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Casinos See Both Pros, Cons May 14, 2003

If gambling expansion in Illinois goes too far, including putting slots at racetracks, it could cripple existing casinos and hurt the state, analysts for the casino industry warn. If it's done just right, though, expansion could bring a windfall of money to both the riverboats and the financially crunched state government, the analysts say.

The addition of slot machines at five Illinois horse tracks is just one key component of a sweeping gambling-expansion proposal now before state lawmakers. Legislators hope the changes would further reduce the state's $5 billion deficit.

The legislation would add slot machines to all Illinois horse tracks, including 1,100 at Arlington Park, and allow arcade gambling at bars, social clubs and possibly airports. Lawmakers also are thinking about cutting casino taxes and adding 800 new gaming spots at the casino in Elgin, and the seven other riverboats statewide.

Marc Falcone and Eric Hausler, gaming researchers with Deutsche Bank Securities in New York, closely examined the various scenarios for expanding and taxing gambling in Illinois. Their study was completed earlier this year on behalf of Deutsche Bank, which represents a nationwide base of clients in the gaming, lodging and leisure industries.

Based on their findings, Falcone and Hausler came up with what they call the ideal expansion and taxation plan.

"The best scenario, we think, is to have no slots at tracks, additional slots at casinos and roll back the taxes," Hausler said. With too much competition, "your revenues stay where they're at, and then the operators are essentially back at square one."

Hausler said having slot machines at horse tracks would damage the casinos by drawing scores of patrons away from them and would devalue the 10th casino license the state hopes to sell for a major profit.

The study says the 10th casino license casino would sell for at least $525 million less and achieve only small tax gains for the state if slot machines are added at horse tracks. If taxes are rolled back from the current rate of 50 percent at the biggest casinos, horse tracks are excluded and riverboats expand, the 10th license could sell for as much as $750 million, the analysts predict.

The talk of expanding gambling comes as casinos already are seeing significant declines in revenue due to the tough economy and last year's 15 percent casino-tax increase, which pushed the casino tax from 35 percent to 50 percent for other top-grossing riverboats.

Additional drops in revenue due to stepped up competition also would make it less desirable for the riverboats to add the extra gaming spots - effectively negating the state's plan to boost its income.

"The threat of new competition will depress capital improvements in the casinos," Hausler said. "They're already getting their brains beat in by the Indiana operators."

Hausler blames this year's decline mostly on the 50 percent tax rate imposed last year on the casino, which previously had a 35 percent rate. He said Gov. Rod Blagojevich's plan to raise the Grand Victoria's tax rate to 70 percent is "absurd" and would drastically harm the casino and potentially put the operation in danger of closing.

Instead he supports the idea of cutting casino taxes back to 35 percent or 40 percent. Though Elgin has yet to take an official stand on the various gambling plans floating around, Stegall agreed the tax rollback and addition of slots at casinos would help business at Grand Victoria. That ultimately helps the state, county and city through tax revenue.

Regarding the tax rollback, he said it could bring the city of Elgin an extra $1.5 million to $2.5 million in taxes. Elgin, which in recent years has seen about $28 million annually in its share of riverboat revenues, is predicting a $3 million setback this year due to the decline in business and the casino tax hike.

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