12/10/2002 12:00AM

Slot money could dwindle


TUCSON, Ariz. - Racetracks are going to find it increasingly difficult to make money off slot machines because of pressures applied by state governments eager to be cut a larger share of the pie, gambling experts and analysts said Tuesday during the Racing and Gaming Summit in Tucson, Ariz.

While several state legislatures are considering the idea of legalizing slot machines at racetracks to fill budget gaps brought on by the recession, they are also increasingly viewing the subsidy to racing as an undeserved windfall, the experts said. As a result, racetracks with slots or seeking slots should realize gambling machines may not be as lucrative in the future.

"It's inevitable," said William Eadington, a professor of economics at the University of Nevada-Reno, during the opening panel of the one-day gaming conference, which for the first time this year, was held one day before the annual Symposium on Racing officially began on Wednesday.

"Whether you like it or not, people are going to notice," Eadington said. "There are more pressing social needs than racing, like education and health, that will press for a reallocation of the subsidy in other directions."

The shift comes at a critical juncture for the racing industry. Racetracks in many states, including Maryland, Pennsylvania, and Kentucky, are lobbying for bills that would legalize slot machines, providing a dramatic influx in new revenues for the tracks and purses. Other state legislatures, including those in Florida and Ohio, are also considering slots at tracks.

Christa Short, a gaming analyst at Bear Stearns, pointed to recent tax-rate increases in Illinois as emblematic of the new movement to divert revenues from gambling companies back to the state. Short also said that initial plans in Maryland for slots at tracks call for a tax rate of 50 percent.

"High taxes are going to be the rule in many of these states" that are considering legalizing gambling machines, Short said.

Steve Rittvo, the president of a lobbying group that specializes in racetrack gambling legislation, said on a panel later Tuesday that tracks need to consider cutting the state in on as much of the gambling revenue as possible to make their cases politically palatable. Arguing for too large a cut of the pie could backfire and cut tracks out of the equation completely.

"You need to maximize the tax returns to the taxing entity while still retaining enough for yourself," he said.

Rittvo and others cited legislation quickly passed in New York last year that legalized video-lottery terminals - a type of slot machine tied into the state lottery - at Aqueduct and Finger Lakes and a handful of harness tracks. The bill allowed the tracks to retain 12.5 percent of the gambling revenues while also allocating 12.5 percent to horsemen. The state would keep 50 percent.

New York's lottery corporation, however, said that tracks would be responsible for nearly all of the capital expenses involved in building and running the slots operation. As a result, tracks in the state are saying that they cannot make money from the operations and are pushing for a new bill that would allocate as much as 20 percent to the tracks, according to Bill Nader, a vice president of Aqueduct.

In Maryland, racing officials are hoping to capitalize on the recent election of Robert Ehrlich as governor. Ehrlich is a Republican who supports slots at tracks. But Maryland racing officials who spoke on the condition of anonymity said they fear that the cut demanded by the state may be comparable to New York's.

Even with the benefits brought by slots, racetracks have not proved horse racing is a sustainable business in the long run, Eadington said. As an example, Eadington said that purse revenues derived from racing at Prairie Meadows in Iowa, a racetrack with one of the most lucrative slot operations in the country, was only $1.4 million in 2001. Slot machines revenues, he said, subsidized Prairie Meadows purses by $15 million the same year.

"The demand for racing remains weak for various long-term reasons, and [legalizing gambling machines] does little to address the fundamentals," Eadington said. Later he added, "What you've done is make a lot of casinos that happen to have animals running around in circles."

Robert Farinella, the president of Prairie Meadows, said that Eadington ignored how the slot-machine subsidy benefits the agricultural industry in Iowa by spurring investment in breeding farms and horses.

"That spins an enormous benefit, especially in an agricultural state like Iowa," Farinella said. "From an economic standpoint [the racing operation] is very, very viable."

Jane Holmes, the president of an industry lobbying group in Ontario, Canada, where slots are legal at tracks, also criticized Eadington's conclusions.

"We have a huge industry that the slots support," Holmes said. "In Ontario, it's over 40,000 people, and that makes us the third-largest agricultural sector in the province."