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Casino Series Part 3: Mass Shortchanged on Casino Fees

Friday, February 17, 2012

 

Massachusetts could leave more than a billion dollars on the table by letting a trio of casino licenses go on the cheap, sticking taxpayers with a losing hand, according to casino industry experts.

Casino developers would likely ante up hefty fees to do business in Massachusetts, considered one of the last great untapped casino markets in the country, contends Jeff Hooke, a Maryland investment banker who has spent years urging states across the country to charge more for gambling licenses.

But the Bay State’s “minimum” bid of $85 million per license, set in much touted casino legislation last fall, is far lower than what officials in New York and Illinois have charged in recent casino licensing deals.

“If you set it low, they will go low,” Hooke said of the minimum bid set by Massachusetts. “The state has an obligation to ensure that it obtains market prices for its casino gaming licenses.”

It is an assessment backed by John Kindt, a professor of business administration at the University of Illinois.

Kindt is urging Illinois to up casino licensing fees to $500 million each, up from just $150,000 that is now being proposed.

Massachusetts casino licenses should also fetch at least half a billion each given the size and density of the state’s population, Kindt argued.

“That is absolutely correct,” he said of Hooke’s assessment. “These licenses are worth hundreds of dollars. Every nickel saved on these fees is just as giveaway to the casino companies.”

Overall, most states take one of two routes when dealing with the casino industry, either charging hefty licensing fees but keeping tax rates modern or going easy on the upfront fees by hiking taxes, industry experts say.

Massachusetts has the distinction of going light in both categories, with a relatively low licensing fee and a tax rate, that, at 25 percent, is half that charged by Pennsylvania, Rhode Island, New York and Delaware.

Instead of $85 million, state officials could charge as much as $500 million per casino license to be the first to enter a lucrative new market, Hooke contends. Bay State gamblers have helped fuel the rise of two of the world’s largest casinos in Connecticut’s Foxwoods and Mohegan Sun while spending more per capita on lottery tickets than anyone else in the country.

With as many as three casino licenses across the state set to be eventually auctioned off, that would bring in a total of $1.5 billion in upfront cash, Hooke argues

In fact, Hooke’s arguments that Massachusetts is now undervaluing its gambling licenses is backed up by a consultant’s report the Patrick Administration used to craft casino legislation four years ago.

“We note that one prospective Massachusetts gaming operator said that the Commonwealth ‘could reasonably command $800 million in total licensing fees,” a report by New Jersey-based Spectrum Gaming found.

The operator, according to a footnote in the report, was Suffolk Downs chief investor Richard Fields.

In contrast to the untapped Massachusetts market, casino companies recently shelled out massive upfront payments fees in other states where there is already stiff competition on the ground, according to Hooke.

Illinois picked up another $200 million when it auctioned off its tenth casino license in late 2008 in the depths of the recession, with the high bid coming in at $435 million.

Meanwhile, in the Empire State, Asian casino tiger Genting Group shelled out nearly $400 million in 2010 for the rights to build a slot complex at the aging Aqueduct racetrack in New York City, with one of the country’s largest slot parlors already doing business just outside city lines in Yonkers.

It is a deal that only comes with video slots, in contrast to Massachusetts, which late last year approved full-scale, Las Vegas-style gambling.

Gov. Andrew Cuomo has pledged to legalize table games like poker, but that is likely to involve a two-year effort to

amend the New York State Constitution.

However, Patrick Administration officials and legislative leaders have argued against setting the state’s tax rate and licensing fee too high.

For starters, they point to the hammering the casino industry took during the recession, arguing gambling operators can’t shell out the huge upfront sums they were paying before the bust.

Moreover, the governor and legislative leaders have pitched the casino bill as a jobs bill that will create as many as 15,000 jobs during what are still tough economic times.

If upfront fees and tax rates are set too high, casino operators won’t have the cash to build big projects and hire thousands of workers, some contend.

“You are really trying to gouge the investor on the front end,” said Andrew Bagley, director of research at the Massachusetts Taxpayers Foundation.

Here again, though, the report Patrick relied on to create his first casino bill offers a much different conclusion, noting tax rates, not upfront fees, had more power to discourage later investment.

“Ongoing gaming taxes, however, are seen as the most important determinant of initial and future capital investment by operators,” according to the Spectrum report.

But the big numbers behind the Illinois and New York deals show that, post recession, casino companies will still pay high prices for choice opportunities, Hooke contends.

In fact, Genting, despite its big upfront payment and a tax rate that is well over 50 percent, has unveiled plans for what will eventually be a major, full-scale gambling an entertainment complex, including what would be the world’s largest convention center.

Moreover, hopes of big job gains in Massachusetts could prove fleeting, contends Heywood Sanders, a University of Texas economist who has studied the expansion of the convention and gaming businesses.

The few thousand jobs Massachusetts may gain through legalizing casino gambling are likely to be siphoned off in turn as other states, such as New Hampshire, legalize expanded gambling.

And as competition ramps up, casino revenues are likely to steadily decline after an initial burst in the early years.

Given that, the state might be better off asking for a big upfront payment and letting the casino companies assume the risk the potential of declining returns in future years.

“It’s vulnerable to competition,” Sanders said. “There is no permanence to it. A casino is a casino – you can make it anywhere.”

Still, Massachusetts is not alone in settling for relatively low casino licensing fees, with states across the country falling for industry spin about jobs and economic development Hooke contends.

“The lobbyists for the gambling industry pull the wool over the eyes of the state legislators – you see it happen time and time again,” he said.

“Massachusetts is at risk of copying the mistakes of other states, most of which left billions of dollars on the table through poorly designed legislation that promoted artificially low fees and taxes for the gaming industry.” 

 

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