Would The Legalization Of VGTs In PA Be A Raw Deal For Casinos?

Posted on April 3, 2017 - Last Updated on April 2, 2017

[toc]The authorization of video gaming terminals (VGTs) at bars, off-track betting parlors, and truck stops has once again emerged as a hot topic in Pennsylvania.

Last year, an omnibus gaming reform bill that included the implementation of VGTs was soundly defeated by a margin of 66-122.

However, the latest iteration of the VGT proposal (HB 1010) has garnered more support. This is primarily due to casino-friendly provisions that would cap VGT payouts at $1,000 and lower the base tax on slot machines from 34 percent to 29 percent, effective July 1, 2018.

Yet, it’s highly questionable if these provisions are substantial enough to offset the revenue losses land-based casinos will inevitably incur if VGTs go live.

VGTs not without their financial merits

Admittedly, as a standalone source of revenue, VGTs can be quite lucrative.

In the similarly-sized state of Illinois, VGTs generated over $1.1 billion in net wagering activity in 2016. They paid over $332 million to state coffers. (Download Illinois stats here).

And that was with just roughly 25,000 VGTs dispersed throughout the state, and not in the population center of Chicago.

HB 1010 would permit a maximum of five VGTs at bar and tavern locations, and 10 at truck stops and OTB locations. Thus, as many as 25,000 – 35,000 terminals could flood the state within a reasonable time frame.

Assuming a tax rate of 34 percent (dropping to 29 percent next year), and an additional four percent reserved for local share community, tax revenue in the vicinity of the projected $300 – $500 million plus another $100 million in licensing fees is not out of the question.

Yet, that hardly means the state would increase its revenue by that figure.

In fiscal year 2015/16, slot machines at land-based casinos generated $2.389 billion dollars, and paid state taxes of $812.1 million.

If the tax rate were five percent lower, the casinos would have collectively paid $119.4 million less to the state.

Factoring this in, VGTs are only worth $180 – $380 million to Pennsylvania, pending land-based slot revenue doesn’t take a hit.

And while casinos would end up making approximately $4,500 more per slot terminal under the new tax, would that really be enough to offset the negative impact VGTs would have on their business?

VGTs may cannibalize land-based PA casino revenue

There are plenty of reasons to believe that the authorization of VGTs in Pennsylvania will have a cannibalistic impact on land-based casino revenue.

Just look at the numbers.

Riverboat casino revenue in Illinois is down substantially since the state legalized VGTs in 2012. Revenue dropped from $1.638 billion in 2012 to $1.413 billion last year. That represents a falloff of 13.7 percent.

Pennsylvania could experience a similar or even greater impact.

The state’s gambling industry is rapidly approaching a saturation point. Slot revenue is taking a tumble, down between 2.44 – 6.17 percent year-over-year from October 2016 through February 2017.

Given this, it’s hard to envision that effectively doubling the amount of terminals in the state will have a more additive than cannibalistic impact on statewide slot revenue.

Even Penn National, which has a financial stake in Illinois’ VGT industry, can’t deny that VGTs detract from land-based slot revenue.

Eric Schippers, senior vice president for public affairs and government relations for Penn National Gaming, has said that the company saw a drop of approximately 8 – 10 percent at its three casino properties in Illinois since the legalization of VGTs.

Due to its vested financial interest in VGTs, Penn National may be able to offset a 10 or even 15 percent dip in land-based slot revenue.

But what about other casinos, particularly those that aren’t located near major population centers? Won’t patrons of these casinos opt for the convenience of VGTs, resulting in even more substantial revenue losses?

For them, a five percent reduction on slot tax will only absorb a small fraction of the blow. Land-based casinos rely on foot traffic to generate not only slot revenue, but revenue on table games, food and beverage, entertainment, and lodging.

Online gambling is a viable alternative for PA

Online gambling may not have the same financial upside as VGTs — although at a projected $364 million at maturity it’s not exactly negligible either. But it’s arguably the safer bet for the land-based casino industry.

More advantageous for operators

For one, every land-based operator will have the opportunity to have a vested interest in online gambling. This is because they will be the only facilities eligible to receive a license.

This lies in stark contrast to VGTs, where most operators wouldn’t reap any profits.

Secondly, online gambling is a different animal than traditional gaming. It attracts a younger, more affluent demographic.

More importantly, online gambling has proven time and time again to have a complementary impact on land-based casino revenue.

So not only is it a reliable and burgeoning stream of revenue on its own. But it’s also a driver of traffic to land-based casinos.

Pennsylvania casinos will arguably be even more effective than neighboring New Jersey at attracting online patrons. The reason is that they’ll be marketing to their unique and focused locals databases.

More advantageous for customers

Finally, online gambling is better for players.

VGTs are often subject to bottom barrel return rates of less than 90 percent. By contrast, online slots often payout 95 percent of more.

Players that lose less outside of the casino will have more expendable money when they decide to visit a land-based venue. It’s simple math.

Given this, if Pennsylvania casinos are forced to advocate for either online gambling or VGTs, the choice is pretty clear.

Robert DellaFave Avatar
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Robert DellaFave

In addition to being an ardent poker player, Robert DellaFave works as a contributor to and editor of several online publications dedicated to regulated US online gambling, including the legal PA online casino and poker markets. Based in New Jersey, Robert also works as a game developer.

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