Submitted Testimony to the Florida State Senate Committee on Regulated Industry

Mr. Chairman and distinguished members of the committee, thank you for the opportunity to submit testimony to your panel today. I realize that many of you may be unfamiliar with our industry, and I always appreciate the opportunity to demystify our business.

For those of you who don’t know about my organization, I’d like to briefly explain what the American Gaming Association is and give you an overview of the industry we represent.

I want to begin by stating clearly that I am not here to advocate for additional gaming in Florida — that is for the people of this state to decide. We are here solely as an information resource. It wasn’t until two years ago that we even began testifying before state legislatures at all. We finally were compelled to do so because our board felt that there needed to be an industry voice responding to some of the unfounded allegations being made by gambling opponents during debates over gambling expansion.

As the national trade association for the commercial casino segment of the gaming industry, the AGA represents its members’ interests on federal legislative and regulatory issues. We also play a leadership role on industrywide issues of public concern, such as problem gambling and diversity, and serve as a clearinghouse for information on our industry. Our membership consists primarily of publicly held casino companies listed on the New York and NASDAQ stock exchanges, including most of the operators you’re probably familiar with, such as Caesars, Harrah’s, MGM MIRAGE and Isle of Capri, which owns Pompano Park here in Florida. We also represent major slot manufacturers, such as IGT, Bally’s and WMS, as well as other vendors and suppliers to our industry.

While we only represent the interests of commercial operators, a lot of our member companies are involved in other aspects of our business, such as Indian casinos, which, of course, you have here in Florida, and slots at racetracks — commonly referred to as racetrack casinos, or “racinos” — which are on your agenda for consideration today.

During the brief time I have, I’d like to emphasize three main points: First, that the regulatory policies you put in place will have a direct impact on the amount of revenue generated for the state; second, that the economic and social benefits of gaming have been well-documented through independent research; and, finally, that we as an industry are committed to responsible gaming. I expect to debunk a few myths along the way as well.

My first point: that the regulatory policies you put in place will have a direct impact on the amount of revenue generated for the state. One of the most important decisions you will make will be determination of a tax rate. 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, because there are variables that can alter that formula, such as the restricted licenses here in Florida. With a cap on the number of facilities, you can still generate a significant amount of capital investment when you have moderate tax rates. I would also note that the tax rate should also allow the operators to compete effectively with the existing operators in the market that are currently not taxed by the state.

Not every state has recognized this economic reality, 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. To give you a sense of the disparity between a high-tax market like New York and other more reasonable jurisdictions, the budget for capital improvements is 15 million dollars at Saratoga Raceway, 10.5 million dollars at Finger Lakes and 8 million dollars at Buffalo Downs, in contrast to more than 100 million dollars at a typical riverboat casino — spending we’ve seen from Isle of Capri, one of your potential operators here in Florida — and upwards of a billion dollars at major destination resorts. The total amount spent on capital improvements in each of these New York racinos is equivalent to what we might spend on just a restaurant in a moderate tax environment!

A high tax rate would put racinos in Broward and Dade counties at a competitive disadvantage with neighboring Indian casinos. The best comparison to what you have in South Florida is in New England, where the effective tax rate is 60 percent in Rhode Island but just 25 percent in neighboring Connecticut. 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 — which they have to drive right past to get there! The spending is not insignificant: Rhode Island and Massachusetts residents spend more than a billion dollars a year at Connecticut’s two Indian casinos, Mohegan Sun and Foxwoods.

Another policy decision that would place casinos 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. Every element of our business is closely monitored by state gaming regulators and, for some activities, by federal regulators as well. Because most casino companies are publicly traded, they also are subject to scrutiny from the Securities and Exchange Commission. 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 gaming was introduced in Atlantic City more than 25 years ago, regulators not only controlled things like hours of operation but also hotel room furnishings, the color of carpeting and the color of tiles in public restrooms. They also required casinos to use smoked glass so you couldn’t actually see in from the outside. And if you wanted a job as a dealer, you needed to become an amateur genealogist and complete a three-inch-thick disclosure form documenting, among other things, the past four generations of your family and where your ancestors had lived. 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.

With the economy weakening in recent years and higher tax rates becoming increasingly common for racinos, it didn’t take commercial casino states long to jump on the bandwagon. In fact, one of the highest tax rates in the nation is in Illinois, where lawmakers raised the state’s top gross gaming tax rate from 35 percent to 70 percent in just two years. Unfortunately for the governor, he learned some tough lessons in economics. Saddled by an unfair tax burden, the industry was forced to cut back to stay profitable. Faced with declining cash flow, operators had to cut 700 jobs, with another 600 jobs going unfilled. Hundreds of millions of dollars in planned construction projects were either put on hold or canceled altogether. Revenues in FY2004 were down by 88 million dollars, with casinos in neighboring states reaping the benefits. Ultimately, the tax hike brought in less than half of what was projected — and payments to local governments actually went down by more than 8 million dollars from 2002 to 2003. The Chicago Tribune recently reported what industry analysts had been predicting all along: that the governor is “back where he started facing a budget hole as high as 2 billion dollars by some estimates.”

This should not come as a surprise to anyone. As I mentioned earlier, the major companies I represent are publicly held, listed on the New York and NASDAQ stock exchanges. They are responsible to their shareholders and must get a fair return on investment.

Although it’s tempting for me to say our 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. While the industry can and will pay more under certain market conditions, such as limited licenses or proximity to large population areas, rates set too high will serve as a barrier to market entry or, in a best-case scenario, only allow for the development of a property that can’t compete on a level playing field with existing forms of casino gambling in the area.

My second point: that the economic and social benefits of gaming have been well documented through independent research. Whenever states consider gambling expansion, there is a debate over the impact of casinos. Years ago, we didn’t have the advantage of independent research or even an historical perspective. But we don’t have those excuses anymore. We have the research — most of which was conducted by the federal government or state governments — documenting the benefits of casino gaming and debunking many of the myths that are repeated so often by our opponents. And perhaps more importantly, we have real-life examples of how casino gaming has helped improve the quality of life in jurisdictions across the country.

When you examine the research and look at real examples instead of the theory and economic models concocted by gambling opponents, you will see that this industry, like any other industry, makes important economic and social contributions to its communities.

Because our industry is entirely transparent, the commercial casino industry’s contributions to the economy are a matter of public record. The 443 casinos in 11 states generated over $27 billion in gross revenues in 2003. Of that amount, $4 billion went toward gaming taxes paid to state and local governments. We’re also a labor-intensive business, providing more than 350,000 direct jobs paying over $11.8 billion in salaries, including benefits. On top of that, racinos employed more than 11,000 people and generated in excess of $711 million for state and local governments.

The National Gambling Impact Study Commission, a federal panel mandated by Congress, confirmed the economic benefits of casinos during their two-year study of the impact of gaming. According to their research, “… a new casino of even limited attractiveness, placed in a market that is not already saturated, will yield positive economic benefits on net to its host economy.” The commission also concluded that, especially in economically depressed communities, casino gambling has demonstrated the ability to generate economic development through the creation of quality jobs.

The commission also investigated some of the claims of social costs associated with our industry. According to their research, communities closest to casinos experienced a drop in welfare payments, unemployment rates and unemployment insurance, and spending on social services was no different in places closest to casinos than in places farther from casinos. The research also found no link between gambling and bankruptcy or gambling and crime. At the same time, the U.S. Treasury Department investigated a possible connection between gambling and bankruptcy and reached a similar conclusion.

When the commission looked at the magnitude of disordered gambling, they found that it was not even close to what had been alleged and continues to be alleged today by gambling opponents. Approximately 1 percent of American adults can be classified as “pathological gamblers,” according to the National Research Council of the National Academy of Sciences (NRC) and Harvard Medical School’s Division on Addictions. The estimate from the commission research was even lower, at 0.6 percent. According to the NRC and other top scientific experts, a majority of those people who are pathological gamblers also experience other problems, such as mood disorders, substance abuse problems and behavioral disorders. As a result, it’s very difficult to gauge the extent of this problem, or even to know whether it’s a distinct disorder.

Which brings me to my final point: that we as an industry are committed to responsible gaming. Regardless of the magnitude of the problem, our companies don’t want customers who bet over their heads, and we have put in place extensive programs to educate our customers and employees. Our commitment to responsible gaming is demonstrated by our actions, which I’d like to describe briefly.

One of the first initiatives undertaken by the AGA when it was founded in 1995 was to create an independent organization that would fund peer-reviewed research to help expand our knowledge and understanding of gambling disorders. The National Center for Responsible Gaming (NCRG) was established in 1996 and since then has awarded 8 million dollars in research grants to prestigious academic institutions and research organizations in the U.S. and Canada. Thanks to the NCRG, we now have promising drug and behavioral treatment options; a new understanding of the brain’s reward system and of how dysfunction in this area can contribute to pathological gambling; further evidence of the genetic factor in pathological gambling; and a clearer picture of how and why some adolescents develop gambling disorders.

The National Gambling Impact Study Commission acknowledged in its final report that “… the largest source of funding for research on problem and pathological gambling is the casino industry.” Our member companies have led the way in providing funding for this organization, committing 13 million dollars to the National Center since its inception nine years ago.

Beyond funding research, the AGA has adopted industrywide standards for responsible gaming. The AGA Code of Conduct, which all of our member companies implemented last year, “codifies” a broad range of practices throughout our industry, from employee assistance and training to alcohol service, advertising and marketing. The code also covers our commitment to supporting research initiatives and public awareness surrounding responsible gaming and underage gambling. For some companies, it simply reinforced existing practices. Others have brought their practices up to the standards spelled out in the code. Isle of Capri, one of your prospective racino operators, played a leadership role in developing the code.

By adhering to a universal set of guidelines such as the code of conduct, the industry as a whole benefits because it not only standardizes our practices but also sets the bar high — which is a goal we have for our industry as a whole in every area of our business.

I hope the information I have shared with you today will help guide you in your deliberations about regulatory policies for racinos in South Florida. I am the first to say that healthy skepticism is a good thing, whether you’re evaluating claims from the industry or its opponents. As my boss, Frank Fahrenkopf, likes to say, “Trust but verify” — the mantra of his old boss, Ronald Reagan, when dealing with the Soviet Union during the Cold War. As a first step, I have provided the committee with copies of the AGA’s 2004 State of the States, our annual survey of casino entertainment; our Gaming Industry FAQ, which includes detailed documentation for all the research I’ve cited in my remarks; as well as copies of our Code of Conduct for Responsible Gaming.

Again, thank you for the opportunity to submit testimony to the committee.  I apologize for not being able to address the committee in person and would welcome the opportunity to testify should the committee decide to hold subsequent hearings on this or any other gaming-related matter.