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Home / Washington Business - March 2006 / Industry Profile: A Tough Bet |
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Industry Profile: A Tough Bet |
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Written On: March 2006 |
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Written By: by Alexis Nepomuceno |
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A third straight "Blackjack!" was music to Jeff's ears while he was playing 21 at a mini-casino in Auburn. Slightly ahead for the night, he decided to meet up with some buddies down the road at Muckleshoot Casino to have a cigar, dinner and play some on the slot machines.
The hypothetical scenario above is all too real to non-tribal casinos that see their customers migrating to one of Washington's 24 tribal casinos. The tribal facilities offer the freedom to smoke, the ability to play more types of games, vast buffets and entertainment. In fact, one of the last places to smoke a cigar indoors is at the Cabana Lounge at the Muckleshoot Casino.
A total of $1.7 billion in gross gambling revenue was generated in 2005; almost a 300 percent increase since 1997 when legislation passed authorizing Nevada-style card games, such as Blackjack, in commercial cardrooms. Since the law has been in effect, more than 130 house-banked cardroom licenses have been issued and 92 of these non-tribal casinos still operate throughout the state.
Tribal versus Non-tribal
The size and scope of operations is the most noticeable difference between tribal and non-tribal casinos. Non-tribal, or mini-casinos, are limited to 15 tables per establishment and wagers are limited to $100. Meanwhile, tribal casinos operate up to 52 tables with $500 wager limits. These facilities can also offer more games such as Keno, Roulette, Craps and electronic "tribal lottery" machines.
Adding salt to the wound, tribal casinos are not subject to initiatives passed in the state, or social engineering laws passed by the Legislature. When the statewide smoking ban passed last November, the only places remaining that allow for smoking were located on Indian reservations. Customers that previously spent a few hundred dollars having dinner and a cigar at El Gaucho or The Met had no choice but to spend those dollars elsewhere.
The competitive discrepancies have Washington’s non-tribal casinos concerned.
"The challenge that is unique and most problematic to the commercial gaming industry is the disparate standard between tribal and non-tribal facilities," PJ Pockets owner Steve Griffiths said. "Tribal facilities offer higher betting limits, longer hours of operation, additional games and, most importantly, machine gaming.
"Non-tribal facilities are prohibited from offering any of these amenities," Griffiths continued. "Additionally, tribal casinos are not subject to state laws such as the recent smoking ban which has adversely affected many businesses, including commercial casinos."
Griffiths is also president of the Recreational Gaming Association, which is the association that represents the majority of Washington’s commercial gaming establishments. He points out that, "...since the introduction of machine gaming in the late ‘90s, tribal gaming operations have comprised a larger and larger share of the overall gaming market until they now make up over 60 percent of all gaming activities in the state of Washington."
Machine gaming or slots have played a crucial role with increased market share wherever it has been present. According to Washington's Cardroom Industry: A Fragile Recovery, a report issued by the Washington Research Council.
The competitive position of the tribal casinos, however, has improved with the introduction of slot machines. Slots are apt to present a major competitive threat to the enhanced cardrooms. In Nevada and Atlantic City, slot machines dominate the market, showing a high degree of popularity with customers.
Based on that experience, cardroom operators may expect some players to shift their gaming from card games to slots. As well, customers who continue to play blackjack may choose to play in casinos that also offer slots, either as an intermittent diversion or to accompany companions who prefer slots.
"Imagine a grocery store that is not allowed to sell milk, eggs or bread trying to compete with a superstore that carries all that and more," explains RGA Executive Director Dolores Chiechi. "The private industry [non-tribal casinos] is operating Pong in an X-Box 360 world."
Free Ride on Taxes
Congress passed the Indian Gaming Regulatory Act in 1988, which does not allow states to tax tribal gaming revenues. However, states are allowed to negotiate a revenue-sharing agreement with tribes, which mostly include an exclusivity for machine gaming.
"The tribes argue they are 100 percent taxed with their revenues going to pay for tribal programs: health care, housing, infrastructure, etc.," Chiechi said. "However, tribal interests spent $6.1 million to defeat Initiative 892, which would have allowed the private sector to operate electronic scratch ticket machines [slots]."
"These tax free dollars did not go back to the tribes," she continued.
Although Washington does not collect a gambling tax, it does allow local governments to tax gambling receipts, up to 20 percent of gross receipts (before expenses) for non-tribal cardrooms. According to the RGA, the average mini-casino must pay 12 percent of gross income. Other types of gambling activity are taxed as well, such as 10 percent for pull tabs and 5 percent for bingo.
The 20 percent tax on gross receipts for cardrooms is particularly high because these businesses are also subject to business and occupation taxes on gross revenues. Add the highest minimum wage in the United States and the highest unemployment taxes in the country, and it is a wonder how these mini-casinos stay in business at all. In fact, only 47 percent of non-tribal casinos reported making a profit in 2004 business financial statements submitted to the Washington State Gambling Commission.
"Mini-casinos are very much like most small businesses," Griffiths said. "They face the challenges associated with minimum-wage increases, the rising cost of health care, and the burden of excessive taxation."
Governments across Washington collected taxes on $881 million in receipts from licensed gambling establishments in 2005. The biggest contributors to the public trough are cardrooms, $308 million in receipts or 35 percent, and pull tabs, $363 million in receipts or 41 percent. Nothing was contributed by tribal casinos, despite the fact that tribal gaming establishments generated more than $1 billion in revenues in 2005 (61 percent of the overall gaming revenues in Washington). Actually, tribes only pay voluntary community impact fees after they turn a profit.
"Since tribal casinos generate absolutely no taxes for the state of Washington, it makes little sense allowing them to dominate this market," said Griffiths. "If Washington state is going to walk the walk of making this state a truly business-friendly state, then addressing these types of inequities is a good place to start."
Trying to Save an Industry
Although cardroom gross receipts increased 13.5 percent in 2005, the majority of non-tribal casinos in the state continue to lose money, according to the Washington State Gambling Commission. Meanwhile, tribal casino revenue has jumped from $422 million in 2001 to more than $1 billion in 2005. WSGC reports that 2005 gross receipts from total non-tribal gambling (includes lottery, bingo, cardrooms, pull tabs and horse racing) is down more than $20 million from what they were in 2001.
What can be done to even the playing field between tribal and non-tribal gaming establishments?
"Treating all segments of the gaming industry the same: Allowing everyone to compete on a level playing field," Chiechi answers. "A review of the local taxing structure for gambling—many of the cities in which our members operate—receive more in tax revenue than our members make in profit."
Although many state and local lawmakers treat cardrooms as an unwanted stepchild, they still serve a significant role in the state’s economy. According to the Recreational Gaming Association, the non-tribal house-banked cardroom industry provides more than 10,000 living-wage jobs in Washington at 92 locations.
"Washington legislators must create a business environment in which commercial enterprises can not only compete, but have the opportunity to thrive in direct competition with tribal gaming facilities," Griffiths said. "Given the disparities between tribal and non-tribal gaming entities, it will not be long before commercial cardrooms and charitable bingo are just insignificant slivers of the tribally-dominated gaming pie chart."
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