The competition in the East is definitely heating up.
The three racinos in Delaware are set to become full-blown casinos offering a full range of table games and sports betting, in addition to the slots they have offered since 1995.
After an extraordinary week that included an initial rejection of sports betting by the state House, marathon negotiations between Governor Jack Markell’s team and lawmakers in both the House and Senate, and remarkably quick votes in both chambers, the governor signed a bill into law May 14 that gives the state’s three racinos a competitive edge over casinos in both Pennsylvania and Atlantic City-although at a significant price, as the effective tax rate on slots will soar over 60 percent under the new law.
Delaware will be the only state besides Nevada with casinos containing sports books. The state was one of four-joined by Nevada, Montana and Oregon-grandfathered under a 1992 federal law banning sports wagering. Delaware qualified for exemption because of a brief, unsuccessful sports lottery run in the 1970s.
Racino officials say they can have sports books up and running in time for this year’s pro football season, and can have live poker, blackjack, craps and roulette up and running within six months.
The exact form sports betting will take will not be known until the governor and state lawmakers receive an advisory opinion from the state Supreme Court on what forms of wagering will pass both state and federal muster legally. However, the three racinos-Dover Downs, Delaware Park and Harrington Raceway-are planning for Vegas-style sports books, which are possible with relatively minor modifications and training of clerks at the tracks’ existing simulcast operations.
The Maryland Factor
Most observers expected sports betting to take hold in Delaware because of the economy and because of competition from Pennsylvania. However, few expected the expansion to include table games so quickly-until Maryland passed a law authorizing five casinos, including a large casino in Baltimore and two within a few miles of the Delaware border in two different areas.
“What pushed us over the edge (for expansion) was Maryland,” says Ed Sutor, CEO of the Dover Downs racino. “Seventy percent of our business comes from out of state, and 50 percent of our business comes from Maryland.”
Bill Fasy, CEO of the Delaware Park racino, says Markell would have pushed the expansion regardless of developments in Maryland. “The governor is just trying to make us competitive,” he says, “and I don’t think Maryland made a difference.”
The original bill in the Delaware Senate pushed by Markell called for two new casinos-one on the Wilmington waterfront; the other at a new racetrack near the beaches-and up to 10 new sports-betting outlets, as well as the table games. In exchange, Markell wanted to raise the state’s share of gaming revenues by 11 percent, from 37 percent to 48 percent. The original House bill included sports betting only, along with the 11 percent tax hike. It failed to reach a supermajority (required for a change to the state Constitution) by only two votes, mainly because of the 11 percent hike.
The compromise bill passed by the House lowered the hike to 6.5 percent, in exchange for the addition of table games. It passed the House easily, on a 30-4 vote. The Senate followed through quickly, stripping its bill of the new gaming venues and approving the House-passed version of sports betting, table games and the increase in the state’s share of gaming revenues.
Sutor says the “victory” of achieving both table games and sports betting is offset to a great degree by what he sees as an onerous tax. He says people should be reminded that the former 37 percent tax was effectively 55 percent when the 11 percent cut for horsemen and 7 percent for vendors are factored in. The new state cut pushes the effective gaming tax over 60 percent, which is one of the highest in the nation.
Until the new games are implemented, Sutor says the new tax is going to hurt. “We’re going to love having sports betting and table games, but we’re going to have big layoffs and cutbacks in the meantime,” he says. “The new tax is going to cut off our ability to do expansions. We had a $50 million, world-class sports book already designed. We had a new, $40 million parking garage already designed. We can’t do either-$90 million of our cap-ex just went out the window.”
Dover now plans to renovate an existing restaurant to create a sports-betting parlor, and to use existing simulcast facilities for wagering in the meantime.
At Delaware Park, the existing facility luckily lends itself to addition of sports betting, Fasy says. In addition to an expansive upstairs simulcast area, football wagers will be taken on fall Sundays-when there are no races-at all betting windows, including those outdoors.
However, the new tax rate has caused Delaware Park to scrap plans to add a hotel, at least for now. “We were ready to go to zoning to submit our plan for a 1,000-room hotel,” Fasy says. “It doesn’t make sense with the new tax rate. Until we see some growth in our market, we need 50 percent equity to get a loan, because we don’t have a stable tax environment. If you’re a lender, you’re going to say, ‘What if the tax goes up to 72 percent?’ Banks aren’t going to do it.”
Table Timeline
The timeline for the addition of table games depends largely on how quickly state regulations are set. The law mandates that the state controller general’s office, the Department of Finance and a representative of the racinos form a panel to draft and agree on table game regulations-and revenue split-within 75 days, after which the rules will be voted on by the General Assembly.
The racinos are partnering with Delaware Technical Community College to bring in dealing instructors from other states and create a dealer training program. If all goes as planned, the racinos hope to have table games go live before Christmas.
That is, if they can afford it.
Sutor says operators are hopeful the panel will follow the lead of West Virginia, which implemented a lower tax rate-35 percent-for table games than it uses for slots because of the extra labor costs and surveillance requirements involved. If the panel applies the law’s new revenue tax to table games, Sutor says Dover Downs will not offer them. “If they take 60 percent on tables like they do on slots, and our payroll is over 40 percent, do you think I’m going to put table games in?” he says. “We hope that within 75 days, we’ll have a reasonable revenue-sharing agreement.”
Fasy, himself an Atlantic City table game veteran, wants an even lower tax. “I think a fair tax is 20 percent,” he says. “That’s what it is in most of the riverboat jurisdictions nationwide. I remember how hard it was to make money in Atlantic City with an 8 percent tax.”
Outside of the Supreme Court opinion, the only possible delay to offering sports betting by football season would be court action. Both the NFL and NCAA have threatened lawsuits to block the new sports betting, but Sutor predicts that any such lawsuits will fail-just as similar lawsuits against the sports lottery failed during the 1970s.
“The NFL sued back in the ’70s and lost,” says Sutor, who derides league officials for what he sees as a double standard. “We would not be surprised if the NFL files another suit, because they are very hypocritical. They testified before our legislature that fantasy sports-which they make a lot of money on-is not gambling. Their lawyers also represent baseball. Twenty-three Major League Baseball teams are on scratch-off lotteries throughout the country. Are lotteries gambling? How many NBA owners are also involved with casinos?”
Adds Fasy, “Why does the NFL allow its channels to go into the sports books in Las Vegas? Why are their lines in the paper every week? Because they know it pumps up the interest in their games.”
“When you get the facts out there,” says Sutor, “the NFL looks ridiculous.”
AC Impact
After the gaming expansion bill passed, some in the Atlantic City media sounded alarm bells of new, powerful competition from Delaware at a time the casinos there are struggling.
However, Sutor says Atlantic City is in little danger from direct competition. “We couldn’t compete in promotions with Atlantic City before; we won’t be able to compete now,” Sutor, a former Atlantic City casino executive, says. “People have overblown what impact Delaware will have on Atlantic City. If Atlantic City revenues go down after we introduce sports betting, it will have more to do with Bethlehem (Pennsylvania) and Aqueduct than with us. Sports betting doesn’t generate a lot of revenue. It’s more of a marketing advantage in bringing people to the property.”
Sutor does concede that the addition of table games is likely to pressure Pennsylvania-now with table games in bordering states West Virginia and Delaware-to approve table games more quickly than previously thought, which would indeed impact Atlantic City.
Atlantic City operators, though, can still count on the fact that New Jersey’s low tax rate allows much more reinvestment in destination amenities than is possible with the high tax rates endured by all of its nearby competition.
New Jersey lawmakers are pressing a federal lawsuit challenging the ban on sports wagering on the basis of states’ rights. After last month’s developments in Delaware, New Jersey state Senator Raymond Lesniak asked Governor Jon Corzine to put his weight behind the campaign for New Jersey sports betting.
