Future casino tax yields: what recent trends in casino wagering and attendance suggest.

• Author: Landers, Jim

This article considers and investigates the future growth potential of the state's wagering taxes. Gaming markets in many states that legalized casino gaming in the 1990s have matured, so the days of extremely robust annual revenue growth may be on the wane. Revenue growth looms large in Indiana as the wagering tax has become a major source of funding for the state's property tax relief program. In 2008, about $486.3 million in revenue from the riverboat wagering tax was directed to property tax relief. What's more, all revenue from the separate racetrack casino wagering tax is dedicated to property tax relief. Note that all years referenced in this article are fiscal years unless otherwise noted. (1)

We first examine the historical growth patterns in attendance and wagering at Indiana's riverboat casinos. By analyzing the win--the base for the wagering tax--instead of wagering tax revenue, we eliminate problems with measuring tax rates and the impact of changes in tax rates over time. (2) Analyzing casino attendance helps to delineate growth in the win that's attributable to income growth versus growth attributable to capacity expansion and market share growth. This is critical because if the markets in Indiana have matured, the annual growth in the wagering tax base will come from the underlying growth in the average win per gambling patron.

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In addition, this article examines the response of the wagering tax base to economic change and how casino gaming in bordering states could affect business at Indiana casinos. Both are critical issues in and of themselves relating to the future growth in gaming revenue.

Recent Patterns in Casino Win and Attendance

During 2008, 26.2 million people gambled at Indiana's eleven riverboat casinos, generating about $2.6 billion in win. The 2008 attendance and win levels are a long way from the first, albeit partial year of casino operations in 1996 when roughly 944,000 gamblers generated a win total of about $71.9 million. Figure 1 reports annual attendance and win totals for the riverboat casinos.

Annual attendance and win grew dramatically in the 1990s, exhibiting a year-to-year pattern similar to the growth patterns for electronic gaming devices (EGDs) and table games discussed in the previous article ("The Two-Sided Coin: Casino Gaming and Casino Tax Revenue in Indiana"). While lagging the supply trends, the trajectory of the attendance and win series also exhibits a rapid leveling off in recent years. From 1997 to 2008, the casinos registered average annual growth for attendance and win of 9.2 percent and 11.9 percent, respectively. However, the annual growth rates for particular years vary significantly around these averages. The leveling in the attendance series and the win series is quite discernible beginning in 2004 once the impact of dockside gaming had registered fully.

Contrasting the two growth periods, attendance increased at a 15.4 percent average annual rate from 1997 to 2002, but dropped to about 1.6 percent on average from 2003 to 2008. Similarly, annual growth in the win averaged about 21.2 percent from 1997 to 2002, but fell to about 3.4 percent from 2003 to 2008. The year-over-year growth rates also have generally declined each year with the most recent years below the average for the period. Annual attendance growth fell from 9.7 percent in 2004 to 0.8 percent in 2005 and 0.9 percent in 2006. The win has followed a similar pattern, with annual growth rates falling from 7.2 percent in 2004 to 4.1 percent in 2005 and 3.1 percent in 2006. Both attendance and win declined in 2008, with attendance declining by 5.1 percent and win declining by 3.5 percent. 2007 represents the outlier during this period because of the opening of the French Lick Casino. Excluding the French Lick Casino from the calculations, 2007 attendance at the remaining ten casinos actually declined by about 1.6 percent (some of which may have resulted from attendance shifting from existing casinos to French Lick). However, the 2007 win rebounded slightly from 2006 to register a 3.6 percent growth rate.

The data indicate that the impact of dockside gaming on attendance and win was significant. While the average amount wagered per gambler wasn't expected to increase, the aggregate amount wagered was expected to rise as more gamblers cycled through the casinos each day. The upward shift in annual attendance following the implementation of dockside gaming is discernible beginning in 2003, but is even more noticeable in 2004, which was the first full fiscal year for dockside operations. Compared to 2002, overall attendance was 19 percent higher in 2003 and 30.5 percent higher in 2004. (3) Likewise, the aggregate win was 12 percent higher in 2003 and 20 percent higher in 2004 compared to 2002.

While the aggregate win grew by 11.9 percent per year on average from 1997 to 2008, the average win per patron grew by only 2.5 percent per year during this period (see Figure 2).

The gap in the growth rates surfaced primarily between 1997 and 2002, when growth in the win averaged about 21.2 percent per year but the win per patron grew by only about 5 percent per year. Since 2003, however, average annual growth in the win has fallen precipitously and the gap between annual growth in the win and the average per patron win has closed almost entirely. Since 2003, average annual growth in the win has registered 3.4 percent while the average per patron win has grown by only 1.8 percent per year. This suggests that the radical year-over-year growth in win during the 1990s was largely due to capacity increases and market expansion via casino start-ups. The statistics indicate that less than a quarter of the annual growth in win during that period was due to year-over-year growth in the win per patron. Now, with the casinos serving relatively mature and stable markets, annual growth in the aggregate win will rely almost entirely on growth in the average win per patron. Based on the average per patron win, the resulting growth could be little more than 1 percent to 2 percent per year.

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The Income Elasticity of the Wagering Tax Base

The income elasticity of the win provides the best indicator of how revenue generation by the casinos has changed and where it may be going. As with purchases of other goods and services, personal income represents the main economic variable that drives casino attendance and wagering levels. (4) The income elasticity of the win measures the percentage change in the win due to a 1 percent change in personal income. In the aggregate, Indiana personal income grew by an average 4.3 percent per calendar year from 1996 to 2007. (5) The aggregate win generated by the riverboat casinos grew by an average of 11.9 percent from 1997 to 2008 (roughly the same period). This suggests a rather large...