The Illinois casino industry feared it would lose gamblers to the betting emporiums in neighboring Indiana when it started to pass on the costs of a hefty state tax hike that went into effect July 1.
As it turns out, Illinois already was losing ground to the Hoosier state, and the moves to shift tax costs to gamblers, which began in earnest in the past few weeks, likely will accelerate the trend.
For close to a decade, Charles Jackson has been a steady patron of Harrah’s Joliet casino, plunking down chips at the tables and pulling slots two or three times a week.
But on Monday, when the 36-year-old mortgage company owner showed up at Harrah’s, it was, he said, for the last time. On that day, the casino began charging gamblers $5 just to get in.
“Monday was my last day,” Jackson said Wednesday as he and his wife, Jacqueline, were placing bets at a roulette table across the state line in Gary, Ind.
What steams gamblers about an entrance fee, he said, “is the fact that I’m already coming to spend money with you, money I can probably lose, and that I used to get in free and drink for free. And now you want me to pay like it’s an amusement park–that’s not what it is.”
For Jackson and his wife, the decision to motor to Gary’s Majestic Star Casino was a personal one. But the Illinois casino industry fears such choices could be the start of a major migration as the state’s casinos begin hitting customers with more costs and providing fewer extras in order to offset the hefty tax hikes that went into effect July 1.
Illinois casinos have already begun charging for admission and parking, increased prices for food and drinks, shortened operating hours and removed some table games in favor of more slot machines.
The new tax comes as Illinois already has lost ground to Indiana in the past year–a phenomenon that observers attribute to that state’s approval of dockside gambling and of unlimited numbers of gambling positions at casinos. They also note that Indiana has a lower tax structure than Illinois, meaning casinos there face less pressure to cut customers’ perks.
The trend could pick up steam if gamblers like the Jacksons react badly to Illinois casinos’ attempts to shore up their profitability in the face of the state’s higher taxes–the highest in the country on commercial casinos–which casino owners say will make a sizable dent in their profits.
“Basically, we’re losing market share now to neighboring states,” said Tom Swoik, executive director of the Illinois Casino Gaming Association.
Of course, Swoik’s organization of Illinois casino operators would be expected to say that. Its members are chafing at the tax hikes of the past two years, which subject casino receipts to tax rates as high as 70 percent, and at the limits on gaming positions.
But he is backed up by data collected by the Illinois Gaming Board, which show an erosion of market share in key geographic regions during the state’s 2003 fiscal year, which ended June 30.
In the behemoth Chicago-Northwest Indiana region, for instance, the four Chicago-area casinos held 52.4 percent of the $2.32 billion market in the 2003 fiscal year, down from a 55.6 percent share the prior year. Similar shifts showed up in two of the three other state regions with cross-border competition, with the third remaining status quo.
A big boost for Indiana’s 10 casinos came last August, when that state moved to dockside gambling, which meant the gaming boats no longer had to cruise, and customers no longer had to wait to board at a scheduled cruise time. (Illinois made that move in 1999.)
Indiana expects another lift from a move to 24-hour operations, which started earlier this month. Illinois restricts its nine operating casinos to less than 24 hours.
But the biggest differential in the next 12 months will be the tax structures of the two states.
In July 2002, Indiana raised its wagering tax schedule, with graduated rates ranging from 15 percent on the first $25 million in adjusted gross revenue to 35 percent on revenues exceeding $150 million. And there is a $3 per head admission tax.
Last month, Illinois raised its tax structure for the third time since the inception of casino gambling in 1991. The graduated rates range from 15 percent on the first $25 million in adjusted gross revenue to 70 percent on revenues exceeding $250 million, the latter mainly affecting the big Chicago-area operations.
The $3 admission tax was raised for casinos with the highest attendance levels, with some paying $4 per customer and others paying $5.
Illinois Gov. Rod Blagojevich’s office stands behind the hikes.
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“The big picture for us is that the casino industry is and will continue to be very, very profitable,” said spokeswoman Abby Ottenhoff. “And the governor’s goal is to make sure Illinois’ economy is healthy, and a critical part of that is closing the $5 billion deficit and making sure that our budget is balanced . . . and the casino industry is one of many asked to share in closing the deficit.”
Other industry observers see it differently, saying the tax structure will seriously impair profitability, particularly at the biggest casinos.
While most casino companies do not break out profit margins on individual properties, Las Vegas-based Harrah’s Entertainment Inc. did report operating margins for its casinos in Illinois and Indiana combined. That margin was 11.7 percent in the second quarter of this year, compared with 20.6 percent in the year-ago quarter, according to Brian Lund, an equity analyst with Morningstar Inc.
“It fell nearly 45 percent, mostly due to the increase in taxes,” he said.
“It’s down to the point where it’s tough to run a profitable business,” he said, noting that debt service and federal and state income taxes must come out of those operating margins.
Many of the state’s casinos are taking steps to generate additional revenue and cut costs to offset the impact of the taxes.
Highest rollers free
On Monday, Harrah’s Joliet instituted a general admission fee of $5, with graduated reductions, down to zero, for its highest rollers. Argosy Gaming Co. is planning to institute similar charges in the next few weeks at its Empress Casino in Joliet, as is Penn National Gaming Inc. at its Hollywood Casino in Aurora.
All three companies are asking the Illinois Gaming Board to allow them to reduce hours.
Hollywood Casino in Aurora already has made some changes, laying off 350 employees around July 1, charging a $3 parking fee and lessening the amount of complimentary deals it offers certain gamblers.
Argosy, which also runs the Alton Belle in Downstate Alton, has reduced hours at its restaurants and has raised prices of food and beverages at its Illinois casinos.
Fewer table games
In addition, Argosy is planning to continue reducing the number of table games at the two casinos, replacing them with slot machines, which require fewer employees. And it is eliminating more “participation games,” which are games loaned for free by the manufacturer in exchange for a share of the profits.
The games usually are some of the most popular slot machines with progressive jackpots, such as Megabucks and Wheel of Fortune.
In addition to adding the entrance fee, Harrah’s Joliet has eliminated some amenities, such as an inexpensive breakfast buffet. It also has cut the hours of its sports bar and increased some drink prices.
And a hike in beer prices is what sent patron Mike Chenoweth, an out-of-work truck driver from Lansing, over the state line Wednesday afternoon.
“Lately I’m here because of the price of beers and the crazy stuff they’re doing in Illinois,” said Chenoweth, 46, as he played a slot machine at Majestic Star in Gary.
Casino operators are aware of the risk of customers heading to Indiana, but say some of their moves are unavoidable.
“We simply cannot continue to eat enormous tax levies without passing something on to consumers,” said Jim Wise, a spokesman for Argosy Gaming.
The differing tax structures in neighboring states raise a couple of questions long-term.
Will an operator such as Harrah’s, which also runs a casino in East Chicago, Ind., simply steer customers there?
Some industry observers, including Tom Grey, executive director of the National Coalition Against Gambling Expansion, think so.
“They play states off each other. They’ve always done this,” Grey said. But it is a touchy legal issue.
In 1997, the Empress Casino in Joliet, owned at that time by Empress Entertainment Inc., began sharing information with the newly opened Empress Casino in Hammond, Ind., which later was sold to Horseshoe Gaming Holding Co.
The casino in Joliet even gave the casino in Hammond its Illinois customer database, allowing the Hammond casino to court Illinois gamblers. Such a move violated the state’s gaming rules and took away gaming revenues that would go to the state.
The Illinois Gaming Board fined the Empress in Joliet $830,000, in part because of the information sharing.
In Harrah’s case, spokesman Gary Thompson said that even though the parent company keeps the names and information of all 26 million Harrah’s customers nationwide, the company does not plan to begin targeting Illinois gamblers to go to Indiana.
Doing so, he said, could weaken the Joliet casino’s profitability.
“We have a pretty significant investment in Joliet and we want to keep that property as a solid entity helping the company,” Thompson said.
Still, he said, the managers of Harrah’s casinos do have a certain amount of autonomy and leeway in trying to attract customers.
“If I was the general manager of the Indiana casino I would be reaching out to as many Illinois customers as possible,” he said, conceding the changes to the Joliet casino will likely be unpopular with customers.
“People who are regular casino visitors are really put off being charged an admission fee. Some will elect to drive to Indiana.”
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As well, the tax structure could hinder future development in Illinois, said Lund, of Morningstar.
“It will be harder to sell the state’s 10th [unused] license,” he said. “No one’s interested in it now.”
Not so, says Ottenhoff, of the governor’s office. The state believes there will be interest in the license, which was valued conservatively at $350 million, taking into account the new tax structure, she said.