A Shuffle through the Gaming Mailbag: Tax Hike in Illinois, State-Run Casinos

Q. I read a report that said Hollywood Casino in Aurora was eliminating table games because of the increase in the Illinois gaming tax (hiking the gaming tax to 70 percent on revenues in excess of $250 million a year). Can they do that? Doesn't the state require that a casino have so many tables and so many slots?

Bob, via e-mail

A. There is no such requirement. A casino that wanted to turn its floor entirely over to electronic gaming devices could do so. But that's not what Hollywood intends.

The initial report in Crain's Chicago Business was in error. Hollywood plans to reduce the number of table games but not eliminate them. It does plan to eliminate "revenue participation games" from among its slot machines. Revenue participation games are slot machines in which the casino must share revenue with the game manufacturer.

Even in jurisdictions with much lower tax rates--and that's every jurisdiction outside Illinois--revenue participation games are a hot-button issue. Casino directors would much rather buy machines outright and keep all the revenue. Problem is, manufacturers put out some of their sexiest, most attractive products as participation games. Many of them have instantly recognizable brand names and pop culture tie-ins, and doing without them means passing on popular favorites such as Wheel of Fortune, The Price Is Right and Monopoly.

That revenue participation games claim healthy shares of casino floors is a tribute to their popularity. If they weren't earning more for the casino than the house average, they wouldn't be there because operators would stick with games that allowed them to keep all revenue. However, with a 70 percent tax rate, the emphasis isn't going to be so much on producing extra revenue as on cutting costs. Saving the cost of having revenue participation games on the floor may be worth more to Hollywood and other Illinois casinos than the extra income they produce.

Q. Do you think casinos will cut the paybacks on slot machines because of the tax hike? Is that how they'll make up the difference?

Esther, via e-mail

A. I received a dozen or so e-mails asking this same question. I can't say for sure, but I doubt there'll be much tightening up of the slots. There may be some, but as I said in the previous answer, there is going to be more emphasis on cutting costs than on producing extra revenue.

Of each dollar in extra gaming revenue produced, the casino keeps only 30 cents, while the state gets 70 cents. But a dollar in cost cuts is worth a full dollar on the bottom line.

There are certain to be layoffs, and that can't be good for players as service levels decline. I'd expect comp programs and promotions to be tightened a bit. It's one thing to go the extra mile to attract extra business when you're keeping 65 cents on the dollar, as Illinois casinos were two years ago, and something entirely different when you're keeping only 30 cents.

There also is likely to be extra effort made to produce non-gaming revenue, which is not subject to the 70 percent tax. Casinos are exploring a return to the days of charging admission, as well as instituting parking fees. For lower-end players, I'd look for little economies such as free buffet offers to be replaced by 2-for-1s, perhaps increasing food service revenue.

Cutting costs and attempting to increase non-casino revenue could drive some customers to northwest Indiana, where none of this is an issue. But let's face it, losing a little revenue to Indiana is a much smaller issue for Illinois casinos when they don't own all that much of the revenue.

Q. My friend saw you at the Spring Seniors Fair (at Drury Lane in Oakbrook Terrace) and said you don't think it's a good idea for the state to own a casino. Why?

Jimbo, via e-mail

A. My primary reaction is as a player. The state regulates the casinos. If it also owns a casino, it means the casino regulators work for the casino owner. Anyone else see a basic conflict of interest here? A situation in which the regulators work for the owner is a scandal waiting to happen.

Beyond that, I'm troubled by some issues that have to do with putting a government-owned business in competition with private businesses. The biggest recurring expense for each casino in Illinois is the gaming tax, which must be paid out of gross gaming revenue, not out of profits.

A state-owned casino wouldn't have that expense. It would be writing into law a huge competitive advantage. I can't think of any businessman who would be happy with such a lopsided playing field.

But that's a problem for casino owners, rather than for players. The regulatory issue is another matter. That's something that affects players directly. I'd be extremely wary of playing in a casino in which the regulators are in the owner's employ.