Taxes and Profits from Slots

The Baltimore Sun reports on the share of the State's profits from slots: 70%. One analyst says the profit margin will be so tight that you can almost already hear the whining of gambling interests. On the other hand, another says this is among the most public-friendly gambling proposals to emerge in awhile:

Maryland slot machine operators will pay one of the nation's highest casino tax rates - effectively 70 percent - if voters approve Gov. Martin O'Malley's plan to legalize the devices, and some industry analysts say that would mean low-end facilities catering mostly to the local population.

"It's going to limit how much you can give away to customers because the margin is so thin, and it will limit how much you can invest in the enterprise," said Lawrence Klatzkin, a gambling industry analyst and managing director of Jefferies Equity Research.

The margin is so tight, Klatzkin said, that Maryland would end up with "a lower-cost product with much more limited offerings" than slots casinos in surrounding states provide to their patrons.

"It doesn't mean that they won't make money," Klatzkin said, "but some of the richer, higher-quality customers will likely go to Dover, Del., or to West Virginia for more comps and giveaways and much better amenities."

Other analysts said the high tax rate is appropriate given how lucrative a slots license can be.

"This is by far the most innovative and taxpayer-friendly proposal set forth in the 50 states," said Jeffery C. Hooke, a Chevy Chase investment banker who studies the gambling industry nationally.

Hooke, who has criticized previous slots proposals in Maryland as a giveaway to racetrack owners, said the O'Malley administration "did a good job of addressing the enrichment problems that have bedeviled other states."

However, it seems like the operators will make plenty of profits and we will also prop up the dying horse-racing industry:

More than half of that revenue, $767 million, would go into an education trust fund. Operators of the slots casinos would get $451 million, and the horseracing industry would get $128 million a year to increase purses, provide money to breeders and refurbish tracks. . . .

The two tracks' getting slots licenses would benefit Baltimore racetrack operator Joseph A. DeFrancis and Montgomery County contractor William Rickman Jr., who owns the Ocean Downs racetrack and a slots casino in Delaware.

DeFrancis and minority owners of the Maryland Jockey Club sold their stake in Laurel Park and Pimlico Race Course and other racing enterprises to Toronto-based Magna Entertainment Corp. in September. They stand to collect 65 percent of the net profits from slots, after expenses, during the first five years, however, then 50 percent for the next five years and 40 percent in the next decade, according to Securities and Exchange Commission filings.

Surely, I am not the only one who wonders why on earth we are giving $451 million to two already wealthy people (and another $128 million to the horse-racing industry for that matter). Why can't the State operate the machines? Then we could offer a more desirable gambling product (does such an animal exist?) and keep more of the profits. The other advantage might be limiting the size a monster lobby for ever-greater expansion of existing operations.

Of course, like many, I suspect that we should probably not travel down the road in the first place. I analyzed the pros and cons of slots in an earlier post.