Can electronic pull-tabs pull in enough stadium revenue?

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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.