What to look for in a casino deal


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Governor Kasich is set to unveil his “deal” with casinos today, and the results will be incorporated into the budget. And given my past involvement with video lottery terminals and casino legislation, I can’t help covering this debate.

If you recall, the reason this negotiation is taking place is because the Governor concluded the state got a bad deal with its $50 million-per casino licensing fees and 33% tax rate. This “bad deal” was spelled out to voters, who then approved it, so apparently Kasich is not particularly impressed with the judgment of Ohioans. But he should know better than anyone that, in this economy, Ohioans will vote for anything if it promises jobs. This bad deal is also enshrined in Ohio’s constitution, so the only way to change it is to ask Ohio voters to again amend the constitution.

The constitution being a mere technicality to Kasich, he charged ahead into negotiations. His two main leverage points were:

  • threatening Video Lottery Terminals at racetracks, and
  • applying the state’s Commercial Activity Tax to gross, rather than net wagering.

Unfortunately, neither of these are really leverage.

The Tax Department and Legislative Services Commission insist that, regardless of any additional language in the budget, the CAT already applies to gross casino wagering. In turn, the casinos have said they will sue to show otherwise. So, unless the Governor announces an agreement today that the casinos will not sue and will go along with paying the CAT on gross wagering, this one will be a loss on the part of Kasich who forced the House Speaker to reverse himself and include a CAT amendment in the state budget.

With VLTs (we’ve discussed this before), the state stands to rake in $650+ million per year in revenue from racetrack slots. So if Kasich is willing to give that up in negotiations with casinos, he better get something approximately that valuable in return. We think it’s extremely unlikely that he will. So this was a bogus negotiating tactic to throw in the mix.

Rumors are already leaking out about the deal. The casinos will pay a newly-invented annual fee (which we will bet $100 is nowhere near what VLTs will bring in), the state will go forward with VLTs, and the CAT will be applied to net and not gross wagering.

If this is true, it means the governor was bluffing. Fortunately, for the state of Ohio, its tax revenue and jobs prospects, the casinos were nice and didn’t raise him all in. In the end, he folded his cards. Time will tell – we expect an announcement in Cleveland at noon.

One important note: VLT revenue will be substantial (in 2009, a 14-month estimate was $933 million). And, unlike casino taxes, taxes on lottery slots go to the state, for the benefit of education (that’s also in the constitution!), so if a deal today includes racetrack slots, we expect and frankly demand to see a corresponding increase in education funding in the final version of the budget. This is something everyone should be watching for.

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