Budget & Tax

Financial expert says Oklahoma casino fees below market rates

January 13, 2020

Ray Carter

Gov. Kevin Stitt says the debate over the fees casino operators pay Oklahoma government for monopoly rights must focus on market value.

“To me, it’s a fairness issue and what is it worth to operate casinos in our state,” Stitt told attendees at a recent luncheon hosted by the Petroleum Alliance of Oklahoma. “It has nothing to do with the Native Americans or what they do for our state. This is all about one issue on casinos.”

One expert says the market value of a casino license is likely much more than the amount that Oklahoma government typically receives in “exclusivity fees” from tribal governments that have geographic gaming monopolies under state compacts, although the value of some casinos will be more than others.

“The values are totally dependent on how close the casino is to a major population center,” said Jeff Hooke, a finance professor and senior lecturer at the Carey Business School at Johns Hopkins University. “In Oklahoma’s case, the value of licenses would vary by their closeness or their proximity to major population centers. The Choctaw resort, for example, which has got over 4,000 slot machines, would have a very high license value. If you looked at it in commercial terms, it would be hundreds of millions of dollars.”

Oklahoma receives its casino gambling revenue through exclusivity fees paid by tribal governments for monopoly rights. Those fees run between 4 percent and 6 percent on slot machines and up to 10 percent on table games.

Stitt has noted the fees for slot machines in Oklahoma are significantly lower than the rates tribal governments pay in other states with comparable markets, a point he reiterated to the Petroleum Alliance.

“I think it’s a math question. I think we can look at other states; we’re not in a vacuum,” Stitt said. “Multiple, multiple states have compacts with tribes or they have commercial gaming, and we can look at that in Connecticut and Florida, and we can look at it in New Mexico, right next door, and we can determine what those things are worth.”

In some states, tribal exclusivity fees run as high as 25 percent, and those tribal-compact rates are far lower than the commercial tax rates imposed on casinos in most states.

According to the annual report issued by the Oklahoma Gaming Compliance Unit at the state Office of Management and Enterprise Services for the 2018 budget year (the most recent available), the state of Oklahoma collected nearly $139 million in tribal gaming exclusivity fees that year.

However, that pales in comparison to the amount operators are willing to pay for a casino license in other states, even accounting for the fact that those licenses cover multi-year terms, Hooke noted. And he pointed out those operators also pay high tax rates in addition to the cost of obtaining a state casino license.

“The highest offer I’ve seen to a state is around $500 million. That was in suburban Chicago,” Hooke said. “And then you’ve seen some cash transactions where money changed hands in the $300 million, $400 million area.”

The Choctaw Nation is among those seeking a casino license in Illinois following legislative approval of new casinos in that state. Gary Batton, chief of the Choctaw Nation, recently discussed that effort in a Dec. 12 letter sent to tribal members.

“As you may have heard, we are moving to expand our gaming operations beyond our 10.5 counties in Southeastern Oklahoma,” Batton wrote. “We’ve applied for permission to establish gaming in northwestern Arkansas. Our proposal would represent a win-win for both ourselves and for the local community. We are also moving forward to potentially establish gaming in suburban Chicago. The town of Matteson, Ill., picked our proposal because of the value it brings to their local community.”

Even though the tribe will face significantly higher casino tax rates and fees in other states, Batton wrote that establishing gaming operations “outside of Oklahoma” would allow the tribe to “increase our revenues.”

Hooke said the value of individual casino licenses varies, but even remote, rural facilities in other states have a market-based value that significantly dwarfs the exclusivity payments Oklahoma currently receives from individual gaming operators.

“If you look at New York as an example, the license value for a casino near a metropolitan area might be $500 million, $600 million,” Hooke said. “And then you’ve actually seen auctions for licenses upstate where nobody lives, in these small towns upstate, where the auction value might be $50 million. You would see the same thing in a place like Oklahoma.”

The $50 million casino-license value Hooke cited for rural New York facilities is greater than the total annual exclusivity fee payment submitted by any single tribal entity in Oklahoma in 2018, according to Oklahoma Gaming Compliance Unit report figures.

Hooke, who previously worked as an investment banker, first became involved with casino issues when Maryland was considering the legalization of casino gambling.

“The powers in the industry wanted Maryland to give away the licenses for free to connected insiders and charge low tax rates,” Hooke said. “Since I had a lot of corporate finance training and had seen a lot of merger and acquisition deals in real life, I quickly realized that the license to operate, a monopoly type license to operate a casino in a populated market, was quite valuable, so rather than giving them away the government should auction them to the highest bidder.”

He subsequently was asked to testify on the issue in other states, including Pennsylvania, Massachusetts, Illinois, and Kentucky.

In part because Oklahoma does not award casino licenses through an open auction, Hooke said higher state exclusivity fees “would be appropriate” based on market conditions, although rates could vary.

“For a large casino near a population center, the license value could be extremely high,” Hooke said. “Those types of properties can also pay a much higher tax rate than what they’ve got already. For a smaller Indian casino in a rural area far away from the interstates and the population center, a lower tax rate is appropriate.”