It’s déjà vu all over again. As Governor Rendell continues lobbying the General Assembly to expand gambling, very little attention is paid to the potential giveaway of valuable slot machine licenses to a small group of wealthy and politically connected people. By failing to auction these limited gambling licenses to the highest responsible bidder, Pennsylvania taxpayers will lose upwards of $2 billion.
Last year, the Senate and House heard testimony from Jeff Hooke, a Washington, D.C.-area investment banker, who indicated that eight gambling licenses would be worth $2.1 billion in the open market. His valuation conservatively set the worth of two Philadelphia slots licenses at approximately $500 million each, two licenses in Pittsburgh at $300 million each, and the remaining four licenses at a collective $500 million.
To give these licenses away for free (or even at the token fee of $50-$75 million), Hooke said, is to effectively bestow on gambling companies the right to print money. This statement was most recently confirmed by two cash offers of over $500 million for a casino license being auctioned in Illinois.
These two bids further support the Pennsylvania value estimates, as do other transactions. In 2000, the Sault Ste. Marie Chippewa Tribe in Michigan paid $265 million for a 40 percent interest in a Detroit casino license, indicating a total license value of $663 million. In 2001, Argosy Gaming established a casino license value of $750 million with its purchase of a suburban Cincinnati riverboat. And in early 2002, MGM-Mirage Corp. offered $615 million for the license to operate a casino in a Chicago suburb.
Although these licenses were for full-scale casinos, it is well-documented that about 75 of a casino’s profits are from slot machines. Therefore the values of monopoly slot machine licenses in Pittsburgh and Philadelphia are relatively similar.
If Pennsylvania policymakers decide to expand gambling in the Commonwealth to provide property tax rebates, they should do so based on taxpayer-friendly policy-not on legislation crafted by gambling and horse racing lobbyists. If nothing else, the Governor and General Assembly have the fiduciary responsibility to make sure taxpayers get the best deal possible.
In 2003, The Commonwealth Foundation urged the state to auction these licenses to the highest responsible bidder in order for taxpayers to realize the greatest benefit. However, since the monopoly licenses remain tied to millionaire track owners, a new approach is necessary-one that was recently presented to leaders in both the Senate and the House.
Racetrack lobbyists are ecstatic about Pennsylvania’s current 46 percent “hold rate”-the amount of slots revenue that the gambling company retains. By comparison, New York’s “hold rate” is 20 percent. This means the slots operators in Pennsylvania would realize profits more than 100 percent higher than those operating to our north. Most important, however, is that such a lucrative “hold rate” in Pennsylvania would mean even fewer dollars would be available to homeowners for property tax rebates.
Complaints about a lower hold rate from the track owners should be dismissed for what they are-greed, at the taxpayers’ expense. If they are unwilling to accept the same offer tracks accept in New York, then the licenses should revert back to the state to be sold at auction. This ensures that homeowners get the highest possible rebates from gambling revenues.
The economic limit for all of Pennsylvania is likely around 23,000 total slot machines. At this number, the average win-per-day-per-machine would be approximately $325, providing gross revenues of $2.7 billion annually. If the state retains 70 percent of the “win” (after allocations to slots operators, horse purses, etc.), the increase in gambling tax revenue (before the acknowledged social costs and tax revenue displacement from reduced tax revenues elsewhere) is approximately $1.9 billion annually-nearly double the amount currently proposed by the governor and the track owners for property tax rebates.
Ideally, government would not be creating monopolies for wealthy, private individuals in the first place. But if our politicians choose to do so, they should put the interests of taxpayers first-not those of the gambling industry. By ignoring the real value of these slots licenses and giving them away for peanuts, homeowners will be the real losers as they receive even smaller rebates than are attainable through an auction or a reasonable “hold rate.”
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Matthew J. Brouillette is president of The Commonwealth Foundation, a free-market public policy research and educational institute based in Harrisburg. For more information, visit www.CommonwealthFoundation.org. Permission is hereby granted to reprint in whole or in part, provided the author and his affiliation are cited.