Slots casinos would pay 70% tax

The Baltimore Sun

Maryland slot machine operators will pay one of the nation's highest casino tax rates - effectively 70 percent - if voters approve Gov. Martin O'Malley's plan to legalize the devices, and some industry analysts say that would mean low-end facilities catering mostly to the local population.

"It's going to limit how much you can give away to customers because the margin is so thin, and it will limit how much you can invest in the enterprise," said Lawrence Klatzkin, a gambling industry analyst and managing director of Jefferies Equity Research.

The margin is so tight, Klatzkin said, that Maryland would end up with "a lower-cost product with much more limited offerings" than slots casinos in surrounding states provide to their patrons.

"It doesn't mean that they won't make money," Klatzkin said, "but some of the richer, higher-quality customers will likely go to Dover, Del., or to West Virginia for more comps and giveaways and much better amenities."

Other analysts said the high tax rate is appropriate given how lucrative a slots license can be.

"This is by far the most innovative and taxpayer-friendly proposal set forth in the 50 states," said Jeffery C. Hooke, a Chevy Chase investment banker who studies the gambling industry nationally.

Hooke, who has criticized previous slots proposals in Maryland as a giveaway to racetrack owners, said the O'Malley administration "did a good job of addressing the enrichment problems that have bedeviled other states."

Although the administration defined sites so specifically that it is likely to limit competition for licenses, Hooke said, those awarded licenses won't be getting a huge windfall.

"They're not going to be minting money," Hooke said.

Legislators, who are meeting in special session, have been asked by O'Malley to put the slots issue on the November 2008 ballot as a constitutional amendment. Bids for licenses would be due the following February.

O'Malley's slots plan calls for the state to buy or lease machines through Maryland's lottery, which would hook them to a central computer monitoring system similar to Delaware's. The plan identifies five sites for slots licenses to be awarded through competitive bidding, with a limit of 15,000 machines.

The plan calls for slots operators to keep 30 percent of "gross gaming revenue," the money left after winning players are paid. From that, they have to pay to build, maintain, staff and operate the slots facility.

Hooke estimated that slots would yield $1.5 billion annually in revenue.

More than half of that revenue, $767 million, would go into an education trust fund. Operators of the slots casinos would get $451 million, and the horseracing industry would get $128 million a year to increase purses, provide money to breeders and refurbish tracks.

William R. Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno, said the tax rate proposed for Maryland is similar to that in New York and Canada.

"The tax rate can work if there is a limit on the number of machines permitted," because limited supply drives up play on the machines and increases revenue for a facility, Eadington said.

Because O'Malley's proposal identifies what appear to be some specific sites, it is unlikely to lead to competitive bids for slots licenses, Eadington said. That would mean less potential revenue to the state.

"It's written so only [certain people] are eligible to bid," Eadington said. "I do not advise it as a useful form of public policy."

O'Malley spokesman Rick Abbruzzese said the proposal "does allow for more competition than [having] slots just at the tracks would have allowed for."

Sites that apparently have been targeted include two racetracks - Laurel Park in Anne Arundel County, where 4,250 machines would go, and Ocean Downs in Worcester County, which would get 3,250.

The legislation all but identifies Ocean Downs as a site for a slots license but is more vague when it comes to Laurel Park, saying only that the application is for a site in "Anne Arundel County, within 2 miles of MD Route 295."

The two tracks' getting slots licenses would benefit Baltimore racetrack operator Joseph A. DeFrancis and Montgomery County contractor William Rickman Jr., who owns the Ocean Downs racetrack and a slots casino in Delaware.

DeFrancis and minority owners of the Maryland Jockey Club sold their stake in Laurel Park and Pimlico Race Course and other racing enterprises to Toronto-based Magna Entertainment Corp. in September. They stand to collect 65 percent of the net profits from slots, after expenses, during the first five years, however, then 50 percent for the next five years and 40 percent in the next decade, according to Securities and Exchange Commission filings.

Hooke estimated DeFrancis' initial share at $4.7 million a year, based on a pretax annual profit of $40 million for Laurel Park. Other former Jockey Club shareholders stand to get $21.3 million.

A consultant for the Jockey Club, which operates the track, said Hooke's figure is far too high because operating and other expenses would consume most of the 30 percent share of slots money that goes to operators. "I think, at best, it will be a break-even deal," said Paul Girvan of the Innovation Group.

In addition to the targeted track sites, a narrowly defined Baltimore tract near Interstate 95 and Route 295 would get 3,500 slot machines. A Cecil County location within two miles of I-95 would get 2,500 machines, and 1,500 machines would go to a facility on state property near Rocky Gap Lodge and Golf Resort in Allegany County.

O'Malley's proposal would require operators, in building facilities, to spend $15 million for each 500 machines they get and to pay an upfront licensing fee of $10 million.

Charles E. Vickery, a racing and gambling industry consultant based in Oxford, Pa., said Maryland would have one of the highest gambling tax rates in the country if O'Malley's plan were approved. Only at the two largest racetracks in New York do slots operators get to keep less than 30 percent of gaming revenues.

The 30 percent share of slots revenues that operators would keep in Maryland is in line with what was proposed in previous slots bills.

The effective tax rate of 70 percent on gross gambling revenues in Maryland compares with 36.5 percent in Delaware, 55 percent in West Virginia and 50 percent in Pennsylvania, according to data compiled by Klatzkin's firm. Operators in West Virginia and Pennsylvania are required to buy or lease slot machines, however, an expense that Maryland operators would not incur.

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