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Rod Smith

States Fight for Gaming Dollars

25 March 2004

LAS VEGAS -- Local fiscal concerns are touching off another war between the states for gaming revenues, just when it seemed as if the economic recovery might lead the industry into a period of consolidation rather than more proliferation.

Deutsche Bank analyst Marc Falcone said the new wave of proliferation is likely to prove to be another big boost for slot makers in Nevada, especially Reno-based International Game Technology, Alliance Gaming and WMS Industries.

According to Deutsche Bank, jurisdictions seriously considering expanded gambling include Arkansas, California, Delaware, Florida, Illinois, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, Pennsylvania, Ohio, Oklahoma, Rhode Island, Washington, Macau and the United Kingdom.

UBS Warburg analyst Robin Farley said expansion clearly is in the cards because of tight state budgets. He predicts prospects, especially for added slots, are best in California, with the expansion of tribal gaming; in Oklahoma, with improved prospects for legalizing racinos; and in Pennsylvania, where casinos and racinos are on the table.

If all the pending proposals in all the jurisdictions were enacted, they would generate sales contracts for an added 200,000 to 315,000 slot machines, Deutsche Bank estimated.

Falcone said 31 states are projecting budget deficits in 2005, up from 18 reporting deficits for 2004.

In addition, he said the improved situation for this year has depended on states raiding rainy day funds and pushing through one-time revenue measures that won't be available in 2005.

"Overall, we believe the deficit situation improved for 2004, but 2005 is shaping up to be more like 2003, with more states projecting deficits and the need for additional revenue sources," Falcone said.

The need for more states to find added revenues will likely lead politicians to consider gaming expansion.

"States will continue to look at gaming as a viable alternative to generate additional tax dollars, and we think it is likely that at least one state per year over the next several years will legalize (casino) gaming," Falcone said.

However, the leading national opponent to expanded gambling said the prospects for proliferation are just a lot of sound and fury signifying little more than a call for campaign contributions.

Gambling foe Tom Grey, executive director of the National Coalition Against Legalized Gambling, said expansion is becoming more costly for the casino companies.

"Now, we're back at the same poker table, but it's going to cost them more than last year," he said. "The polls are against them and people think they're undertaxed. And now they can't threaten they'll pull out because they've stayed in Illinois where the (average) tax rate is 38 percent and they're bidding more than $500 million for a license to open (a 10th) casino."

Isle of Capri last week won a bidding war against Midwest Gaming and Harrah's Entertainment with a $518 million offer for Illinois' 10th gaming license.

Grey said all the promises in local political campaigns across the country to pay down deficits with expanded gaming are nothing more than a legislative election promise to look at adding jurisdictions next year if gaming companies ante up this year.

University of Nevada, Las Vegas professor Hal Rothman warned that few jurisdictions have legalized gambling in recent years despite state and local budget problems.

"The only thing that makes it more likely now is the decreasing number of taxable citizens as the population ages and the growing anti-tax backlash (against increased local taxes)," he said.

"Most states and counties have cut to the core everything but essential services. Gaming, at least initially, creates a solution, even though the costs will flow (later)," Rothman said.

On the other side of the coin, Rothman said as the United States becomes a more mature society, retirees who live longer and have tremendous amounts of money to spend create an inviting target for gaming companies favoring expansion.

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said that in the long run expansion into added jurisdictions might not be good for the industry.

Gaming executives "need a strategy of where expansion makes sense. What they have been doing is building an automatic backlash that adds the growing tendency across the country to raise added revenues simply by soaking the industry with higher tax rates," he said.