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Cashing in on dockside gambling

By Daniel Michaels, May 20th 2005
INDIANAPOLIS The first year of dockside gambling has helped Indiana's beleaguered budget, but not all of the state's 10 riverboat casinos have reaped big rewards.

State and local governments took in $142million more during the first 12 months of dockside gambling than the previous dozen months.

Casinos had been required to conduct gambling only during two-hour cruises. Last year, the state ended the cruising rule, allowing customers to come and go as they please.

The move led to more gambling, and the state also restructured the tax on casinos, requiring many of them to fork over a larger share of their profits.

"The state of Indiana has been the single biggest beneficiary," said Mike Smith, executive director of the Casino Association of Indiana, an industry trade group. "From the state's standpoint, the revenue has been tremendous."

But two casinos saw a bigger jump in their tax bill than in their increased revenue from gambling. And, over the long term, half of the 10 boats are not expected to receive enough extra revenue to offset their increase in taxes, Smith said.

Still, even those casinos that suffered a loss tout the convenience for gamblers.

"Customers like it, and we're a customer-focused business," Smith said.

State budget director Marilyn Schultz agreed that the state has benefited, but she said officials had hoped the change would generate even more revenue.

"Not much has happened in the last two years in terms of revenue that has made anybody very happy," she said.

The General Assembly approved dockside gambling and the new tax system as part of a legislative package meant in part to balance the state's budget, which faced a deficit of about $800million.

Lawmakers had resisted the change for years, even as Illinois docked its riverboat casinos, luring customers from the Indiana boats.

But faced with the growing budget crisis, Indiana lawmakers combined dockside gambling with the new tax structure and moved it through the House and Senate during a special session in June 2002. The changes took effect on Aug.1 of that year.

The legislation created a graduated wagering tax that began with a 15percent bracket for a casino's first $25million in annual revenue and topped out at 35percent for revenue of more than $150 million. That replaced a flat 20percent wagering tax.

"There was some real momentum initially," said Barry Morris, general manager of Caesars Indiana, which is in Harrison County and is the riverboat nearest Louisville. But over the entire year, "it has not lived up to our expectations."

The 10 riverboats' total win the amount lost by bettors and collected by the casinos increased 12percent over the previous 12 months. Based in part on the experience in Illinois, predictions had been that dockside gambling could result in a 30percent increase in wagering.

If that level of wagering had occurred, casinos would have paid as much as $300million in additional taxes during the first year. Most of the gambling tax revenue pays for property tax cuts, freeing up money in the state's budget for other government services.

The state's largest casinos faced the biggest tax increases. Caesars, for example, paid $25million more in taxes in the 12 months that ended Aug.1. That's a 40percent increase; its revenue during the same period increased by $31million, or 13 percent.

"We always knew the tax burden was going to be onerous," Morris said.

The biggest loser has been Lawrenceburg's Argosy Casino, near Cincinnati, which handles by far the most wagering in the state and generates the biggest gambling profits. Its gambling revenue increased $37.9million during the first year of dockside, but it paid $42.9million more in taxes.

Still, Argosy general manager Larry Kinser said switching to dockside gambling was the right decision.

"The customer is so much happier. They can go out and get something to eat when they want to and not be virtually trapped," Kinser said. "But from the (financial) standpoint alone, dockside has been a little bit of a disappointment."

Customers at Caesars were clearly happy to see an end to cruises and boarding times.

"It's more practical because people don't have to waste time," said Elpi Tan, an engineer from Jeffersonville. "When you're on the cruise you get stuck, and if you don't have any more money, you get bored."

Tan's wife, Naty, said she often had to rush through her buffet dinner to make the departure for the two-hour cruise.

Helen Barrett of Louisville agreed.

"You couldn't really tell you were going up and down the river anyway," she said.

Ray Cooler of Jeffersonville, a retired construction company owner, said dockside saves him time. He said he spends about $400 during each of his twice-a-week visits to the boat.

"You don't have to be on a certain schedule," he said. "You can come and go as you please."

While the first-year numbers were disappointing to the casinos, of even more concern is that they do not reflect the full impact of the increased tax burden. That's because dockside gambling began on Aug.1, 2002, one month after the beginning of the state's fiscal year, which is the accounting basis for the graduated tax system.

The result is that casinos paid taxes under the new system in which the tax rate increases as the year progresses and annual revenues rise for just 11 months of the new fiscal year. The 12th month of dockside gambling July 2003 was the first month of the new fiscal year, when the tax cycle started anew and rates were again at their lowest.

A full 12 months under the new system, which casinos will deal with this year, will result in even more taxes paid relative to revenue.

Still, the changes have not been a problem for all the casinos.

Belterra Casino in Vevay saw the largest percentage increase in wagering revenue 21percent among the five casinos on the Ohio River, even though it's one of the smaller riverboats.

Belterra paid an additional 19percent in taxes during the first 12 months of dockside gambling, leaving the casino with a net gain of nearly $17million.

"We're pleased with it," Belterra general manager Alain Uboldi said. "Our tax rate remained about the same. It might have gone up but not significantly. It is not a major problem for us."

Uboldi the switch was especially helpful to Belterra because it is in a rural area, between Louisville and Cincinnati. People had shied from making the longer drive to Belterra, instead going to closer casinos, so they wouldn't risk missing the boarding time, he said.

"Before dockside, it was terrible for people," Uboldi said. "There were so many people rushing here and then missing the cruise by a few seconds. They'd have to wait an hour and a half."

Grand Victoria Casino in Rising Sun was the only riverboat to oppose dockside gambling. Most customers must pass Argosy on their way to Grand Victoria, which had staggered its boarding times to catch those who missed cruises at Argosy.

General manager Larry Buck said casino officials believed that customers would have fewer reasons to bypass Argosy.

"We thought we would not do as well as other boats primarily because of our location disadvantage," Buck said. "But we've been pleasantly surprised. People say our place is not as smoky, not as crowded. Our service is nicer."

Still, at 3percent, Grand Victoria's increase in wagering revenue during the past 12 months paled in comparison to Argosy's. But so did its tax increase just 5percent this past year. The bottom line was a $2.2million net gain in revenue over taxes.

That's not surprising. Legislators designed the tax structure to benefit smaller casinos and reap more revenue from the larger ones.

Morris said that's a problem because it discourages the larger casinos, including Caesars, from making investments and marketing to more customers. He said Caesars has stopped promoting bus tours that bring people to the casino and are instead focusing more on higher-end customers who spend more.

Caesars' wagering revenue tops $275million annually. That means more than half of the revenue is taxed at the highest rate of 35percent.

At that rate plus the $3 admissions tax casinos pay for each person who boards it's barely worth trying to increase revenue, Morris said.

"Some folks won't take a pay raise because it puts them in a higher tax bracket," he said. "It's like that."

However, the Casino Association of Indiana has no plans to ask lawmakers to cut the tax rate, Smith said.

"It seems every year one or two of the properties will throw out a revised tax program," he said, "but we'll not be doing that as a group."

Morris said he doubts casinos could ever persuade lawmakers to lower the tax rate, giving less money to the state.

Instead, he hopes that as the economy improves, so will casino revenue.

"I think dockside came at a pretty bad time in the economy," he said. "People got tired of their 401(k)s shrinking. They're really concerned with the drawback of not having job certainty. They're hearing horror stories about the economy. It just hasn't been a good time."

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