Florida's Next Challenge

The recent decision by voters in Broward County, Fla., to allow slot machines at four pari-mutuel facilities in the area is proof once again that the American public has embraced gaming.  Despite our opponents’ best efforts to promulgate myths and falsehoods about our industry, the undeniable success story of gaming is resonating more strongly than ever.

Florida lawmakers are now left with the task of determining what types of machines will be brought to Broward, as well as setting up tax and regulatory structures to govern the industry.  As we’ve seen in several states across the country over the past few years, decisions about how to tax and regulate slots can dramatically impact the success or failure of these new operations.  Legislators proceeding in Florida and other states considering gaming would be wise to take heed of the what we’ve learned. 

On the issue of taxes, a leading consultant in the hospitality industry recently summed up the impact of tax rates this way: A 10 percent tax rate will get you a Bellagio, a 35 percent tax rate will get you a Holiday Inn, and a 70 percent tax rate will get you a slot barn. Of course, this is a generalization, and certain variables can alter that formula, such as the restricted licenses available in Florida. With a cap on the number of facilities, Florida can still generate a significant amount of capital investment with moderate tax rates.  However, whatever tax rate is levied in Florida should allow operators to compete effectively with the existing operators in the market that are currently not taxed by the state. A high tax rate would put racinos in Broward County at a competitive disadvantage with neighboring Indian casinos.

New England provides the best comparison to the situation in Florida.  In Rhode Island, the effective tax rate on racetrack casinos is 60 percent, while the tax rate in neighboring Connecticut is just 25 percent. The lower tax rate has encouraged capital investment at the Indian casinos in Connecticut, creating vastly superior properties and more spending by Rhode Island and Massachusetts residents there than at the more convenient Rhode Island racinos. The spending is not insignificant: Rhode Island and Massachusetts residents spend more than $1 billion a year at Connecticut’s two Indian casinos, Mohegan Sun and Foxwoods.

As I’ve written before in these pages, there are several other states that have failed to recognize the economic realities of excessive taxation, and their decisions have had a profound impact on the revenue potential for operators as well as states. In New York, where the effective tax rate is close to 80 percent, investment in capital improvements has been minimal. Illinois provides yet another example of how an unreasonable tax rate on the industry can reduce employment opportunities and stifle growth.

Another policy decision that would place Florida’s new racinos at a competitive disadvantage is excessive regulation. As state-regulated businesses, casinos already are subject to some of the most comprehensive regulations of any industry in the country.

With few exceptions, we welcome the tight regulation and law enforcement oversight because it helps us maintain the integrity of our business. But there is such a thing as excessive regulation, which is common in new jurisdictions wary of the impact of gambling. When casinos on riverboats were first legalized more than a decade ago, they were all required to cruise. Regulators imposed loss limits and size restrictions. In many ways, they made the product as inconvenient as possible for customers. But what we have seen over time in many jurisdictions is a gradual relaxation of some of the more onerous regulations that were borne out of initial suspicion of the industry.

The lesson here is that policy decisions are not always the best business decisions. Arbitrary choices about tax rates as well as the number and types of machines that can be played, hours and other operational issues fly in the face of good economics and create an artificial environment where market forces don’t determine success. Imposing high tax rates will not maximize economic and social benefits — for either the industry or the state.

Although it’s tempting to suggest gaming taxes should be as low as those paid by every other industry, we recognize that ours is a privileged industry, and states do have the right to tax our business at a higher rate than others. However, a careful balance needs to be achieved in order to ensure that our publicly held companies can get the fair return on investment demanded by their shareholders.

As they head into their deliberations, legislators in Florida would also be mindful to take advantage of the decades of independent research now available detailing the impact of gaming on communities across the country.  Gone are the days when lawmakers had to rely on myth or propaganda to make crucial decisions about the future of the industry. We now have the documentation — most of which was conducted by the federal government or state governments — showing the benefits of casino gaming and debunking the falsehoods still repeated by our opponents.

And perhaps more importantly, there are countless real-life examples of how casino gaming has helped improve the quality of life in jurisdictions across the country. As the process continues, there is no doubt that legislators will be confronted with numerous conflicting studies about the economic and social impact of gaming. But to really understand the truth, I encourage legislators to visit those communities that already have embraced gaming and talk to the mayors, the chiefs of police and others who have experienced casinos firsthand.

What they’ll tell them is the same thing they told the federal commission: that all the fear mongering about bankruptcy, crime and other social ills predicted by opponents has not materialized. In fact, quite the opposite happened.

Voters in Florida have made their decision, and now the real work begins.  Let’s hope lawmakers act judiciously in setting the tax rates and regulatory structures in the state. The wrong decisions now could result in the failure to realize the potential of this new revenue source for the county and state before it even gets off the ground.