A slot machine at Resorts World Catskills in upstate New York and a slot machine at Resorts World New York City appear identical to players. But the one in the Catskills hands over 37% of its revenue in taxes while the one in the city pays 66%. And a different machine at that New York City venue pays yet another tax rate, 60%, because it’s assigned to neighboring Nassau County’s off-track betting corporation.
Welcome to the gaming industry in New York, where market forces run a distant second to politics, limiting the payoff to both casino companies and state coffers. And while boosting local economies is the argument that advocates always make for legalizing casino gambling, the rules in New York do their best to blunt the industry’s economic impact. While politics is inevitably a factor in regulated industries, insiders agree that New York stands out for hindering the success of its casinos.
The results are clear. Resorts World Catskills and the three other upstate casinos that began opening in December 2016 expected to produce $903.5 million in gross gaming revenue during 2019. Instead, they tallied only $610.5 million. The casinos would have needed a nearly 50% jump in revenue to meet their 2019 estimate. Resorts World Catskills, the only New York casino that makes public its financial results, was losing up to $10 million every month, even before the pandemic, and had to be bailed out by its owner. Collectively, the four casinos paid 36.4%, or $108 million, less than expected in taxes. It’s easy to find the main culprit for this mess: The casino locations were dictated by politics, not common sense.
Now, as state officials face decisions that carry monumental economic, fiscal and social implications—whether to allow mobile sports betting and issue licenses for full-fledged casinos downstate—there’s a growing awareness of how Albany has blown much of the benefit of opening up the state to gaming. A long-awaited study by Spectrum Gaming, a Pennsylvania consultancy with a portfolio of projects worldwide, maps out a more market-driven road for New York’s betting businesses, though it’s unclear whether the state’s leadership will choose that route.
How Not To Regulate an Industry
More than a year in the making and expanded to 500 pages to cover the effects of COVID-19, the report describes a gaming landscape littered with excessive regulations and political considerations that trump economic reality. “The paradox that is gaming in New York begins with the unassailable fact that gaming is largely a creature of the political process, wholly dependent on decisions that are rarely put through an economic calculus,” says the report’s opening paragraph. “Often, the decisions have been more dependent on what is politically achievable or advantageous.”
Casino gambling came to New York in 1993 when the Oneida Indian Nation opened Turning Stone Resort Casino near the state’s geographic center. In 2004 the state added video lottery terminals, or VLTs—electronic gaming machines linked to a central random-number generator—and shoehorned them under the legal authority for lotteries and bingo. They were allowed at horse tracks to rescue the racing industry but mostly to funnel millions in tax proceeds to Albany after the fallout from the 9/11 attack had hit the budget. Then a 2013 constitutional amendment authorized full-service, for-profit casinos to help inject some life into depressed areas upstate and to produce still more money for the state. Different rules driven by different objectives regulate each set of gaming facilities, and they each pay different tax rates.
What all the gaming venues have in common is steep tax rates. And taxes are paid on revenue, not profits, so even money-losing casinos face big tax bills. It’s Business 101: The higher the taxes, the lower the return on investment and the lower the investment in facilities and amenities—and in attracting players. This shortchanges the state as well as the casino owners.
“New York should consider itself a stakeholder in gaming operations rather than seeing it as an adversarial relationship,” says Matt Landry, managing director at Strategic Market Advisors. “With no investment or expense, the majority of the proceeds go to the state. At the same time, operators languish under tax schemes that are clearly past an inflection point and do not appear to benefit either the state or operators.”
The state’s gaming-tax policy functions as a prism, creating multiple streams of market distortion. Tax rates—including aid to the racing industry and local communities, and administrative fees—range from 54% to 70.5% for VLT facilities and average 30.3% for casinos, well above New Jersey’s 12%. Native American casinos, now operated by four Indian nations in more than a dozen locations, pay the state 25% of gaming-machine revenue and nothing on other activities.
Indeed, the hypercompetitive Northeastern market magnifies New York’s gaming-policy failures. The rivals range from megaresorts Foxwoods Resort Casino and Mohegan Sun in Connecticut and holiday-and-convention destination Atlantic City, N.J., to tribal slot-machine parlors in shopping centers. “There were 15 casinos in the Northeast 15 years ago; there are 60 now,” says casino consultant Jay Sarno.
Lower-taxed casinos have the financial flexibility to upgrade their properties and spend more on promotion, but even states with higher tax rates than New York’s have a marketing edge. Pennsylvania’s casinos pay 54% in taxes on gaming-machine revenue and 16% on table-game revenue, compared with New York’s casino rates of 37% to 45% on machines and 10% for table games. But Pennsylvania’s casinos pay no tax on the value of free-play promotions for slot machines, the modern version of giving customers rolls of quarters. In New York, the tax-free allowance for free play is capped at 15% of the gross gaming revenue for VLT operators and 19% for casinos.
“The cap on tax-free free play could be removed to increase competitiveness,” says Sarno, explaining that a slot machine customer with a track record of losing $100 a visit can expect a $20 free play offer from New York casinos but a $50 offer from Pennsylvania. “If the distance is fairly equal for patrons to travel, the higher offer will win.”
When VLTs debuted, New York taxed all free play. Sarno helped VLT operators convince the state that a tax-free allowance would boost competitiveness, increasing revenue for the casinos and the state. But whether you view the free-play allowance as a tool to even the regional playing field or a government subsidy that encourages more gambling, it was the result of lobbying rather than a market-based decision.
Betting on Rent-seeking
Blame lobbying also, rather than a consistent, defensible state policy, for the varying tax rates for VLT operators. Favored operators wrangle concessions to avoid some state-imposed costs. The system breeds uncertainty, creating an environment of rent-seeking rather than entrepreneurship and innovation. It encourages operators to spend time and resources pleading for regulatory changes rather than improving their product.
Even Spectrum’s report, in evaluating proposals for equalizing the tax rates among New York’s operators as well as alternative tax schemes, encourages the rent-seeking culture. It concluded that “the most effective means of ensuring that future tax policy changes are based on economic principles is to suggest that operators can petition the state for relief.” It’s a nod to the politicians that depend on campaign contributions and to the lobbyists and consultants, such as Spectrum, that profit from this environment. That points to only more lobbying and uncertainty.
New York’s biggest gaming market distortion isn’t taxes, though. Even the name of the 2013 law that authorized casinos, the Upstate New York Gaming and Economic Development Act, indicates that catering to the most customers was not a priority. It was aimed at keeping New York gamblers from playing in neighboring states and, of course, generating more tax revenue. Another goal was to create badly needed jobs upstate, and after Gov. Andrew Cuomo, under pressure from the environmental lobby, ordered a statewide ban on fracking, critics said the casino law was merely a consolation prize for struggling parts of the state losing out on a lucrative industry that was booming next door in Pennsylvania.
The law created three zones outside the tribal gaming areas, each entitled to a casino license, and authorized a fourth license for any zone. It protects the casinos from competition for seven years before allowing casinos in the New York City area. In addition to Resorts World Catskills in the heart of the old Borscht Belt, there are del Lago Resort & Casino in central New York’s Finger Lakes region, Tioga Downs Casino south of Ithaca near the Pennsylvania border and Rivers Casino & Resort in Schenectady near Albany.
In many ways, the law embodies the New York gaming paradox that Spectrum highlights. New York City’s per capita income is 36% higher than the highest-income region upstate, and downstate produces 83% of the state’s entire VLT revenue. So barring casinos from the state’s most populous and prosperous areas, and scattering them upstate, excludes the best locations for destination resorts that could compete regionally and deliver the most revenue to operators and the state treasury.
The Catskills’ ‘Dirty Dancing’ Heyday
As if the far-flung zones weren’t bad enough, choosing the casino sites within the zones was also politically motivated. “For 50 years the Catskills have sought gaming as a way to grow our tourism-based economy,” declared state Sen. John Bonacic, who represented the region, at the bill signing in 2013. The Catskill Mountains—memorialized in the 1987 film “Dirty Dancing,” set in 1963—provided a summer respite from New York City from the 1920s into the 1960s, before air-conditioning and air travel gutted the region’s appeal. Casinos were touted as a panacea back when New Yorkers’ closest gaming options were Las Vegas and the Caribbean.
Appointees to the state’s Gaming Facility Location Board undoubtedly understood that history. The Catskill-Hudson zone includes prosperous Orange County, which attracted multiple casino proposals because it is the closest part of any zone to New York City. But the board excluded the county from consideration, citing the law’s goal to assist poorer areas. “The board determined that to fulfill the intent of the act, one gaming facility license in the region should be awarded to a qualified and desirable applicant in Sullivan County or Ulster County,” states the selection report. “The board recognized that an Orange County casino could generate substantial revenue as a result of its proximity to New York City. However, various internal modeling scenarios found that an additional facility in Orange County could destabilize that single project in the traditional Catskill area.”
Says Landry of Strategic Market Advisors: “The selection of the Catskills location lacked insight into how the location would compete in the broader market, or perhaps it was more of a political decision.”
Resorts World Catskills ended up in Sullivan County, and while its 2019 revenue of $207 million topped the other casinos, that was $94 million below its forecast. That huge shortfall left its owner, Empire Resorts, scrambling. Not only did its controlling shareholder, Malaysian billionaire Lim Kok Thay, need to bail it out, it also shut down the VLTs at its nearby Monticello Raceway. Then Cuomo and the legislature, ignoring the reasoning of the location board, authorized it to move those 1,000 VLTs to Orange County, without competitive bidding. Empire had pursued an Orange County casino when the licenses were handed out.
That deal echoes one in 2012, when Lim and Cuomo announced plans to make Resorts World New York City a full-service casino. It’s been a venue for only VLTs, but it would’ve been part of a $4 billion convention center with hotels and other attractions, also without competitive bidding. That plan fell apart, but once again state revenue is sagging, this time due to the pandemic. That’s rekindled interest in downstate casino licenses, though they’re legally barred until December 2023. Cuomo has lately insisted that downstate licenses will require competitive bidding, but he’s frequently changed his mind on gambling issues during his decade as governor.
There’s widespread conjecture that the two downstate racetrack VLT sites, Resorts World at Aqueduct Racetrack and MGM Resorts-owned Empire City at Yonkers Raceway, will get preference for licenses that could carry a $500 million upfront license fee. The Spectrum study outlines multiple downstate scenarios, most frequently including casinos at both tracks, which could add table games and thus tax revenue more quickly than by building new complexes.
“I believe we can create a transparent and credible process to expedite the downstate licenses for the state to realize the significant revenue associated with the licenses,” says state Sen. Joseph Addabbo, who chairs the Senate’s Racing, Gaming and Wagering Committee and whose district includes Resorts World New York City. He’s proposed starting the licensing process by July 1 as part of a bill he’s sponsoring to legalize betting on sports by phone and online; sports betting is now permitted only at upstate casinos.
In January, Cuomo put sports betting on the menu to gin up more tax dollars. Spectrum’s report estimates that if the rights to handle mobile sports betting were awarded to the current license holders—a potential lifeline for the floundering casino and VLT operations—annual revenue could top $1 billion within five years. Cuomo, however, wants to set up a single state provider “to have the people of New York actually get the profits from mobile sports betting and run it the way we run the lottery, which is state-run and the state gets all the revenue.”
“It’s a horrible idea,” says David Leppo, chairman and chief executive of FootballBet.com. “If there was a monopoly in Las Vegas, you wouldn’t have the Vegas Strip.” With 25 years of sports-betting experience in Mexico and Asia, he notes that a monopoly will produce inferior products, miss revenue forecasts and possibly drive sports betting out of state or underground. Moreover, New York’s flagging lottery revenue, even before a first-ever loss in 2020, and the bankruptcy of New York City’s off-track betting corporation illustrate government ineptitude at running even monopoly gaming enterprises.
Multiple operators will “maximize revenue, both short and long term,” says Addabbo. “Due to its competitive nature, the mobile sports-betting model should offer customers a variety of programs, odds and other benefits.” The Senate approved his bill on March 15, and it awaits reconciliation with the state Assembly’s bill, which does not include expedited licensing for downstate casinos. The bill then goes to the governor. All sides must reach agreement by the April 1 budget deadline or wait until next year’s budget cycle.
Consultant Landry supports multiple operators for sports betting, but warns that when it comes to gaming, “New York does not miss an opportunity to miss an opportunity.”