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Can electronic pull-tabs pull in enough stadium revenue?

Electronic pull-tabs
Allied Charities of Minnesota/King Wilson
Using a hand-held device, someone playing an electronic pull-tab machine would match pictures on a touch-screen.

A major pillar of the Vikings stadium proposal unveiled last week is tax revenue from an expansion in charitable gambling.

But such a financing plan has lots of unknowns — and one key question: Will the introduction of electronic gambling gizmos generate enough income to repay the bonds?

The financing proposal depends on electronic pull-tabs supplying funds to repay $398 million in bonds the state plans to float to build the facility. (Minneapolis will back another $150 million in bonds with sales taxes, pending City Council endorsement to the financial arrangement. The entire public financing plan, Gov. Mark Dayton said last week, wouldn't use "a single dollar of general fund tax revenues.")

Minnesota already allows paper pull-tabs. To win cash prizes, players match pictures on the front of the cards they purchase, usually for $2 each, under tabs that they tear off. Bars and restaurants sell them on behalf of nonprofits, and the proceeds -- minus the prize money, expenses and taxes -- go to charity. Among those who benefit in Minnesota: American Legion posts, VFW groups and others who use the money to support local sports leagues, scholarships and the like. 

Electronic pull-tabs would work pretty much the same way. Using a hand-held device, a player would match pictures on a touch-screen.

The more Nintendo-ish devices, hopes Dan O'Gara of O'Gara's Bar and Grill in St. Paul, will boost business from younger participants who are accustomed to fiddling around with games on their cell phones, tablets and laptops. "People on a college campus wouldn't know what a paper pull-tab is," he says.

Are projections realistic?

But are the projections for new pull-tab revenue realistic?

To figure that out, you first have to look at how much money is needed.

The state has to borrow $398 million. That amount does not include interest. Normally, interest charges would double the amount owed. But rates are low right now, says Wilson White, a New York municipal bond expert, and Minnesota's credit, while not perfect, is pretty solid. So he expects that interest costs would run about 60 percent of the total. So, that's a combined $636.8 million. Spread that over 30 years, and you get an annual repayment of roughly (very roughly) $21 million.

That's real money, but put beside the Department of Revenues estimates of income that would flow in from electronic pull-tabs and electronic bingo (which also may be added to the state's gambling offerings), the amount looks like chicken feed. In a Dec. 5 fiscal note, the revenuers projected that charitable e-gambling would produce about $72 million a year in taxes. 

Seriously? That seems like a lot, considering that all charitable gambling last year produced about $38 million. 

John Spry, an assistant professor of economics at University of St. Thomas who keeps track of charitable gambling, says that pull-tabs "have high uncertainty as a revenue source."

Laurie Gluesing, gambling manager for CLIMB Theatre, a non-profit that runs games to finance anti-drug and anti-bullying stage productions for school-age kids, is more dubious about such a large gush of cash. "I think it's a crap shoot," she says.

Little evidence for estimates

For starters, there's scant evidence to show how much electronic pull-tabs would bring in. No state currently offers them in the same way as Minnesota plans, according to Tom Barrett, executive director of the Minnesota Gambling Control Board.

"Other states are looking to us," he says. So there's no history to draw on. In Idaho, e-pull-tabs [albeit in a different format], have produced "an incremental increase" in business, says Scott Henneman, vice president of Oasis, which develops new gaming technology. How big is that increment? Well, he wasn't quite sure. "Bigger than 1percent, ha-ha."

Minnesota’s Revenue Department moreover based its estimate on assumptions that may or may not hold. Among them: 1,500 sites would offer electronic bingo, and 2,500 would install pull-tab machines. One earlier bill enabling electronic charitable gambling proposes limiting large outfits (those with more than 200 seats) to 12 machines and small establishments to six. The Revenue folks went with a more conservative estimate, suggesting that large bars would put in 9 bingo games and 12 pull-tab terminals, while smaller establishments would install three and four.

Then, using several other conjectures (how much income each machine would generate), subtracting out payments for prizes and expenses, and multiplying what was left by the applicable tax rate — and more on that later — the guesstimators came up with $72 million, most of it from pull-tabs.

Charitable groups want tax changes

But King Wilson, executive director of Allied Charities of Minnesota, a trade group, asserts that there is no certainty that many bars would install so many — or, in some cases, any machines.

The incentives, he asserts, are simply not there. The new equipment would add to charities' expenses. Now they pay about 1.2 cents per pull-tab. Leasing machines could run $100 to $125 a month, according to Henneman.

If costs are substantially higher, prizes would have to be smaller. Smaller prizes would attract fewer customers, says Wilson, and revenues might not increase as much as the revenue folks have suggested.

Margins, Wilson insists, are already squeezed because of the odd way in which pull-tabs are taxed.  (Warning: We're going into the weeds.) Charities pay state taxes on total annual revenues — nothing, if they take in under $500,000, 1.7 percent for revenues between $500,000 to $700,000, 3.4 percent for those earning $700,000 to $900,000 and 5.1 percent for those with revenues over $900,000.

For example, a charity that takes in $1 million for pull-tabs, paying 80 percent to players, 10 percent, or $100,000, for expenses (rent to the bar, salaries, record-keeping and so on), winds up with $100,000 in net receipts. A corporation might pay 8 or 9 percent in taxes on that amount. But the pull-tab charity would have to pay 5.1 percent on its total $1 million take or $51,000 — a 51 percent tax rate, as Wilson sees it, leaving only $49,000 to go to good works the organization sponsors. 

Allied Charities has long been lobbying the state for what it calls "tax relief and reform." They would prefer to have pull-tabs taxed like bingo games, which pay 8.5 percent of net receipts. A charity pulling in $1 million from bingo and paying out 90 percent in prizes and expenses would wind up owing only $8,500 in taxes.

Bottom line: Without any change in the tax structure, King says, many charitable operators would be very tempted to shift to electronic-linked bingo. Doing so would upend the Revenue Department's projections, which assumed that only 15 percent of new gaming would go to electronic bingo.

Gluesing is now considering what she'll do in the 25 bars where CLIMB Theatre operates games. She won't give up paper pull-tabs completely, but any foray into electronic gaming could well shift over to bingo. "Then we might make some money instead of just collecting taxes for the state," she says. 

Even if the Department of Revenue assumptions are correct in its $72 million-a-year estimate — or maybe even overly conservative — a burst of new revenue could flatten out later.

When new forms of gambling are added in a state, says Lucy Dadayan, a researcher who tracks state gambling trends for the Rockefeller Institute, there's an increase activity for a while — though it often lags behind projections. But "growth falls over time" as the novelty wears off. 

Finally, you have to wonder whether charitable gaming will be healthy enough over the next 30 years to keep churning out a reliable stream of tax money.

A House research report called "2006-2010: Industry under Stress" offers some troubling facts. Since 2004, gross receipts from lawful charitable gambling declined by 20 percent. Last year, according to Barrett, charitable gaming turned in its first increase in years, a surprising 15 percent. But, he adds, it's too soon to know whether that's a fluke or a trend.

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Comments (14)

Exactly!

Thank you for the article, Marlys. I have been wondering about that $72 million number since it was released. I would also like to know how the percentages break down as to how many current pull tab operators pay what tax rate. In my experience, most of the small town bars that have pull tabs are using the procedes to pay for hockey uniforms for the local high school and such. So I would assume that they would fall into that untaxed range.

Charitable gambling?

Sorry, but I'm still not getting this. How is it charitable gambling when the revenue is going towards a millionaire's football stadium so he can ratchet up his profits?

This is the language which seeks to inform less and less.

I.e., rather than call a thing by its real name. This should be called the "Billionaire Handout Tax".

Leave charitable gaming alone.

Another economic pipe dream

Another economic pipe dream from the legislature. Income and gambling revenue is declining and there are a limited number of people who participate. Hopefully most people will be smart enough not to invest their entertainment dollar in losing odds.

How do we know elec pulltabs aren't HD DVD?

I'd work it a different way, from a new product introduction model. Start with having to produce $21 million a year. Minnesota's current population is 5.3 million, of which 4.1 is over age 18. Department of Human Services says 80% have gambled in some form in the last year (from a survey), so that leaves 3.2 million. I can't find any statistics, but I'd wager only 25% of them used pulltabs (810k), and the rest were weekend poker games with the guys, office pools, Vegas, lottery, etc.

So the base is about 810,000 people currently using pulltabs. To run any kind of pulltab game, about 85% of the revenue goes back as prizes. If the state (stadium) only retains 15%, about $140 million has to be wagered to end up with $21 million, or $173 per gambler per year. That's an average, every $10/year gambler needs a $335/year gambler to balance him out.

Is the universe of potential customers really the same using paper pulltabs? I doubt it. Paper pulltabs are gambling, but its a social exercise. You talk and drink while you do it, you have to go to the bartender/clerk for more tabs, you look at the size of the jar and wonder how many more winners are left in there -- all essentially shared activities. You never see someone by themselves pulling tabs; it's always a group. (Ever seen a loner playing video trivia by himself?) Now imagine how the collective fun disappears when you're staring at an ipad. There's no reason for interaction, you can't show the result around, there's nothing for the bartender to pin to the wall, there's no comparison. I would think very few paper tab customers would transition to electronic, and I'd have to be convinced that the lack of a touchscreen is what's holding the young group back.

I'm sure any bond house is going to want guarantees on the payments and not just a bunch of speculative statements based on focus groups. The Legislature hasn't much of a history with forecasting the uptake of handheld devices, and the issuer will want the right to go to the general fund if the product launch fails.

Appropriation Bonds

Jim,

The deal that uses pulltabs rather than general fund appropriations to fund the stadium raises an issue that I haven't heard widely discussed, but did see mentioned in an MPR article.

The stadium deal would use appropriation bonds rather than traditional bonds. An appropriation bond requires periodic re-passage through the legislature to approve continued payment, unlike a traditional bond that legally binds the state into payment for the whole period of the bond no matter what subsequent legislatures want to do.

As you can imagine, re-passage means there is a risk it won't get paid back. Additional risk to the lenders means additional expense to the state in financing costs.

And, the kicker is that if the new gambling revenue doesn't cover the costs, we'll still have to pay out of the general fund. Assuming some future legislature doesn't decide to just default on the debt.

I'm not 100% sure on this, but if the funding wasn't supposed to be directly tied to the gambling revenue, then I think we would be able to get traditional bonds which would cost less. This whole gambling revenue gambit just seems contrived and ill-advised.

MPR Article: http://minnesota.publicradio.org/display/web/2012/03/01/vikings-stadium-...

Let's not do anything smart.

Well, you could make the stadium deal contingent on sufficient revenue, and hold the deal for a year until AFTER electronic pull tabs are introduced so you see exactly how much they raise. In other words, introduce the pull tabs first, and go ahead with the stadium only if the tabs raise the money. Or, make the team liable for shortfalls.

Nice article.

Thanks Marlys, this is exactly what we need.

There's one more part of the

There's one more part of the tax structure that was left out: If a charitable gambling organization hits that top tax bracket, each month they need to pay an additional $10,000 flat fee on top of the 5.1%. The tax year runs from July-June, so if the hypothetical charity in the article hits that $900,000 mark in May, then they'll be paying an additional $10,000 for taxes in May and June.

That leaves only $29,000 for the charity, with $71,000 going to the state.

Combined Receipts Tax facts

Mr. Kilanowski states that a fee of $10,000/month is due from organizations which exceed the $900,000 level in a fiscal year. This is incorrect. The $10,000 is a one-time number. To see the calculation look at Mn Revenue Dept. Worksheet E- Lawful Gambling Combined Receipts Tax.

That said, the method and level of taxation on Charitable Gambling is horrendous and must be reduced or smaller organizations will continue to exit the industry and survivors have less and less to donate to community needs.

Finally, the idea that a project of the scope of a stadium will depend for financing on a totally untested gambling paradigm is crazy. I will be one of those responsible for deciding whether electronic pull tabs or bingo is offered in the establishments where my organization conducts lawful gambling. So far no one has provided me enough information to make the case that it is a viable business.

The worksheet you refer to is

The worksheet you refer to is a monthly worksheet (it even says "Keep this worksheet to use when completing next month’s Worksheet E." at the top of the sheet), as charitable gambling organizations pay in to taxes every month. Once the $900,000 is hit for the fiscal year, the $10,000 fee is applied every month on top of the 5.1% tax on all income. As a board member of one of the smaller organizations that you speak of, it is indeed a challenge to deal with.

I respectfully disagree

I'm CEO of a club that does about $2.5 mil/ year. Last month we were at about $1.3 mil for the fiscal year. Our combined receipts tax was under $8000. The total YTD is about $31,000. The $10,200 gets paid the first month you cross the threshold. After that it is part of the running total of taxes already paid that gets deducted from the total to determine what's due in the current month.

The $10,200 represents the accumulated tax that is due from $0 to $900,000. After $900,000 the rate is 5.1% of the amount over $900,000.

Here's the kicker...That tax on our GROSS is payable whether we made a profit or not.

Marginal Revenue

No mention of the 1.7% Distributor Tax which is levied in addition to the Combined Receipts Tax.

My club’s marginal tax rate is 6.9% on every dollar sold. We have to pay 81% in prizes to attract players (and compete with Tribal casinos). That’s 88 cents off the top of every dollar in sales.

From the remaining 12 cents, we have to buy the games we sell, pay rent for our space and pay employees to sell games and file the reams of compliance paperwork required by the State. Our marginal profit (donations) is about a penny. And from that penny, local jurisdictions demand we donate to their charitable funds for the privilege of running a gambling business.

In the end, our marginal revenue approaches zero. It makes no business sense for us to take on the risk and expense of the new forms of gambling at current tax rates. Our sales might go up a bit, but we will wind up with less to donate.

And if we don’t install the equipment--or if it puts us out of business--the State gets no revenue. Minnesota taxpayers at-large will be left to pay off the stadium debt.

Pull Tabs Funding

It would be a good start, and probably would work given the people in the state that partake regularly in pull tabs.