Chapter 2 ECONOMIC ENVIRONMENTS Gary Anders Arizona State

Chapter 2 ECONOMIC ENVIRONMENTS Gary Anders, Arizona State University Kathryn Hashimoto, East Carolina University Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Introduction The Blind Men & the Elephant n For the blind man who touched the tail, the elephant was like a snake. n For the one who touched the side, it was like a wall. n For the one who touched the ear, it was like a fan. n For the one who touched the leg, it was like a tree trunk. n This story captures the differences that researchers and consultants have regarding how commercial gambling affects the social and economic texture of communities. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

BACKGROUND INFORMATION Multipliers: n Number of times a dollar circulates in the local economy. n Determines the total impact of each dollar of direct spending on the local economy. n The higher the number, the better the economic worth of the transaction. n Generally the multiplier is around two. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Leakage: when parts of a dollar spent are exported outside the local economy. n n n When casinos are locally owned, the money stays longer in the local economy and benefits the local community with more investment. Results: a higher multiplier. When casinos are owned by an outside corporation, the money is siphoned out of the community. Results: a lower multiplier. Depending on type of ownership, casinos can have a stronger or weaker economic impact on the local economy. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Positive Economic Impact n Employment – Direct: ü The major reason for allowing casinos ü ü Opening a casino increased household employment in three of four rural counties Types of jobs created may not have a significant positive effect on higher paying jobs n Employment – Indirect: opportunities are less obvious ü Construction workers needed to build casino ü Improvements in infrastructure require other occupations ü Services are needed: restaurants, banking, housing ü These services require space; more construction ensues ü Indirect job opportunities spiral upward as various community needs are created because of the growing population Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Positive Economic Impact n ü Tax Revenue: States cannot mandate or collect taxes from Native American casinos. A compact is negotiated to specify the responsibilities of both sides. ü For commercial casinos, states directly tax revenues. ü Tax rates range from over 36% in Illinois to 6. 25% in Nevada. ü ü ü For underdeveloped states, tax revenues from casinos make a major impact on the resource base of local communities Where revenues from casinos are displacing other sources of gambling tax revenue (i. e. , tracks and lotteries) the total impact of tax revenue from casinos is lessened. Employees in casinos and related businesses pay state income and sales taxes; states further benefit from this additional tax revenue. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Positive Economic Impact n ü ü Spin-off Development: Casinos buy goods and services from the area. Businesses grow or develop to meet the increasing demand. Increased land use. Hospitality services (hotels, rental cars, etc. ) begin construction to meet the needs of the tourists, locals, and corporations. According to a 1997 Arthur Andersen report, the introduction of casinos leads to growth in almost all other areas: retail sales, commercial and housing construction, restaurants, etc. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Negative Impact n ü ü Many positive aspects of gaming also have a negative side: Casinos’ demand for land = increase in land values = higher taxes for nearby property owners Small businesses that can’t afford higher taxes may leave or go bankrupt, which changes the character of the community ü Possible costs of additional police and security ü Additional security costs to avoid mob influence Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Summary n ü ü Literature presents mixed results concerning impact of gambling: Proponents argue gambling increases local tax revenues, creates new jobs, and stimulates economies through induced consumption and employment multipliers. Critics argue that gambling displaces existing expenditures as a result of transfers from existing businesses to casinos. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Summary What factors affect the economic benefits? n First: Whether gambling is exported to residents of other states, and whether opening local casinos encourages residents not to gamble in other jurisdictions. For maximum benefits, casinos should bring in new money rather than displacing existing consumer expenditures. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Summary n Second: Where does the money spent on gaming come from? If some portion of the gaming dollars comes from the customer’s savings or substitutions for other types of entertainment, the displacement effect is small. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Summary n Third: Net economic impact should take into consideration the substitution effect. Substitution effect – if a portion of money spent at a casino comes from reduced revenue from other forms of gaming, then the casino’s overall economic benefits are reduced. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Summary n Fourth: Different tax rates in different states cause revenue generation to vary substantially. Governments may attempt to institute an optimal tax to balance gains to the state against costs of providing increased services. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Summary n Fifth: Economic impact studies typically use expenditure and employment multipliers that demonstrate the benefit to regional economics through direct purchases and employment, or through indirect multiplier effects. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Future of Commercial Gaming n n n The near future will likely see continued expansion in new gaming markets, which can lead to market satiation. Unless growth is met with increased demand, the overcapitalization will result in reduced profitability. Online gambling is a new competitive alternative that could significantly affect the demand for casinos. ü ü ü Internet gambling industry is estimated at over $5 billion and growing rapidly. Given the ease and convenience, internet gambling is certain to become a serious competitor of casinos. While there are on-going policy efforts to extend regulatory control, there are significant challenges because of the low cost of establishing these websites in offshore locations. Hashimoto: Casino Management: A Strategic Approach © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.