Policy Study

Expanding Slot Gaming in California

A Business Analysis

Executive Summary

California’s severe finanacial situation has prompted state leaders to consider expanding casino-style slot machine gaming. Governor Schwarzenegger and his administration, in particular, are counting on slots revenue to help plug the state’s massive budgetary hole. Several options available have fueled controversy within the state regarding revenue and other concerns. To aid leaders in comparing the options, this report examines several possible market designs that California could adopt to expand casino-style slot machine gaming and enhance state revenue. Specifically, this report projects what revenue California would receive under each market design, and what other advantages and drawbacks are implicit in the designs.

Our findings indicate that, if the state elects to expand casino-style slot machine gaming, it would maximize state revenue by auctioning off a small number of operating licenses via a “Reverse Auction” whereby potential operators (including state horse tracks and Indian tribes) vie for the licenses by offering to retain the smallest portion of the win. Under that design, our modeling shows the state would receive $3.5 billion annually from slot gaming at 15 non-urban locations, with the present value over 20 years equaling $32 billion. If the games were placed in prime urban locations, the present value of state revenue from the machines increases to $37 billion.

The state could also receive substantial revenue by auctioning the licenses for cash up front. For 15 nonurban licenses, we project that the state would receive $15.9 billion initially, followed by smaller annual payments of $468 million, for a total present value of $20 billion.

By comparison, the Indian gaming compacts recently negotiated by Governor Schwarzenegger’s administration, if enacted with all casino-operating tribes, would provide the state with $9 billion in present value revenue. Alternatively, Proposition 68, which would give slot machine monopolies to horse tracks and card rooms near prime urban areas, would provide California with gaming tax revenue of a present value of C $17 billion. Proposition 70, which would place an 8.8 percent state income tax on Indian gaming operations while maintaining their monopoly position, would provide tax revenue of a present value of less than $3 billion to the state.