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Projections: Casino industry, not Illinois, wins if gambling grows

Published: Friday, Dec. 28, 2012 8:42 a.m. CDT

(MCT) — In a state as broke as Illinois, it wouldn't be a stretch to assume that the push for aggressive gambling expansion — including a lavish Chicago casino — is all about the money.

But plans for five casinos and slots at six horse tracks would do more to maximize casino profits and increase tax revenue for local governments than to shore up the state's shaky bottom line, according to new fiscal projections provided to the Tribune.

The sweeping casino package vetoed by Gov. Pat Quinn was not destined to generate a major annual increase in gambling revenue for Illinois, according to estimates by the nonpartisan Commission on Government Forecasting and Accountability.

The projections showed the state's return would be small compared with casino revenue increases because the plan created a smorgasbord of tax cuts and tax breaks for the gambling houses. The legislation also fostered an environment in which horse tracks and new casinos would cannibalize each others' profits and those of 10 existing casinos, according to the commission's estimates.

Lawmakers failed to override Quinn's veto this past fall, but the issue could be ripe for deal-making during the lame-duck session in early January when outgoing lawmakers can cast votes without the pressure of facing re-election.

It's a safe bet that if a new agreement includes the major components of the previous plan, casinos would see a much larger bump in revenue than the state, according to commission projections. Gross revenues made by casinos and the taxes they pay to local governments would more than double, but the state's total take would increase by only 19 percent, the analysis said.

"That's not much of an increase, especially when you're doubling the amount of casinos' gross receipts," said Eric Noggle, a senior analyst with the forecast commission, a support agency that provides financial projections to the Legislature.

"Gamblers in the state will lose double the amount they were losing before, yet the state is only going to be gaining a relatively small (annual) revenue increase," Noggle said.

Such estimates have drawn the ire of gambling expansion backers who insist the revenue will be much greater. They also argue that the projections ignore jobs that would be saved and created at horse tracks and economic development that would be spurred at new casinos and hotels.

"I think their numbers are flat wrong," said Rep. Lou Lang, D-Skokie, author of two previous casino expansion bills that passed the Legislature. "In the history of Illinois gaming, every projection made by every government body has always been low."

A Christmas tree deal

Passing casino expansion in Illinois requires a delicate dance in Springfield.

Lawmakers who back casinos in Chicago, in the suburbs or downstate must be assuaged so enough votes can be tallied, Lang said. So must those who want horse track slots to shore up that industry and others who favor lower taxes and more games for existing casinos to help them compete.

As a result, the latest gambling expansion pitch included slots at four suburban Chicago horse tracks as well as tracks at the Illinois State Fairgrounds in Springfield and in Collinsville, near St. Louis.

New casinos were to be added in Chicago, Danville, Rockford, north suburban Park City and a south suburban Cook County location to be determined by the state Gaming Board.

The plan cut casino taxes, reducing all rates and lowering the maximum rate to 40 percent from 50 percent.

Existing casinos could increase their gaming positions — the number of slot machines and seats at table games — to 1,600 from 1,200.

All these ornaments were considered necessary to pass a so-called Christmas tree bill, and the analysis showed they came with a price — hits to potential revenue for the state.

"This tree fell over," said Tom Swoik, executive director of the Illinois Casino Gaming Association, which represents the state's 10 casinos and is opposed to the expansion plan. "At some point, you add so much it doesn't make sense."

In October, the commission released a study predicting the gambling expansion plan would increase state and local tax revenues from $200 million to $300 million in 2017 — when all the new casinos would have been running for a few years.

However, the analysis did not differentiate between state and local revenue.

In response to questions from the Tribune, the commission conducted a more detailed analysis and concluded that with the new gambling venues, local tax revenues would grow annually by $110 million, or by 102 percent. That income is expected to double because it's tied to a $1 tax paid at the door by each casino patron, money that would increase because of the expansion in gambling locations.

The state's annual revenue would increase by $104 million, or just 19 percent, according to the estimate.

At the same time, gross revenue for casinos would more than double to $3.76 billion from $1.8 billion per year thanks to the dramatic expansion of gambling locations, to 21 from 10, according to the same forecast.

The annual revenue projections don't include about $1 billion in one-time money the state would receive in various payments from casinos required under the proposal.

Nor do the forecasts factor in possible losses in casino revenue as a result of the state's legalization of video poker machines in bars, taverns and restaurants. The first games went live in October, and some projections call for the state to have as many as 60,000 games.

Bill Thompson, a University of Nevada at Las Vegas professor emeritus who specializes in gambling studies, called the commission's revenue projections reasonable.

The estimates, he said, show lawmakers have been more focused on catering to special interests — horse track owners, casinos and specific communities — than developing a sound, statewide gambling strategy.

"This approach is like taking a mud ball, throwing it at the wall and seeing what sticks. It doesn't sound like it's thought out," said Thompson, who has written six books on casinos.

'It will be huge'

While the gross revenue casinos bring in statewide would double, it would be distributed among twice as many locations. As a result, the projections assume a reduction of casino taxes paid at the highest rates by individual locations, driving down the state's total take.

"When you take the number of gamblers — even if there are more of them — and spread them around ... you're not going to get as much revenue because of the tax structure," Noggle said. "Then when you lower the tax rates on top of that, it's a double whammy hit on the state's revenues."

Lawmakers passed additional tax breaks for casinos that would reduce state revenue.

The last package the Legislature passed included up to a 5 percent tax break for existing casinos if future profits are less than they were in 2012.

The commission's estimates project almost all 10 existing casinos would qualify for the tax cut, costing the state $67 million in potential revenue per year.

In disputing these projections, Lang said the estimates on the state's annual revenue are far too conservative because they don't assume enough in added business from gamblers who now frequent Indiana casinos. He said they also underestimate the effect of a Chicago gambling palace that would be granted a robust 4,000 gaming positions.

"I would be surprised if this generates less than $200 million per year in new money for the state, but it would not surprise me if it were $1 billion," Lang said.

"Some people think my $1 billion number is specious, but nobody knows how valuable a city of Chicago casino could be," Lang said. "I think it will be huge, beyond anybody's guesses."

Cannibalization risks

In his gambling veto, Quinn stressed the need for better oversight of a Chicago casino, called for banning political contributions from casino owners and voiced other ethical concerns.

Through a spokeswoman, Quinn declined to comment on the relatively small state revenue increases that gambling expansion is forecast to provide, citing ongoing negotiations on gambling and pension reform.

Swoik, the casino association director, said his group doesn't oppose all expansion and would support casinos in Chicago, Rockford, Danville and Lake County.

The state could maximize its tax revenue by opening casinos in those new markets, Swoik said, and by cutting casino taxes to encourage owners to invest more in improving and marketing their properties.

But allowing additional casinos or horse track slots, Swoik said, would create too much cannibalization — an effect already seen since Rivers Casino opened last year in Des Plaines.

Since then, revenue at Elgin's Grand Victoria Casino is down 20 percent, according to Gaming Board figures.

Joliet Mayor Tom Giarrante is concerned about the possibility of a south suburban casino. He estimates his city would lose 20 percent of its casino tax money each year — about $5 million — under state expansion.

But horse track supporters have argued that allowing slot machines at their facilities would create jobs and stabilize existing ones in a struggling industry. Track owners and union leaders eager for new construction jobs created the Illinois Revenue and Jobs Alliance to lobby for gambling legislation.

The group commissioned a study that estimated expansion would generate about $3.3 billion in gross revenue for casinos, add $195 million in annual state revenue and create 20,451 jobs.

"This bill is just as much about jobs as it is about revenue," said Lang, offering his own estimate that casino expansion would save or create 90,000 jobs.

Lang counts 30,000 jobs currently supported by horse racing and 60,000 jobs he said would be created at casinos and ancillary businesses such as hotels.

Thompson, the gambling expert, said scattered casinos such as those in Illinois do little to generate economic development beyond the site of the riverboat. Most customers drive in, gamble and leave, he said.

In 1995, Thompson conducted a study in Joliet that found 50 percent of the businesses did not see revenue growth after the city's two riverboats opened while the other half lost revenue.

"Those numbers are bogus. It's pie in the sky," he said of Lang's estimates.

"There is a lot of blowing into the wind that doesn't jibe with reality from these lawmakers," Thompson said. "All they are thinking about is getting more revenue for my city, my industry, and in this case, it's not even getting much more for the state."

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