Racinos may push gambling’s limits

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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