The greatest threat that could derail the American casino
industry’s bright future is not economic, but political. In state after state,
the tax rates that politicians impose on casinos seem to inevitably settle at
roughly 50 percent. (These are, of course, the "effective" tax rates. When a
casino must pay 10 percent or more of its revenue to the racing industry to
supplement purses, technically that is not a tax, but it has the same effect.) The casino industry has struck a devil’s bargain in the states
in which it hopes to expand. Political leadership in these states invariably
views casinos as a new and "free" revenue source. Not surprisingly, casino
legalization tends to accompany economic downturns. The explosion of riverboat
casinos, for example, followed the recession of the early 1990s. Adelson’s Sands
plans to build a $600 million hotel, mall and casino on a vacant ore field at
what was once the Bethlehem Steel Works in Pennsylvania. Politicians are deaf to any arguments that gaming tax rates
should be lowered to more reasonable levels. They choose not to listen to any
notion that lower tax rates would result in more capital investment in their
states, thus creating more jobs, attracting more visitors and ultimately
generating more revenue. The result is that casinos will inevitably expand into
more states, but these high tax rates will discourage casino operators from
building integrated resorts. Instead, the industry is developing what can be
best described as a hub-and-spoke model. The entertainment destinations serve as
the hubs, while the high-tax franchises function as the spokes. Naturally, the
hubs are the markets in which casinos have attained some level of critical mass,
such as Las Vegas, Atlantic City and the Gulf Coast of Mississippi. The industry’s long-term agenda is to continue evolving toward
mainstream entertainment, which would allow it to penetrate even deeper into the
adult demographics. This strategy does not translate into turning nongamblers
into gamblers, but instead aims to develop new attractions to draw in new
customers. This business model suggests that a casino is just one piece of an
entertainment mosaic. The casino, of course, is the centerpiece that brings
customers to the particular locale, while allowing major resort operators to
price even highly upscale restaurants and hotels competitively. Michael Pollock and Fredric Gushin are the managing directors of
Spectrum Gaming Group. Paul Bromberg is chief operating officer
of
Spectrum OSO Asia.
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