Back in the Saddle Again

Anyone who’s been an observer of the horse racing industry knows that the past two decades have brought steady declines in attendance, purses and overall revenue at tracks across the country. While there have been some consistent performers, such as Churchill Downs, the brightest spot for this segment of the gaming industry has been tracks with slot machines, or racinos.

The racino concept originated in 1990, when West Virginia became the first state to allow slot machines at a racetrack. Since then, five other states have followed suit: Rhode Island and Louisiana in 1992, Iowa and Delaware in 1995, and New Mexico in 1999. New York and Maine recently legalized racinos, but none are operational yet.

The development of racinos has changed the face of the horse racing industry, the casino industry and the gaming industry overall.  For example, MTR Gaming Group, Inc., parent company of Mountaineer Race Track & Gaming Resort, has been listed by Forbes magazine as one of “200 Up and Coming Companies,” in the United States.

Since the racetracks incorporated slot machines into gaming operations, their prize purses have increased significantly. In Delaware and West Virginia, for example, the average purse is nearly 80 percent more than racetracks without slots. This advantage of supplemented purse amounts gives less prestigious tracks the ability to attract top horses, trainers and jockeys—and, in turn, draw them away from more established tracks without slots.

Companies whose business was once limited to horse racing are now considered full-fledged gaming companies. Only three years ago, Penn National just owned horse racing facilities in Pennsylvania. Today, the company owns and operates six riverboat casinos in three states and properties in Colorado as well as three racetrack facilities, including one racino in West Virginia. One of the AGA’s newest members, Peninsula Gaming, recently became the first company to build a racino from the ground up, including track, stables, grandstand, clubhouse and casino at Evangeline Downs in Louisiana.

Racino advocates suggest that these facilities have distinct advantages over traditional casinos. They create a new revenue stream in a difficult fiscal and political climate, limit geographic expansion of gambling, and help preserve the racing industry, among other benefits. On the other hand, others believe they needlessly limit the economic and fiscal benefits of gaming, such as capital investment, tourism and employment, and provide no meaningful opportunity for broader economic development goals, such as downtown revitalization. The AGA, for its part, continues to take the position that it’s up to individual states to determine what, if any, gaming they would like to add to their current mix.

Regardless of the arguments for and against the racino model, several casino companies have recognized that racinos offer an opportunity to distribute their product and brand names. Caesars Entertainment (formerly Park Place Entertainment) was one of the first to recognize the potential of racinos, signing a management contract with Dover Downs in Delaware. The property has grown to include a 232-room hotel, a conference center, multi-purpose ballroom and five restaurants. More recently, Harrah’s began operating Bluffs Run Casino in Iowa and Louisiana Downs, while Boyd Gaming began operating Delta Downs in Louisiana.

The success of the racino, like the riverboat, limited stakes and land-based casino models, shows that our product is adaptable to different economic and political considerations. Some states envision us as an industry that can create jobs and generate economic development. Others see us as a source of tourism and convention business. What works in one community might not work elsewhere. The lesson learned is that we can adapt our business to reasonable needs of just about any community.

Some of the demands of these communities have hardly been reasonable. Because racinos typically have been seen as solutions for cash-strapped states rather than job creators, legislators have squeezed the greatest amount possible out of the operations. The effective tax rates range from a “low” of 25 percent in New Mexico to 80 percent in New York—a rate so high that it has had virtually no takers. The tax rates proposed in Maryland, Pennsylvania and other states considering racinos have been similarly onerous. The trend is toward tax rates so high they discourage capital investment or, worse, prevent any investment whatsoever. States often forget that the tax rate chosen today will affect the kind of gaming product offered for decades to come.

A casino doesn’t need to be “convenience gambling” just because it’s located at a racetrack. Governments can maximize the broad, long-term economic benefits of racinos by creating legislation that encourages capital investment, job creation and the kinds of amenities typically associated with destination resort casinos. The synergy between the pari-mutuel and casino industries as seen in the racino model has been successful for both segments of our industry. With reasonable tax rates and an educated public, we can do even better.