[toc]A new report from a major credit agency has few high hopes about Pennsylvania’s new gambling expansion law. The agency downgraded the state even though our projections say Pennsylvania will generate $120 million in upfront licensing fees as well as $275 million annually.
Moody’s dislikes high tax rate, satellite casinos
Philly.com initially reported on the findings from credit agency Moody’s earlier this week.
“While the state finances may benefit from this bill, it is less clear to what extent existing operators in the state will actually benefit,” the report stated.
The Moody’s findings focus on two areas that appear to them to be problematic. The first is the 54 percent tax rate on online slot games revenue.
Oppresively high tax rate makes turning a profit difficult
Back in the summer, the House and Senate each proposed gambling expansion bills with vastly different taxation rates. At the time, we discussed the problems inherent in a hihg rate like 54 percent.
The primary issue is that the rate makes breaking even exceedingly more difficult for these casino companies. These are the highest casino taxation rates in the country. As such, Pennsylvania land-based casinos bring in one of the highest casino tax revenues in the country. That is not because the state is more bustling than Vegas though. It is because the Keystone State takes such an exceptionally large cut.
The second problem with the tax rate is that it is hardly competitive with the 16 percent rate offered in New Jersey. While these numbers are the rates the casinos pay, it does affect the players at the end of the day.
If one casino pays only 16 percent in taxes while another pays 54 percent, the former property is going to have a signifciantly larger marketing and operational budget to draw in customers. With Pennsylvania’s proximity to New Jersey, Moody’s and others believe this makes the market less enticing to the local population.
Satellite casinos and VGTs could cannibalize existing brick and mortars
Those tracking the New Jersey online casino market know the idea that the online offering cannibalizes the brick and mortar casino is laregly bunk.
However, Moody’s cause for concern when it comes to cannibalization has a bit more validity. Namely, the agency is concerned with the expansion of satellite casinos and video gaming terminals (VGTs) at truck stops.
The report points out that the slot machine supply in the Keystone State will rise anywhere from 13 to 31 percent as a result of the expansion. For table games, the increase should amount to around 16 percent.
In Illinois, where VGTs are also legal, reports indicate they do have a small negative impact on the revenue of the state’s casinos.
There is also the matter of the Live! Hotel and Casino planned for the Stadium District of Philadelphia. With a 13th casino in a major metropolis, some of the smaller brick and mortars will likely struggle to keep up.
Finally, Moody’s observes that the financial rebound of Atlantic City factored into its conclusions. After several years of decline, the New Jersey beach town is on the rise, with at least one more casino, Hard Rock, scheduled to open next year. With the competitor city flourishing, the agency expects some revenue decline for PA casinos.
Is Moody’s right to be worried?
Given Pennsylvania’s recent fiscal history, it is neither unexpected nor unprecedented for a credit agency to downgrade the state’s credit score.
Really though, until the state sees which companies seek out online gaming licenses and where the satellite casinos will go, it is tough to truly make very accurate guesses about the market.
We certainly think brick and mortars, looking at New Jersey, realize getting into the online gambling arena is a no-brainer. However, even our numbers assume 100 percent participation, which we do not know is the case just yet.