Racinos may push gambling's limits

May 14, 2007

During their first half-decade in operation, the state's casino slots machines grew their total sales to $22 billion, according to Indiana Gaming Commission records. But in the last five years, slot sales grew just 18 percent, reaching $25.9 billion in 2006. That's what business textbooks call a maturing market.

In their rush to find property tax relief for homeowners, legislators last month approved 2,000 slot machines at each of Indiana's horse racing tracks, Hoosier Park in Anderson and Indiana Downs in Shelbyville. It was a major windfall for the tracks, which now can be converted into "racinos".

The state's horse industry also hit the jackpot. It will rake in a 15-percent cut of the racinos' annual adjusted gross revenue from slots.

"It makes them basically casinos that will do a little racing on the side," joked Purdue University economist Larry DeBoer.

The rest of the state's gambling industry already is reacting. On May 8, Las Vegas-based Pinnacle Entertainment Inc., which operates the Belterra Casino in southeastern Indiana, called off a $45 million, 250-room expansion, citing the threat of racino competition.

The management of Hoosier Park, on the other hand, is beside itself over that track's renewed prospects. Hoosier Park President Rick Moore said his team is meeting with architects, engineers and construction firms to brainstorm about where to put their 2,000 slot machines. Moore said no plans have been set, because nobody wanted to presume the enabling legislation would be approved.

"For the first couple of days after it passed, I was walking around in a daze thinking, 'Golly, did this really happen?'" Moore said. "Now it's all about, 'How do we make this all work?'"

That's a big question--and not just for the racinos. After more than a decade in business, gambling is now an established industry in Indiana. And there are signs that legislators' favorite cash cow is running dry.

"Your [statewide gambling sales and tax] totals might go up some [from the racinos], but it's certainly not going to go up incrementally the way it did when we first started," said retired attorney Alan Klineman, who served as the first chairman of Indiana's Gaming Commission, from 1993 to 1998. "The people from central Indiana who want to game [currently] have to go to the Ohio River, Lake Michigan or French Lick. [I'm] somewhat concerned over whether [racinos] will cut into the revenue the state derives from the existing casinos."

Last year, Indiana milked the gambling industry for $803 million in taxes. That's nearly eight times more than the $104 million in taxes it generated a decade ago in its first year, but only 47 percent more than the $545 million it drew five years ago.

In exchange for the right to become racinos, the tracks each must pay license fees of $250 million, all of which is earmarked for property tax rebates to homeowners. State Sen. Luke Kenley, R-Noblesville, who oversaw much of the racino debate as chairman of the Senate's Tax and Fiscal Policy Committee, said he's still not certain Indiana didn't leave money on the table.

A public auction might have generated more money upfront, Kenley said. But both tracks already have ownership and management in place. Legislators were reluctant to open the potential for forced marriages between tracks and separate slots operators.

"It got to be a knotty problem," Kenley said.

Over time, the racinos will generate far more for the state than the $500 million in upfront license fees. The question is, how much? The Legislative Services Agency estimates they'll produce $90 million to $115 million in annual new tax revenue. But the agency includes this major qualifier: The totals are not adjusted to account for the negative impact the new slots likely will have on tax collections from the state's riverboat casinos.

"These potential competitive impacts on the fiscal outcomes are indeterminable, but could be significant," according to LSA.

Indiana originally allowed riverboat casinos only on its borders on the theory that most of their sales would be generated by tourists. Nobody knows for certain how many of their visitors travel from the Indianapolis region. But the tracks are confident that some of those people will prefer the shorter commute to Hoosier Park or Indiana Downs.

Legislators, on the other hand, are most concerned with the state's total gambling take. They're banking on the idea that close geographic proximity will persuade people who previously hadn't gambled at the riverboats to do so at the racinos--thus generating new taxes.

"We just don't know, and that is the big question, what is the limit of this market," DeBoer said. "At what point do we run out of people who are saying to themselves, 'Gee, I've never gambled before. But now it's so convenient, let's give it a try.'?"

The introduction of slots at Indiana's horse tracks also may soon persuade other nearby states to up their ante. Klineman noted that, a decade ago, Indiana faced little direct gambling competition. But now Michigan has Indian casinos, including several in Detroit. And Kentucky, which had long resisted turning the historic Churchill Downs track in Louisville into a racino, will face increased pressure.

"I can't believe that now that we have gaming at our horse tracks, Kentucky won't follow," Klineman said. "Competition will increase as everybody comes on board, that's for sure."

It won't happen overnight, but Moore envisions building Anderson into a true tourism hub, with diverse attractions and restaurants. Horse racing and slots, he said, are just the foundation.

That's exactly what the state's 11 other casinos have been trying to do, too.

"I want to see Anderson become a destination center," he said. "I want to see a hotel and convention center here where people want to go and spend the weekend for racing, to be entertained. How long it's going to take, how many years, I can't tell."

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