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Iillustration by Craig LaRotondaDelaware racino executives such as Dover Downs’ Ed Sutor and Delaware Park’s Bill Fasy see the share of gaming revenues returned to the state as a tax that would kill development of existing casinos. Wayne Lemons, head of the Delaware State Lottery, views the revenue retained by the racinos’ gaming operations as a commission paid by the state.

With such fundamental differences over what constitutes an income and what constitutes a tax, it’s little wonder why competing forces in the local gaming industry are at such odds over the expansion of gaming sites in Delaware.

It’s an issue members of the legislature will have to settle for themselves before voting on a bill to allow new casinos to operate in the state. The proposal, introduced in the house last year, was tabled until the current session, at Governor Jack Markell’s request. At issue: Will building more casinos spell doom for the three existing operations, or would new operations generate a dependable—and large enough—stream of revenue for the state?

The disagreement is huge.

Page 2: Two Points of View

 

Two Points of View

Casino operators who see the state’s take of revenues as a tax would seem to have a point when it comes to financing their growth in order to stay competitive.

“We’ve gone from almost $20 million in revenue down to $7 million since the most recent tax hikes,” says Fasy. “You just can’t show a return on investment to secure the lending necessary for development with drops like this.”

Delaware Park has put a planned hotel on hold due to revenue declines as a result of state action, as well as the continuing bleak economic outlook.

Sutor says Dover Downs has had to shelve $90 million in development projects due to cash flow issues tied to tax rates. “We’ve had three tax hikes in three years,” he says. “It’s an unstable tax environment. We’re taxed higher than any other state except for Rhode Island.”

Shaun Fink, executive director for the Dover-based Caesar Rodney Institute, a free-market think tank, cites the Delaware Economic and Financial Advisory Council’s estimates that Delaware will take a 60 percent hit on gaming revenues when four new casinos in Maryland come on line.

Yet others point to a national picture that indicates racinos—horse-racing facilities that offer gaming—posted a gain in revenues, even as Delaware-based operations were posting losses.

“Racing casinos gained 5.5 percent in revenues during recession-plagued 2009,” says House Majority Leader Pete Schwartzkopf. “Meanwhile our three racinos all lost revenue.” (Figures are derived from a report by the American Gaming Association.)

Schwartzkopf says the national picture looks rosy because of the gain in revenues that resulted from creating more venues. It would appear that Schwartzkopf might have a vested interest in that Gaming Association report—he is a staunch supporter for a proposed (and permit-approved) Del Pointe racino in Millsboro—but he would dispute such a conclusion.

“My efforts are not based on what I personally feel for or against expanding the casino industry,” Schwartzkopf says. “I’m doing this for the thousands of jobs that would be created and the significant revenues that would accrue to the state.”

Which would move the debate from that balance sheet and taxes versus commissions over to the classroom—specifically the Milton Friedman school of free and open market competition.

Page 3: So What’s the Payoff?

 

So What’s the Payoff?

“By restricting licenses, Delaware restricts competition and increases racino revenues and thus tax revenues back to the state,” says Jim Butkiewicz, a professor of economics at the University of Delaware. “What if there were only three restaurants allowed to operate in the state? Would anyone think that represented true competition?”

Fink asks simply whether the state’s proper role is to protect taxpayers or entrenched businesses.

“There is a closed pipe theory regarding gambling,” says Fink. “CRI does not believe Delaware can support more than three casinos. If the state’s proper role is to look after its taxpayers, the question then is, are the current casino locations the best to mitigate the certain revenue losses when Maryland’s additional casinos come on line?”

It’s an illustration of the real estate chestnut: location, location, location.

“Most out-of-state gamblers are coming to Delaware on their way to somewhere else, or because Delaware is closer to home for Maryland residents than, say, New Jersey,” Fink says.

“Why would Marylanders continue coming to Delaware when they’ll soon have four casinos to choose from in their own backyard? Why would anyone drive past a brand new casino to go to an old one? We have to remember that when Delaware’s slots came online, it killed the slot business in New Jersey.”

Fink believes Maryland’s proposed Ocean Downs casino will put an end, for example, to Harrington’s draw of bettors from Washington, D.C. And the recently opened Hollywood Casino in Perryville, Maryland, will significantly and negatively impact Delaware Park.

“If Harrington were located farther south and closer to Route 13, and Delaware Park were, say, near Wilmington’s Riverfront, their chances of mitigating losses due to Maryland’s casino development would improve,” Fink claims.

Yet Butkiewicz doesn’t believe the status quo is sustainable. “With the percentage of revenues paid back to the state and the continuing competitive pressures from Maryland and Pennsylvania, that combination may prove lethal to one or more of the existing racinos here,” he says.

Butkiewicz believes new venues may provide a more competitive environment for Delaware gaming, which is needed for the industry to survive and remain sustainable. That’s the argument Schwartzkopf used to forge legislation to expand gaming sites in the state. “There’s an old saying that a better mousetrap will catch more mice,” Schwartzkopf says.

He points to projections showing that, by merely preserving the status quo with the three current casinos, revenues will stagnate or decline dramatically over the next seven years.

“If Delaware and Maryland-Pennsylvania do nothing to expand gaming in the state, gaming revenues through 2013 remain even with 2009,” Schwartzkopf says. “But if Delaware maintains the status quo while those two states expand their operations, Delaware gaming revenues drop from the current $565 million down to $481 million by 2013.”

The figures come from a recent report by New Orleans-based TMG Consultants that projects significant revenue and job growth as the result of adding two venues. According to the TMG report, the picture brightens only when Delaware adds new operations.

“By 2013, gaming revenues from the added venues will see revenue gains topping $750 million,” Schwartzkopf says. “And by 2017, according to TMG, revenues with those additional sites here will reach revenue returns of $785 million, as compared to just over $500 million without the added casinos.”

Page 4: Does it All Add Up?

 

Does it All Add Up?

Critics—mostly the three current racino operators—claim TMG made several erroneous assumptions in its reporting. Fasy and Sutor point to the study’s projection of a 38-plus percent hike in bettors coming into the state with the two additional venues.

“We estimate that 20 percent of adults visit our racinos,” says Fasy. “The study claims that penetration rate will almost double. How?”

“The consultants also claimed the number of trips to Delaware casinos will double from six to 12,” Sutor says. “Why?”

Both agree that Delaware and surrounding states are convenience states when it comes to gaming.

“If there’s a 7-Eleven blocks away from your home and a Wawa five miles away, which one are you going to drive to for that gallon of milk?” asks Fasy.

He points to a once-strong market visiting Delaware Park from the York and Lancaster, Pennsylvania, areas. Between the hike in gas prices and casinos opening in Pennsylvania, he believes those customers have been lost forever.

“There was a poll that showed 80 percent of respondents claimed they’d like to drive one hour or less to a gaming site,” Sutor says. Fasy estimates that his visitors travel from two hours or less away from Delaware Park.

Because of the convenience factor, both see competition from outside the state as siphoning off current customers and directing them to closer venues in their home states instead of driving farther to two new venues in Delaware.

Page 5: Is it Worth it?

 

Is it Worth It?

Butkiewicz sees problems with all projections that show a windfall of gaming revenues for the state. He and a colleague recently produced a study that contradicted a claim that sports betting would bring in $71 million in revenues. His study showed the revenue gain would amount to little more than $3 million.

“The state is expecting too much from gaming,” Butkiewicz says. “The projections are way out of line with reality.”

Fink says the state is relying too much on gambling. “Remember the banks?” he asks. “Well, here we go again.”

Fasy believes there is an even more fundamental reality at work. “The whole gaming industry was put together back in 1994 to save the horse racing industry,” he says. “And it worked.” The racing industry supports the local agriculture necessary to breed and feed horses, he says. If additional casino-only sites siphon revenue from the racinos, that industry is put at risk.

Not so, says Schwartzkopf. “The state’s racing association receives revenues from all gaming operations and redistributes them to the various tracks. As long as gaming revenues rise, as they will with additional venues, revenues to support the horse racing will continue to grow.” Schwartzkopf points to the proposed Del Pointe project, which includes a mile-long track.

Regardless of the results of the legislative battle to preserve current venues or increase them, the struggle for wringing ever more revenue from the gaming industry is likely to continue. Gaming is the fourth-largest source of revenue for the state, behind personal income tax, corporation revenue and abandoned property.

“Governments like to go after low-hanging fruit, looking for additional revenues,” says Sutor. “That low-hanging fruit is us.”

With projections that don’t seem to add up, Butkiewicz sees the state behaving like a compulsive gambler striving for greater riches with one more bet.

“Delaware has a gambling problem,” he says. 

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