tax relief. Note that all years and Attendance is quite discernible beginning in 2004 referenced in this article are fi scal During 2008, 26.2 million people once the impact of dockside gaming years unless otherwise noted.1 gambled at Indiana’s eleven riverboat had registered fully. We fi rst examine the historical casinos, generating about $2.6 billion Contrasting the two growth growth patt erns in att endance and in win. The 2008 att endance and periods, att endance increased at a wagering at Indiana’s riverboat win levels are a long way from the 15.4 percent average annual rate from casinos. By analyzing the win—the fi rst, albeit partial, year of casino 1997 to 2002, but dropped to about base for the wagering tax—instead of operations in 1996 when roughly 1.6 percent on average from 2003 to wagering tax revenue, we eliminate 944,000 gamblers generated a win 2008. Similarly, annual growth in problems with measuring tax rates total of about $71.9 million. Figure 1 the win averaged about 21.2 percent and the impact of changes in tax reports annual att endance and win from 1997 to 2002, but fell to about rates over time.2 Analyzing casino totals for the riverboat casinos. 3.4 percent from 2003 to 2008. The att endance helps to delineate Annual att endance and win year-over-year growth rates also have growth in the win that’s att ributable grew dramatically in the 1990s, generally declined each year with the most recent years below the average

■ FIGURE 1: Annual Casino Attendance and Casino Win, 1996 to 2008 for the period. Annual att endance growth fell from 9.7 percent in 2004 $3,000 30 to 0.8 percent in 2005 and 0.9 percent Casino Win Casino Attendance 26.5 in 2006. The win has followed a 24.2 $2,500 25 similar patt ern, with annual growth 20.3 rates falling from 7.2 percent in 19.0 $2,000 20 2004 to 4.1 percent in 2005 and 3.1

$2,312.7 percent in 2006. Both att endance

$1,500 $2,157.6 15 and win declined in 2008, with

$1,926.6 att endance declining by 5.1 percent $1,000 $1,755.3 10 and win declining by 3.5 percent. 2007 represents the outlier during $500 5 this period because of the opening Annual Casino Win (in Millions) Casino (in Annual Win of the French Lick Casino. Excluding Annual Casino Attendance (in Millions) Casino AttendanceAnnual (in $0 0 the French Lick Casino from the calculations, 2007 att endance at 2007 2008 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 the remaining ten casinos actually Source: Indiana Gaming Commission declined by about 1.6 percent (some

Indiana Business Review, Spring 2009  7 of which may have resulted from ■ FIGURE 2: Annual Aggregate Win and Win per Gambling Patron, 1996 to 2008 att endance shift ing from existing $3,000 $120 casinos to French Lick). However, the Casino Win (left axis) Win Per Patron (right axis) 2007 win rebounded slightly from $2,500 $100 2006 to register a 3.6 percent growth rate. $2,000 $80 The data indicate that the impact of dockside gaming on att endance $1,500 $60 and win was signifi cant. While the average amount wagered $1,000 $40 per gambler wasn’t expected to increase, the aggregate amount $500 $20 Win Per Gambling Patron Total Casino Win (in Millions) wagered was expected to rise as more gamblers cycled through the $0 $0 casinos each day. The upward shift in annual att endance following the 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 implementation of dockside gaming Source: Indiana Gaming Commission is discernible beginning in 2003, but is even more noticeable in 2004, was due to year-over-year growth in win.6 However, this fails to control for which was the fi rst full fi scal year the win per patron. Now, with the the impact of rapid supply growth for dockside operations. Compared casinos serving relatively mature that led to radical year-over-year to 2002, overall att endance was 19 and stable markets, annual growth growth in casino att endance and win percent higher in 2003 and 30.5 in the aggregate win will rely almost during the 1990s. Remember, from percent higher in 2004.3 Likewise, the entirely on growth in the average 1996 to 2001, the supply of casino aggregate win was 12 percent higher win per patron. Based on the average gaming in Indiana grew from zero in 2003 and 20 percent higher in 2004 per patron win, the resulting growth to ten riverboat casinos, over 16,000 compared to 2002. could be litt le more than 1 percent to EGDs, and almost 700 table games. While the aggregate win grew by 2 percent per year. Thus, comparing the aggregate totals 11.9 percent per year on average from aft er 2002, or comparing the win 1997 to 2008, the average win per The Income Elasticity of the per patron with per capita personal patron grew by only 2.5 percent per Wagering Tax Base income, provides an elasticity year during this period (see Figure 2). The income elasticity of the win measure that isn’t biased by the The gap in the growth rates surfaced provides the best indicator of how supply and market expansion during primarily between 1997 and 2002, revenue generation by the casinos the 1990s. While personal income when growth in the win averaged has changed and where it may be grew by an average of 4.1 percent per about 21.2 percent per year but the going. As with purchases of other calendar year from 2002 to 2007, the win per patron grew by only about 5 goods and services, personal income 2003 to 2008 growth in win averaged percent per year. Since 2003, however, represents the main economic about 3.4 percent. This implies that average annual growth in the win variable that drives casino att endance the income elasticity is really about has fallen precipitously and the gap and wagering levels.4 The income 0.8. Comparing the average win between annual growth in the win elasticity of the win measures the per patron with per capita personal and the average per patron win has percentage change in the win due to a income (PCPI) confi rms this result. closed almost entirely. Since 2003, 1 percent change in personal income. PCPI grew by an average of 3.6 average annual growth in the win In the aggregate, Indiana personal percent per calendar year from 1996 has registered 3.4 percent while the income grew by an average 4.3 to 2007 while the win per patron average per patron win has grown percent per calendar year from 1996 grew by an average of 2.5 percent per by only 1.8 percent per year. This to 2007.5 The aggregate win generated year from 1997 to 2008. This implies suggests that the radical year-over- by the riverboat casinos grew by an an income elasticity equal to about year growth in win during the 1990s average of 11.9 percent from 1997 0.7.7 was largely due to capacity increases to 2008 (roughly the same period). A couple of recent studies of and market expansion via casino This suggests a rather large income the long-run and short-run income start-ups. The statistics indicate that elasticity of 2.8, implying that a 1 elasticity of casino win confi rm less than a quarter of the annual percent increase in personal income these results. The long-run elasticity growth in win during that period leads to a 2.8 percent increase in the focuses on the trend in the win,

8 Indiana University Kelley School of Business, Indiana Business Research Center measuring the relationship between income elasticity estimates for eight tax base should have declined by the trend in the win and the trend states where casino gaming began about 2 percent. In fact, actual win in personal income. The short- during the 1990s. The estimated declined by 3.5 percent, suggesting run elasticity, however, focuses on elasticity values average about 1.4, Tosun and Nichols’ research may deviations from the long-run trend and range from about 0.9 to 2.0. underestimate the impact of cyclical due to short-term fl uctuations in the In contrast, the elasticity estimates downturns on the wagering tax. business cycle, measuring whether for Nevada and New Jersey, where wagering is cyclical or counter- the casino markets were relatively The Potential Impact of cyclical. mature by the 1990s, equaled 0.22 Cross-Border Competition Landers (2008a) utilizes aggregate and 0.38, respectively. Research by various sources suggests quarterly win and att endance totals Understanding the potential that riverboat casinos, like those in for the riverboat casinos in Indiana short-run eff ects of an economic Indiana and other Midwestern states, and quarterly Indiana personal downturn on Indiana’s wagering tend to serve spatial markets of 50 to income estimates to forecast the tax base are, however, equally as 100 miles, with the preponderance of win generated by the casinos. important as understanding the long- patrons traveling less than 50 miles to Since wagering could vary with run growth patt erns. On this subject, visit a casino. Gazel and Thompson changes in demand for gambling, the information is scant. The 2000 (1996) interviewed casino patrons the forecast model focuses on the to 2001 period is the only time until in Illinois, fi nding that 50 percent relationship between the win and recently that an economic slowdown of the interview subjects resided personal income. The forecast has occurred while Indiana has had within 25 miles of the casino they model also accounts for the impact casino gaming.8 Unfortunately, still- visited. An additional 35 percent of of supply changes on the win, maturing casino markets coupled the casino patrons resided between using quarterly casino att endance with the startup of Belterra Casino 25 and 50 miles of the casino they as a proxy for the impact of supply in October 2000 masked any cyclical visited. Less than 5 percent of the changes on the aggregate quarterly behavior of the wagering tax base. In interview subjects traveled more win. Using a quarterly series addition to their long-run elasticity than 100 miles to visit a casino.10 running from 1997 to 2004 and estimates, Tosun and Nichols also use The Illinois Gaming Board (1997) 1997 to 2005, Landers generates their eleven-state sample to provide performed similar survey research statistically signifi cant income illuminating estimates of the short- that suggested that about 62 percent elasticity estimates ranging from 1.35 run income elasticity of casino win. of Illinois casino patrons lived to 1.55. When the estimating series Six of the income elasticity estimates within 50 miles of the casino they is shortened, beginning in 2000 or they generate are statistically visited.11 Over half of these casino 2001 and running through 2005, the signifi cant and range from 0.86 to patrons lived within 25 miles of their income elasticity estimates remain 1.95, with the high being the estimate preferred casino. Relative to Indiana, statistically signifi cant but fall to a for Indiana. The Indiana estimate Przybylski et al. (1998) found that range of 0.49 to 0.57. Thus, without suggests that the wagering tax base only about 4 percent of patrons at the confounding eff ects of casino is cyclical and highly responsive the casinos on the Ohio River in start-ups, market expansions, and to cyclical economic change, with Southern Indiana traveled more than deregulatory policies that occurred a 1 percent decline in real personal 120 miles to visit one of the casinos, until the early 2000s, the actual income resulting in a decline in the and only about 3 percent of patrons income eff ects are more discernible wagering tax base of 1.95 percent. A at the casinos in and potentially are not so robust. 1.95 percent decline in the wagering traveled more than 60 miles to visit Tosun and Nichols (2008) confi rm tax base could result in a loss of a casino.12 Consequently, the fact that the long-run income elasticity wagering tax totaling about $14.2 that ten of eleven riverboat casinos in mature casino markets may be million based on the average tax are located on Indiana’s borders considerably lower than in new rate paid by the casinos. However, suggests that a signifi cant proportion markets. They estimate the income the revenue loss could be higher of gamblers visiting Indiana casinos elasticity in eleven states. The data to the extent that the base decline reside in surrounding states.13 Figure encompasses all quarters of casino is skewed to casinos paying the 3 shows the locations of Indiana’s gaming in nine of the states going highest marginal wagering tax rate. eleven riverboat casinos and two new back to the 1990s, and goes back In 2008, Indiana real personal income racetrack casinos. as far as the mid-1980s for Nevada declined by about 1 percent.9 Tosun Przbylski et al. (1998) estimated and New Jersey. Tosun and Nichols and Nichols’ short-run estimate for that Indiana residents represented generate statistically signifi cant Indiana indicates that the wagering about 54 percent of the gamblers

Indiana Business Review, Spring 2009  9 visiting the riverboat casinos on the spearheading a drive for a ■ FIGURE 3: Location of Indiana’s Eleven Riverboat Ohio River in southern Indiana, but ballot measure to legalize and Racetrack Casinos, 2008 represented only about 12 percent of racetrack casinos and stand- the patrons visiting the Northwest alone casinos in Cincinnati, St. Joseph LaGrange Steuben Elkhart Indiana casinos. More recently, Policy Cleveland, and Columbus. LaPorte Porter Analytics, LLC (2006) estimated that Interestingly, Penn National Lake Noble De Kalb Marshall the Indiana resident share of casino owns the Argosy Casino in Starke Kosciusko patrons totals about 36 percent at Lawrenceburg, Indiana, but Whitley Allen the casinos on the Ohio River and also owns Raceway Park Jasper Pulaski Fulton about 32 percent at the Northwest in Toledo, Ohio, one of the Newton Wabash 14 Indiana casinos. This clearly locations where a racetrack White Cass Wells Adams indicates that expansion of casino casino could be built.16 Penn Huntington Benton Miami gambling in the surrounding states National also reported a Carroll Howard Grant Black- near Indiana’s borders could interfere total of almost $38 million ford Jay Warren Tippecanoe with the existing casino markets and in contributions to the “No Clinton Tipton Delaware Randolph signifi cantly impact the yield from on Issue 6” political action Fountain Hamilton Indiana’s wagering taxes. committ ee that opposed the Boone Madison 17 Henry Historically, casinos in northern 2008 ballot initiative. Montgomery Wayne Hancock Illinois have posed the only real In 2008, the Kentucky Parke Hendricks Marion

Vermillion Putnam direct competition for Indiana legislature considered Rush Fayette Union riverboat casinos. Casino gaming is but failed to approve Morgan Johnson Shelby illegal in Kentucky and Ohio and, a ballot measure that Vigo Clay Franklin until recently, casino gaming in would have amended the Owen Decatur Michigan was limited to commercial Kentucky constitution to Monroe Brown Sullivan Bartholomew Ripley Greene Dearborn casinos in Detroit and tribal casinos legalize casino gaming. Jennings Ohio far enough north that they did not Legislation has been Jackson Switzerland Lawrence interfere with any Indiana casino introduced this year to Jefferson markets. This changed in August allow operation of video Knox Daviess Martin Scott Washington 2007, when Four Winds Casino lott ery terminals (VLTs) Orange Clark opened in Michigan about 10 to at seven of Kentucky’s Pike Dubois Floyd 15 miles from Blue Chip Casino in eight racetracks.18 Gibson Crawford Harrison Michigan City. Since opening, Four These locations Warrick Vander- Perry burgh Racetrack Casinos Winds has displaced roughly one- would include Posey Spencer third of Blue Chip’s business, leading Churchill Downs Riverboat Casinos to a reduction in wagering tax in Louisville, Source: Indiana Legislative Services Agency revenue from Blue Chip of about $27 Kentucky; Ellis million in 2008.15 This illustrates how Park in Henderson, Kentucky (near critical surrounding state competition Evansville); and Turfway Park in predicated solely on proximity could could become if Ohio or Kentucky Florence, Kentucky (near Cincinnati). be exacerbated if the surrounding authorizes casino gaming. Casino Since the proposed legislation would states adopted less costly regulatory gaming in either state could result in be an expansion of the Kentucky structures or lower gaming taxes. signifi cant displacement of business Lott ery, it is being argued that it does This action could serve to free-up and tax revenue from casinos in not require a statewide referendum more capital at competing casinos southern Indiana. In 2008, the six on a constitutional amendment to which could be used for bett er casinos in southern Indiana generated legalize casino gaming.19 marketing, such as higher player about 52 percent of the statewide win The preponderance of the impact allowances, higher pay-out rates on (about $1,321.8 million) and about from surrounding state competition EGDs, and bett er complimentary 52 percent of the total wagering tax would likely manifest itself by items (or “comps”) like free meals, (about $376.9 million). gamblers from those states shift ing drinks, and hotel rooms. In addition, Ballot initiatives to amend their att endance from Indiana casinos competition from surrounding state the Ohio constitution and allow to closer alternatives in those states. casinos could cause Indiana casinos casino gambling were defeated in Locating casinos in Cincinnati, to “price-compete” or increase the 2006 and 2008 by wide margins. northern Kentucky, Louisville, or near pay-out rate on EGDs (where the Nevertheless, it appears that a new Evansville could displace a signifi cant pay-out rate is adjustable) to maintain ballot initiative may be in the works share of the customer base that the their customer base.20 This would for the 2009 election. Reportedly, southern Indiana casinos serve in increase the average percentage of the Penn National Gaming, Inc. is Kentucky and Ohio. Any patron shift gross wagers paid back to gamblers,

10 Indiana University Kelley School of Business, Indiana Business Research Center but would decrease the win, which is ■ FIGURE 4: Blue Chip Casino Market the base for the wagering tax.21 Navin and Sullivan (2007) investigated the les Mi impact that new casinos entering 0 Ottawa 10 the St. Louis area casino market potentially have on the EGD win Racine percentage at existing casinos. Their Allegan Wisconsin Kenosha estimates suggest that the opening iles of additional casinos within 50 miles Illinois M McHenry Lake 50 of another casino decreases the win Van Buren Kalamazoo les percentage at existing casinos by 0.4 Mi 5 percent to 1 percent for each new Kane 2 Four Winds Berrien Cass St. Joseph casino opening within that distance. Dupage Cook Casino Blue Chip Michigan The recent displacement of Casino Indiana Lagrange business at Blue Chip Casino by Kendall LaPorte St. Joseph Elkhart nearby Four Winds Casino serves Will Lake Noble Porter to demonstrate the att endance and Marshall Grundy Kosciusko win losses that could occur in other Starke Kankakee Whitley Indiana casino markets if Kentucky Fulton or Ohio legalizes casino gaming and Jasper Pulaski Newton

Illinois Wabash makes a concerted eff ort to establish Cass Iroquois White casinos in areas bordering Indiana. Huntington Indiana Benton Miami Four Winds is a tribal casino operated Carroll by the Pokagon Band of Potawatomi Ford Howard Warren Tippecanoe Indians in New Buff alo, Michigan. Clinton Vermilion The location is 10 to 15 miles from Other Casinos Fountain Blue Chip Casino in Michigan City, Montgomery State Boundaries well within the spatial market to Source: Indiana Legislative Services Agency the north and east that Blue Chip monopolized since it opened in proximity to gamblers in that general million, respectively, to averages August 1997. Figure 4 shows the market, it potentially can undercut of about 280,000 and $24 million, 25-mile, 50-mile, and 100-mile areas Blue Chip (vis-à-vis marketing, pay- respectively.23 The opening of a new around Blue Chip Casino. out rates, or comps) solely on the and larger riverboat casino by Blue Blue Chip’s market area has always basis of the tax diff erential. Chip led to these marked increases. been somewhat truncated to the west Figure 5 and Figure 6 compare the However, aft er Four Winds Casino due to the casinos in Lake County monthly att endance and win at Blue opened in August 2007, average and Illinois. However, prior to the Chip Casino to the average monthly monthly att endance and win fell opening of Four Winds, Blue Chip’s att endance and win at all other to levels well below those att ained market to the east and northeast casinos in Indiana.22 The att endance at Blue Chip when it operated its was basically unimpeded. Making and win series are de-seasonalized old riverboat casino. From August the simplifying assumption that a using a twelve-month moving 2007 to December 2008, Blue Chip gambler won’t pass one casino to visit average in order to smooth month- averaged only about 188,000 patrons another casino that is further away, to-month volatility. Each series for and about $15.7 million in win per Four Winds physically reduces Blue all other Indiana casinos is relatively month. Comparing the August Chip’s market area, to the east and smooth and stable. The average 2007 to July 2008 period to the prior especially to the northeast. What’s monthly att endance declined slowly twelve-month period, att endance at more, in comparison to Blue Chip, from about 225,000 to about 200,000 Blue Chip has declined by about 26 Four Winds pays a much lower excise from the beginning to the end of percent and the win generated by tax on its gaming receipts. During the series. Meanwhile, the average the casino has declined by about 27 2008, the combined admissions and monthly win was roughly $20 million percent. In 2008, these declines in wagering tax rate on Blue Chip casino per month over most of the series, business led to losses of about $2.5 was 31.3 percent of the casino win. but fell below the $20 million mark in million (a 26 percent reduction) in In contrast, Four Winds pays a total 2008. admission tax payments and about of 8 percent of its win on EGDs only In comparison, the monthly $27 million (a 32 percent reduction) to state and local government in att endance and win at Blue Chip in wagering tax payments from Blue Michigan. Thus, not only can Four jumped in February 2006 from Chip Casino. This entire revenue loss Winds compete with Blue Chip by its averages of roughly 232,000 and $19.5

Indiana Business Review, Spring 2009  11 accrued to the state and its property ■ FIGURE 5: Blue Chip Casino and Other Casinos’ Monthly Attendance, 2004 to 2008 tax relief program. 400 Opening of New While the competition from Four Riverboat Casino Winds has led to marked reductions in the att endance and win generated 300 by Blue Chip, it appears that it has Opening of Four Winds Casino also pushed the win percentage on EGDs down slightly as predicted 200 by Navin and Sullivan (2007). On average, the win percentage on EGDs reported monthly for Blue Chip 100 Casino has been slightly lower since Four Winds Casino opened compared Blue Chip Monthly Attendance

Casino Attendance (in Thousands) AttendanceCasino (in Average Monthly Attendance at Other Casinos to prior years. The mean diff erence in 0 the win percentage before and aft er JFMMJS A J A O NJFA D MMJS JAO N D JFAMMJS JAO N D JFAMMJS JAO N D JFAMMJS JAO N D Four Winds opened is statistically 2004 2005 2006 2007 2008 signifi cant, ranging from about 0.14 Source: Indiana Gaming Commission percent to 0.21 percent depending on the time frame of the comparison.24 This magnitude fails to approach the ■ FIGURE 6: Blue Chip Casino and Other Casinos’ Monthly Wins, 2004 to 2008 win percentage reductions cited by $30 Navin and Sullivan, but could have Opening of New reduced the wagering tax payments Riverboat Casino Opening of Four from Blue Chip by roughly $1.5 Winds Casino million to $2.5 million. This is based $20 on the total amount wagered on EGDs at Blue Chip in 2007 before Four Winds opened.25 Consequently, the small, albeit statistically signifi cant, decline in Blue Chip’s win $10

percentage indicates that almost all of Casino Win (in Millions) Blue Chip Monthly Win the reductions in win and wagering Average Monthly Win at Other Casinos tax from Blue Chip is due to patrons shift ing their business to Four Winds $0 JFMMJS A J A O NJFA D MMJS JAO N D JFAMMJS JAO N D JFAMMJS JAO N D JFAMMJS JAO N D Casino and not from any “price” 2004 2005 2006 2007 2008 competing behavior by Blue Chip. Source: Indiana Gaming Commission Conclusion The history of casino gambling fl att ened out is just as remarkable. one-half to three-quarters the annual in Indiana to this point has been Since 2003, att endance has grown by rate of growth in personal income. dominated by two contrasting an average of only 1.6 percent per What’s more, this research suggests growth periods. The fi rst, stretching year, with the win growing by an that cyclical economic downturns from 1996 until roughly 2001 or average of only 3.4 percent. could have signifi cant negative short- 2002, witnessed the opening of ten The recent trends in casino run eff ects on wagering tax revenue. riverboat casinos with over 16,000 att endance and win suggest that, Short-run declines in income during EGDs and almost 700 table games. at best, long-run annual growth in recessionary periods could lead to Average annual growth in casino the wagering tax may persist, but declines in casino win at almost att endance equaled about 15.4 at rather nominal rates. Research twice the rate of decline in income. percent and the average annual estimating the relationship between Finally, future growth in wagering growth in casino win equaled about personal income and casino win tax revenue could be signifi cantly 21.2 percent. However remarkable confi rms this conclusion. The research impaired if casino gaming is legalized these early growth rates were, the also indicates that in mature casino in Ohio or Kentucky and competing speed at which the trend in casino markets, like those in Indiana, casino casinos are located in the Cincinnati att endance and casino win has since win may grow at a rate that is only or Louisville areas, or in

12 Indiana University Kelley School of Business, Indiana Business Research Center report casino att endance and casino win by Gazel, Ricardo C., and William N. Thompson. Kentucky near Evansville. The level ZIP code. 1996. Casino Gamblers in Illinois: Who Are of displacement that might occur 15. Blue Chip’s win in 2008 was $77.5 million They? A Demographic and Economic Study. with competition from either Ohio or below its 2007 win. Based on a 35 percent Chicago: Bett er Government Association. marginal wagering tax rate, the loss in win Kentucky is not estimable. However, led to a loss of about $27 million in wagering Layton, Allan, and Andrew Worthington. the displacement occurring at Blue tax revenue. 1999. The Impact of Socio-economic Factors on Gambling Expenditure. International Journal of Chip Casino in Michigan City due to 16. James Nash, “Gambling company now pushing own casino proposal: Penn Social Economics 26(1):430–439. competition from a nearby casino in National, which fought rival’s 2008 ballot Landers, Jim. In Jinping Sun and Thomas Michigan is indicative of how critical issue, looks to November election,” D. Lynch, eds. 2008a. Methods and Issues in this issue could become. Columbus Dispatch, January 9, 2009, www. Forecasting Casino Tax Revenue. Government dispatch.com/live/content/local_news/ Budget Forecasting: Theory and Practice 161-185. stories/2009/01/09/casino.html. Notes Boca Raton, FL: CRC Press Taylor and Francis 17. Pac Contributions—No on 6 Committ ee Group. 1. References the state fi scal year, which begins (Con Issue 6), Campaign Finance Filings on July 1st and ends on June 30th of the year Database, Campaign Finance Unit, Ohio Landers, Jim. 2008b. What’s the Potential denoted. Secretary of State, www.sos.state.oh.us/SOS/ Impact of Casino Tax Increases on Wagering 2. Recall that the wagering tax series contains Campaign%20Finance/disclosure.aspx. Handle: Estimates of the Price Elasticity of coincident structural breaks in 2002. At 18. Video lott ery terminals are operated at Demand for Casino Gaming. Economics Bulletin that time, dockside gaming began, but the racetracks in Delaware, Rhode Island, and 8(6):1–15. wagering tax was increased by about 40 West Virginia, and at social and fraternal percent when the rate structure was changed clubs in West Virginia, with the state lott ery Navin, John C., and Timothy S. Sullivan. 2007. from a fl at rate of 20 percent to a graduated agencies in these states administering and Do Riverboat Casinos Act as Competitors? rate structure ranging from 15 percent to 35 regulating their use. A Look at the St. Louis Market. Economic percent. 19. Gregory A. Hall, “Stumbo fi les gambling Development Quarterly 21(1):49–59. 3.Twenty-four-hour gaming operations at the bill,” Louisville Courier-Journal, January 9, Nichols, Mark W. 1998. Deregulation and casinos were allowed for the fi rst time in 2009. Cross-Border Substitution in Iowa’s Riverboat 2004; however, there was no statistically 20. The win percentage on EGDs can be Gambling Industry. Journal of Gambling Studies discernible impact of this change on readily altered by casino owners while the 14(2):151–172. att endance or win. win percentage for table games refl ects 4. See Nichols (1998), Rivenbark (1998), Layton traditional payout rates. Nichols, Mark, and Mehmet S. Tosun. 2007. and Worthington (1999), Potiowsky and 21. The win percentage is the average Actual Tax Base Elasticity of Gaming Revenues: Parker (2000), Thalheimer and Ali (2003, percentage of the gross wagers on EGDs Short-Run and Long-Run Estimates. Paper 2008), Nicols and Tosun (2008), and Landers retained by the casino. It represents the price presented at the National Tax Association 100th (2008a, 2008b). to the gambler for playing the EGDs. The Annual Conference on Taxation, November 5. Annual aggregate and per capita personal payout rate is equal to one minus the win 15-17, 2007. Columbus, Ohio. income measures utilized in this article percentage, thus, increasing the pay-out rate are estimates (updated September 18, decreases the price to the gambler. However, Policy Analytics, LLC. 2006. A Benefi t-Cost 2008) published by the Regional Economic the base for wagering tax is the win. So price Analysis of Indiana’s Riverboat Casinos for Information System, Bureau of Economic competition is expected to reduce the win FY2005: A Report to the Indiana Legislative Analysis, U.S. Department of Commerce. and, as a result, reduce the wagering tax Council and the Indiana Gaming Commission. 6. The arc elasticity is equal to 2.4. yield. Indianapolis: Policy Analytics, LLC. 7. The arc elasticity is equal to 0.7. 22. The June–December 2008 win totals for Potiowsky, Tom, and Cora Parker. 2000. 8. U.S. GDP declined in the third quarter of other casinos include the monthly win totals Oregon’s Lott ery Revenue Forecast. 2000 and the fi rst and third quarters of from the Hoosier Park and Indiana Downs Paper presented at the Federation of Tax 2001 according to the National Income and racetrack casinos. Administrators Annual Revenue Estimating Product Accounts, Real Gross Domestic 23. Severe weather aff ected att endance and win and Tax Research Conference, September Product, Chained Dollars, U.S. Bureau of in February 2006. 24-27, 2000. Waterville Valley, New Hampshire. Economic Analysis. 24. Based on separate t-tests: (1) An 9. Quarterly real personal income in Indiana independent samples t-test comparing the Przybylski, Michael, Daniel Felenstein, in millions of chained 2000 dollars, Federal January 2004–July 2007 average monthly win Daniel Freeman, and Laura Litt lepage. 1998. Reserve Bank of St. Louis, third quarter percentage to the August 2007–December Does Gambling Complement the Tourist 2007 to second quarter 2008, release date 2008 monthly average; and (2) a paired Industry? Some Empirical Evidence of Import 12/18/08, htt p://research.stlouisfed.org/fred2/ samples t-test comparing the August 2006– Substitution and Demand Displacement. personalincome. July 2007 average monthly win percentage to Tourism Economics 4(3):213–232. 10. Based on interviews of randomly selected the August 2007–July 2008 monthly average. patrons (n=785) visiting fi ve Illinois riverboat Both tests were signifi cant at less than the 1 Rivenbark, William C. 1998. The Tax Incidence casinos during July–August 1995. percent level. of Casino Gaming in Mississippi. Public Finance 11. Based on surveys of randomly selected 25. The “coin-in” or total wagers on EGDs Review 26(6):583–598. patrons (n = 13,000) visiting ten Illinois at Blue Chip during 2007 totaled $3,216.3 Thalheimer, Richard, and Mukhtar M. Ali. riverboat casinos over four days in June million. The win percentage reductions 2003. The Demand for Casino Gaming. Applied 1997. led to a reduction in the win of about $4.5 Economics 35(8):907–918. 12. Based on ZIP code data for players supplied million to $6.8 million based on the coin-in by Indiana casinos. total. Based on a 35 percent marginal Thalheimer, Richard, and Mukhtar M. Ali. 13. The two new racetrack casinos in wagering tax rate, the revenue loss would 2008. The Demand for Casino Gaming With Anderson and Shelbyville likely serve range from about $1.6 million to $2.4 million. Special Reference to a Smoking Ban. Economic a proportionately smaller non-resident Inquiry 46(2):273–282. customer base due to their interior locations. References 14. Based on ZIP code level patron data supplied by riverboat casinos located in Illinois Gaming Board. 1997. 1997 Annual Northwest Indiana and the Ohio River. Data Report. Springfi eld: Illinois Gaming Board.

Indiana Business Review, Spring 2009  13 Spring 2009

States with Gaming

Commercial Casinos Indian Casinos (Class II and Class III facilities) Lotteries

Pari-Mutel Wagering Racetrack Casinos Charitable Gaming

Source: IBRC, using American Gaming Association data

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