The Impact of the Proposed
Choctaw Casino on the
Economy of Southwest Louisiana
BY
AND
DARYL V. BURCKEL, DBA, CPA
EXECUTIVE SUMMARY
On February 5th Governor Mike Foster announced that he had signed a contract with the Jena Band of Choctaw Indians that allows them to build and operate a casino on the border with Texas near the town of Vinton, Louisiana. This casino will undoubtedly expand the gaming industry in Southwest Louisiana by attracting more patrons to the area. But when Louisiana legalized casino gambling in 1991 it was with the intention of generating more taxes for state and local governments, creating jobs, and fostering economic development. The study was commissioned by the Calcasieu Parish Police Jury and the Port of Lake Charles to determine the extent to which the proposed Choctaw casino will contribute to these goals.
The study examines how various market segments will be affected by the proposed Choctaw casino and considers several different scenarios. The general conclusions are that casino revenue and spending associated with casinos in Southwest Louisiana is likely to increase, but if Pinnacle cancels its casino resort complex in south Lake Charles there could be a net loss of over 800 jobs in the parish. But the greatest impact in on tax revenue: depending on what Pinnacle does, the State stands to lose between $32 million and $55 million a year in taxes while local governments could lose between $7 and $17 million a year in taxes.
Moreover, the proposed Choctaw casino will cause major disruptions and relocations within Southwest Louisiana. Many jobs will be transferred from the Kinder and Lake Charles areas to area around Vinton and across the border into Texas and while some of those who become unemployed may accept jobs at the Choctaw casino and relocate, others will not. Local businesses will also feel the impact: a number of hotels, restaurants, gas stations and other business have sprung up or expanded around Kinder and Lake Charles to meet the needs of the new casino industry and they will not be situated to serve the market in Vinton. The Port of Lake Charles will be adversely affected if Pinnacle cancels the casino resort it is building on port property in south Lake Charles. But perhaps the greatest impact will be on the Coushatta Indian Tribe that has been developing the casino it operates on tribal land just north of Kinder which will experience an approximate loss of 30% ($70 million) decline in casino revenue
In 1991 the Louisiana legislature authorized 15 riverboat casinos to be located on waterways around the state. Players (now Harrah’s) was the first riverboat casino in Southwest Louisiana; it was located at the eastern base of the I-10 bridge over Lake Charles and began operations in December 1993. In 1994 the Coushatta Indian tribe opened a land-based casino approximately 55 miles northeast of Lake Charles near the town of Kinder. In 1995 the Isle of Capri obtained a license to operate a riverboat casino at the western base of the I-10 bridge and this was quickly followed by both Players and the Isle of Capri obtaining licenses to operate an additional boat so they offer continuous dockside gambling. In October of 2000 the voters of Calcasieu Parish approved the addition of slot machines at Delta Downs, horseracing track located 30 miles west of Lake Charles near the town of Vinton and close to the Texas border. And in October 2001 Pinnacle Entertainment obtained the 15th and final riverboat license to build a $225 million casino / golf resort on property owned by the Port of Lake Charles at the eastern end of the I-210 bridge.
The map on the following page shows the location of these casinos. Table 1, also on the following page, shows the gaming positions, gross win, win per gaming position, net state and local taxes paid, full-time equivalent employment, payroll and spending for 2001 as well as estimates for 2004 (Delta Downs opened its slot machine facility February 13, 2002 and Pinnacle is scheduled to open its casino resort in October 2003). The proposed Choctaw casino is not included in this table.
It has been estimated using gaming participation rates and the population within 200 miles of Lake Charles that Southwest Louisiana has a potential gaming market of $849 million[1] (see table 2). By comparison, the five casinos operating in Shreveport currently have a gross win of $750 million while the 12 casinos on the Mississippi gulf coast have a gross win of $1.3 billion. For Southwest Louisiana to approach the size of the Mississippi gulf coast market it would need to become a regional gaming destination. For this to happen, Southwest Louisiana would need to develop gaming infrastructure—hotels, restaurants, golf courses, theaters, marinas, etc.—sufficient to attract patrons from more than 200 miles away. Given the current environment of uncertainty and rules and regulations constraining the gaming industry in Louisiana, that is not likely to happen any time soon.
Source: GVA Marquette Advisors and the Louisiana State Police
The Southwest Louisiana gaming market consists of four major segments:
(1) Local gamblers who live within 50 miles of a casino.
(2) "Day-trippers" who drive between 50 miles and 200 miles to visit a casino and return the same day.
(3) Stop-off traffic from Interstate 10.
(4) Destination gamblers who come to Lake Charles solely for the purpose of gambling and spend at least one night in a local hotel or motel.
Each segment responds to different variables and each has a different potential for growth. For example, in Southwest Louisiana the market for local gamblers is already saturated and its future growth will depend on the strength of the local economy rather than the number of casinos in the area. Similarly, the number of travelers stopping off at a casino is largely a function of the traffic on Interstate 10. “Day-tripper” patronage, on the other hand, is affected by the distance to a casino as well as marketing efforts while the patronage of destination gamblers depends on the availability and price of local hotel rooms as well as local features, attractions and amenities.
Our estimate of how these market segments are distributed over the existing casino operations in Southwest Louisiana is shown in Table 3. Our estimate of how these market shares will be affected by the entry of Delta Downs and Pinnacle is shown in Table 4 based on our projection that the Southwest Louisiana gaming market will grow 29 percent to $785 million by the year 2004. We anticipate that Delta Downs will have little affect on either local (Louisiana) gamblers or the destination market because of its location, lack of table games, and lack of nearby infrastructure, and its primary impact will be on day-trippers and I-10 stop-offs. However, we do expect Pinnacle will cut into
Table 3
the local gaming market due to its location in south Lake Charles, though its major marketing focus will be on the destination market and attracting high-rollers with its golf course and luxury hotel. Once Pinnacle opens, we anticipate that Harrah’s and the Isle of Capri will sell or relocate their second riverboats and use the proceeds to develop their own properties in an effort to attract patrons from more distant markets.
The Jena Choctaw Band has announced that its planned casino complex will feature 3,000 slot machines and 100 table games. The big question, of course, is what impact this will have on the economy of Southwest Louisiana. To answer this, we began by looking at how it would affect a market served by Harrah’s, The Isle of Capri, The Grand Casino-Coushatta, Delta Downs and Pinnacle. The initial scale of the Choctaw’s proposed casino is similar to the Grand Casino-Coushatta, though there is nothing in their compact with the Governor that would prevent it from being larger. Given that the Grand Casino-Coushatta has an estimated annual win of $250 million and that the Choctaw casino would have an advantage over it in every market segment, we expect the Choctaw casino will have a gross win of $297 million per year.
Our analysis of the individual market segments is as follows:
Local Gamblers: While Delta Downs is likely to have little impact on the local gaming market, the same is not true of the Choctaw casino. Grand Casino-Coushatta has demonstrated that local gamblers will travel extra distance to get better odds and the spacious environment of a land-based casino. We believe this will be true of the Choctaw casino as well and expect that it will capture at least 25% of the local market with the baulk of this coming from the Grand Casino-Coushatta.
Day-Trippers: The Choctaw casino will be 30 minutes closer to the Southeast Texas gaming market than the Lake Charles riverboats, and 75 minutes closer than the Grand Casino-Coushatta. This will allow them to attract new patrons Texas and this will allow the day-tripper market to grow by 20%, or $47 million. But the Choctaw casino will also take significant day-tripper patronage away from the existing casinos, decreasing their total win by $53 million.
I-10 Stop-Offs: The Choctaw casino will be the first opportunity to gamble for eastbound travels on I-10. We anticipate it will capture at least 40% of this traffic and because the size of this market is essentially fixed, virtually all of this patronage will come at the expense of existing casinos.
Destination Gamblers: This is the market segment with the greatest ability to grow, although much depends upon how aggressively the Choctaws go after high-rollers and more distant patrons. It will require more than just advertising to successfully penetrate this market; they will need to develop the type of attractions and amenities that will make people choose their facility over Las Vegas, Biloxi, the Caribbean, or even Disneyland. We anticipate that one-third of the Choctaw’s business will come from destination gamblers but about half of this will be at the expense of existing casinos.
This analysis is summarized in Table 5, which shows the Southwest Louisiana gaming market growing to $903 million by 2004. For this to happen Pinnacle would have to remain in the market and both Pinnacle and the Choctaw casino would have to draw heavily from Houston and beyond. But Pinnacle has stated that they may cancel their plans to build a casino resort on Lake Charles if the Choctaws are allowed to open a casino on the Texas boarder--a threat made more credible by the fact that Pinnacle’s license does not allow them to scale back their plans to adjust for the Choctaw’s entry. As mentioned previously, it is also likely that Harrah’s and the Isle of Capri will relocate or sell their second boats if either Pinnacle or the Choctaws enter the market. Thus, we believe the most likely situation in 2004 is a market with either the Choctaw casino or the Pinnacle casino (not both), Delta Downs, The Grand Casino-Coushatta, and Harrah’s and the Isle of Capri each operating a single boat. Each of these scenarios is considered in more detail in the next sections where we examine the impact on taxes, employment and spending.
Table 5
II. The Impact on Tax Revenues
Comparing the taxes paid by different casinos in Southwest Louisiana is very complex because each casino is taxed differently: Harrah’s pays a head-tax to the City of Lake Charles; The Isle of Capri pays a percentage of its revenue to the City of Westlake and the Police Jury; Pinnacle pays the Port of Lake Charles and the City of Lake Charles; Delta Downs makes contributions to the Horsemen’s Association; the Coushatta Tribe makes donations to Allen Parish; and the Choctaw’s would pay into a state education fund. To keep things simple, the tax computations that form the basis for this portion of the study are contained in Appendix I and only the products of those computations are discussed in the main text.
Tax revenue projections for 2004 were made for each of the four scenarios. Scenario “A” represents the status quo in that it assumes the Choctaw casino is not approved, Pinnacle completes their project as planned, and Harrah’s and the Isle of Capri continue to operate two boats each. Scenario “B” assumes the Choctaws are allowed to build their casino but everything else stays the same. Scenario “C” assumes the Choctaws build their casino and Pinnacle does not develop their property. Scenario “D” assumes the Choctaws enter the market, Pinnacle does not build its casino, and Harrah’s and the Isle of Capri each relocate one of their boats. These projections are shown on the following page in Table 6.
One issue that must be addressed is whether or not the payments required of the Choctaws in the compact with the Governor constitute a tax. Federal law is quite clear that states do not have the authority to tax activities that take place on Indian land. Thus, the 6%[2] of net revenue (i.e., the gross win less operating expenses) that the Choctaws must pay to local governments can only be used to “offset and defray” expenses which result from the operation of the Choctaw’s casino with the distribution of these funds determined by a commission composed of representatives of local government, the Choctaw Band, and the State. Thus, local governments may recover expenses incurred due to the operation of the Choctaw casino, but they cannot receive net benefits that might be distributed to parish residents.
The compact also requires the Choctaw band to contribute 15.5 % of its net revenues to the Support Education First Fund (SELF). These funds are to be used to promote Indian education as well as “other education” within the State, although the proportion going to these unspecified “other” educational activities is not explicit. In return, the State of Louisiana is obligated to actively support the Choctaw’s efforts to buy land in the Vinton area and have it declared a reservation by the Department of the Interior, as well as to fight in court any effort to block the construction and operation of their casino.
Table 6 indicates there will be a loss of $53 million in state and local tax revenue under scenario “D.” But the vagueness of the language in the compact and the unknown cost of the State’s compliance makes it impossible to attach a monetary value to these payments. Thus, it must be assumed from both a legal and a practical standpoint that any loss of revenue from a non-Indian casino to the Choctaw casino constitutes a complete loss of tax revenue. If these payments are not counted as taxes, then the Choctaw casino will reduce State and local tax revenue by approximately $72 million dollars per year.
The employment impact consists of jobs created directly by the casinos (i.e., those persons on its payroll) as well as jobs created by other businesses that benefit from the casino operations. Statistical analysis performed for Gambling in Louisiana: A Cost/Benefit Analysis[3], found that for every three jobs directly created by casinos in Southwest Louisiana, two additional jobs were created in other sectors of the economy. For example, there are currently 5,571 persons employed by casinos in Southwest Louisiana, which suggests there are another 3,510 jobs spread throughout the economy that are also dependent on the casinos, for a total employment impact of 9,081 jobs.
Projections of casino employment in Southwest Louisiana in 2004 are shown in Table 7 on the following page. Under scenario “A”—the status quo—we estimate that there would be 12,050 direct and indirect jobs in southwest Louisiana attributable to the casinos industry. We assume that the Choctaw casino will have 3,000 employees, but when it is added the to the current market (scenario B) total employment rises to 13,247, an increase of only 1,197 jobs. There are several reasons why the increase in overall employment is less than the number persons employed at the Choctaw casino.
Job Displacement: We estimate the Choctaw casino will take away $179 million of business from the existing casinos in Southwest Louisiana, causing them to lay off many of their employees.
Job Leakage: Because of the lack of housing in the Vinton area and the Choctaw casino’s proximity to Texas, we anticipate that at least twenty percent of the Choctaw’s employees will choose to reside in Texas communities.
Cross-border Spending: A significant portion of the spending by the Choctaw casino, its employees and its patrons will be done in Texas communities such as Orange, Vidor, and Beaumont. Thus, many of the indirect jobs that are created will be in Texas rather than Louisiana.
Electoral Pressures: One subtle difference in the employment practices of Indian and non-Indian casinos is that non-Indian casinos value their employees’ votes in local elections so they tend to hire local residents, spread their jobs around using a large number of part-time employees, and spend their money where it will create jobs in the local economy. Indian casinos do not face the electoral pressures and tend to hire more full-time employees with less regard for their residence and voting status.
Under scenario “C,” Pinnacle responds to the Choctaw casino by canceling its Lake Charles resort project. If this happens, and estimated 1,611 direct and indirect casino jobs will be lost, reducing total employment to 11,636. This would mean a net loss of 414 jobs attributable to the Choctaw casino. Under scenario “D” Harrah’s and the Isle of Capri relocate their second boats eliminating 425 jobs in the local economy. But if this happens it may not be strictly due to the Choctaw casino; there is a chance they these boats would be eliminated if Pinnacle enters the market, although the probability is much greater with the Choctaws casino. Thus, the Choctaw casino could cost Southwest Louisiana from 414 to 839 jobs with a payroll of between $10.5 million to $21 million.
IV. The Impact on Spending in Southwest Louisiana
The spending impact has two components: (1) the money spent by the casinos and their employees and (2) the money spent in other parts of the economy by visitors to the casinos. But not all this spending is a clear gain; one must adjust the displacement that takes place when local residents lose money at casinos because that money would have been spent elsewhere in the local economy. The Gaming in Louisiana study found that for every dollar local residents lost at a casino, other local spending was reduced by 65 cents. After making this adjustment, the net spending attributable to casinos and casino visitors in Southwest Louisiana was approximately $468 million in 2001.
Because the Choctaw casino will cause little increase in gambling by local residents, it will have a small displacement effect, probably in the range of 30%. But its spending must be adjusted to account for the reduced spending associated with existing casinos when the Choctaws enter the market.
Casino Patron Spending: Approximately 10 million persons visited a Southwest Louisiana casino in 2001. Six million of these came solely for the purpose of gambling and they spent approximately $200 million in the local economy. We expect that the Choctaw casino will draw around 3 million visitors per year and that these visitors will spend approximately $220 million outside the casino. But due to the lack of gaming infrastructure in the Vinton area, such as hotels, restaurants, golf courses, shopping, tourist attractions, etc., we expect that at least half of this spending will be done in Texas.
These expectations are reflected in Table 8, which shows projections of spending under the four scenarios used in the other sections of this study. Under scenario “B” in which the Choctaws enter the market and all other gaming operations continue, spending in Southwest Louisiana would increase by $72 million a year. Under scenario “C” in which the Pinnacle project is cancelled, overall spending would be up by just $4 million a year, and under scenario “D” in which Pinnacle and two riverboats leave, spending would be up by $3 million a year.
Another way to estimate the spending impact can be obtained from the data in Table 5 that indicates that $118 million of the Choctaw casino’s revenue will come from new patrons while $179 million will come from existing casinos. This suggests a positive impact, including a multiplier effect, of about $190 million a year and a negative impact of about $115 million a year from transferring spending to the Vinton area where some of it will be lost across the border to Texas. By this rough calculation, the net spending impact of the Choctaw casino on the economy of Southwest Louisiana would be approximately $85 million a year.
If the Jena Choctaw Band of Indians is allowed to build a casino on the border with Texas, it will have a major impact on the economy of Southwest Louisiana, not all of which will be good. Casino revenue and spending associated with casinos is likely to increase, but if Pinnacle cancels its casino resort complex in south Lake Charles the could be a net loss of over 800 jobs in the parish. But the greatest impact will be on tax revenue: depending on what Pinnacle does, the State stands to lose between $32 million and $55 million a year in taxes while local governments could lose between $7 and $17 million a year in taxes.
Looking beyond the aggregate numbers, the proposed Choctaw casino will cause major disruptions and relocations within Southwest Louisiana. Many jobs will be transferred from the Kinder and Lake Charles areas to area around Vinton and across the border into Texas and while some of those who become unemployed may accept jobs at the Choctaw casino and relocate, others will not. Local businesses will also feel the impact. A number of hotels, restaurants, gas stations and other business have sprung up or expanded around Kinder and Lake Charles to meet the needs of the new casino industry and they will not be situated to serve the market in Vinton. The Port of Lake Charles will be adversely affected if Pinnacle cancels the casino resort it is building on port property in south Lake Charles. But perhaps the greatest impact will be on the Coushatta Indian Tribe that has been developing the casino it operates on tribal land just north of Kinder.
While we believe that competition is good for business and it is essential for making the market grow, Indian casinos and state-licensed and regulated casinos do not play on a level field. Indian casinos have a significant advantage because they pay no taxes and are able to operate land based casinos with no limitations on space or the number of gaming devices they offer. To allow the Choctaws to operate a casino on the border with Texas where it would also enjoy significant locational advantages over the Lake Charles riverboats and the Coushatta casino would choke development of the gaming industry in Southwest Louisiana, with no apparent benefit to state or local governments.
Daryl V. Burckel is the Department Head of the Accounting, Finance and Economics Department at the McNeese State University. He earned his doctorate at Mississippi State University and specializes in the areas of financial analysis, business valuation of closely-held business interests, and taxation. He has published over 50 referred articles in journals such as the Journal of Accountancy, Applied Economics, North American Journal of Economics and Finance, Tax Notes, Taxes: The Tax Magazine, Journal of Taxation, The CPA Journal, and Akron Business and Economic Review.
Michael M. Kurth is a professor of economics at McNeese State University. He earned his doctorate at Virginia Tech and taught at Emory and Henry College and California State University-Hayward before coming to McNeese in 1984. He is specialized in labor economics, public finance, and public choice analysis and has published in journals such as Public Choice, The Journal of Labor Research, and The Journal of Contemporary Studies. In 1988 he received the Duncan Black Award from the Public Choice Society for co-authoring the best article in public choice that year.
Both Dr. Burckel and Dr. Kurth have done extensive research in the local gaming market and both were on the editorial board of Gambling in Louisiana: A Cost/Benefit Analysis prepared for the Louisiana Gaming Control Board. Both have testified before the Gaming Control Board on several occasions.
[1] Proposed Pinnacle Casino Resort: Market Study and Financial Projection, GVA Marquette Advisors, July 2000
[2] Comparing the Choctaw’s payments with the tax rates of the non-Indian casinos may be misleading because the Choctaw’s rate is based on net revenue whereas non-Indian casinos are taxed on their gross revenue. Assuming the Choctaw’s expenses are 70% of their gross revenue, 6% of net revenue would be equivalent to 1.8% of gross revenue and the 15.5% of their net revenue they are required to pay to the State would be equivalent to 4.65% of their gross revenue.
[3] This study was prepared under the direction of Tim Ryan and Janet Speyrer of the University of New Orleans for the Louisiana Gaming Control Board in 1999 and it is available on-line at http://www.uno.edu/~coba/dber/gambling1998/