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Any efforts by Indiana to invigorate its casino industry should note that employment is an important goal, and an obvious beneficiary of such policies, particularly with respect to tax rates. There is a clear cause and effect between gaming tax rates and gaming employment, as shown in the following chart. While there are exceptions and limitations when looking at the correlation in a particular state, the trend nationally is unmistakable: Among the 23 states with state- regulated casinos (i.e., excluding Indian gaming), a lower tax rate leads to higher employment. Note that the figure below excludes Nevada, which because its 270,000 jobs figure is literally off the chart (its effective gaming tax is 8.0 percent).

Regulatory, Tax Reform in Indiana 31 Figure 15: State effective gaming-tax rates vs. number of casino employees, with trend lines

Sources: Spectrum Gaming Group, American Gaming Association, state gaming commissions, media reports. Notes: Tax data are based on American Gaming Association State of the States: The AGA Survey of Casino Entertainment and GGR results prepared by respective state agencies (and published by Spectrumetrix). We calculated the effective tax rate for each state as the respective percentage of reported gaming tax revenue (per AGA) as a percentage of reported GGR by state. Employment counts are the latest available through various sources noted above. The Maryland employment figure includes 1,700 for Horseshoe Baltimore, which opened August 26, 2014.

Lowering tax rates will not automatically result in employment increases. Lowering tax rates simply allows (or encourages) casino operators to develop different, more comprehensive business models. The direct nexus for lower tax rates is capital investment, which allows casinos to make themselves more attractive to a wider variety of patrons, and which results in a broader array of amenities that, in turn, require greater levels of employment.

Data on capital investment and tax rates mimic the relationship shown above between tax rates and employment. In a 2005 white paper for the American Gaming Association, Eugene Christiansen provided data on the 2004 casino tax rates and capital investment since 1989.25 _Even

if we ignore Nevada and New Jersey as outliers, Christiansen’s 2004 data suggest that higher

25 _{Eugene Christiansen, “The Impacts of Gaming Taxation in the United States,” for the American Gaming}

Association, 2005. http://www.americangaming.org/sites/default/files/uploads/docs/whitepapers/the_impacts_of_gaming_taxation. pdf 0% 10% 20% 30% 40% 50% 60% 70% - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 NJ MS CO SD OK MI IA LA NM MO KS IN OH FL IL WV PA DE NY ME MD RI Ef fe ct iv e t ax ra te . 2 0 1 2 C asi n o job s Jobs

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taxes are generally correlated with lower levels of capital investment. However, we must also keep in mind that this analysis does not take into account how restrictive state regulations are, in terms of number and size of casinos allowed in the state. If the current supply is at the capacity allowed by the state, then it may not be surprising that there is little capital investment in a particular state. Nevertheless, Christiansen is correct when he asserts, “Low tax rates do more than attract capital investment. They make larger, more diverse gaming facilities feasible.” This is simply because if taxes are lower, the return on investment by casino investors is higher. Thus, they are inclined to invest more, which translates into more hotels, entertainment, shopping, and restaurants at casino resorts – and ultimately, more jobs.

Summary

These and other options will ultimately prove to be costly by either adding expenses, or reducing revenue. The alternative – rethinking and reinventing this revenue stream – could allow casino operators to be more creative in their promotional spending, as well as in their investment strategies, which could lead ultimately to more revenue for government.

No entity can guarantee that such potential win-win strategies could be developed in every instance across Indiana, nor can anyone guarantee that the projected results can be achieved for all potential strategies. Certainty can only be achieved if the status quo is maintained: Revenues will continue to decline, as will admissions fees.

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Free Play Drives Gaming Revenue

“Free play” (also referred to as “promotional slot credits”) is generally defined in the gaming industry as a cash-equivalent incentive that operators provide to players to induce loyalty, return visitation and increased spending. Such cash incentives take the form of a designated amount of free slot-machine wagers that the patron can make. In our experience in developing and analyzing loyalty programs, we have found that patrons value cash incentives more than any other promotion and, therefore, they offer the highest response as compared to competing programs. From our experience, the following expected response rates to various incentives are commonplace and/or reasonable:

Figure 16: Response rates to casinos’ patron incentives

Source: Jay Sarno & Associates

Historical database analysis – based on reviews of confidential client data sets in multiple markets – has continually proven increased revenue due to the use of cash (free play) rewards because of its ability to drive multiple return visits. Gaming industry executives have long held the opinion based on years of research that the return on investment when using such incentives is between 3:1 and 4:1 (for example, a $10 free play reward would yield an additional $30 to $40 in gaming revenue, or a net of $20 to $30 in gaming revenue that may not have otherwise materialized). A Spectrum Associate with more than 20 years of combined experience in the theoretical analysis and actual implementation of promotional credits has prepared numerous tests for clients in multiple gaming jurisdictions – including Florida, Mississippi, New Jersey, Nevada and Pennsylvania – and found that the return on investment when using such cash incentives is between 3:1 and 4:1, with exceptions being as high as 10:1.