Under Pressure: How Economic and Regulatory Strains Threaten to - - PDF document

Under Pressure: How Economic and Regulatory Strains Threaten to Undermine Tribal Gaming

Christine M. Masse

Partner Miller Nash LLP

Understanding Gaming Law Issues: Under Pressure: How Economic and Regulatory Strains Threaten to Undermine Tribal Gaming Christine M. Masse, Miller Nash LLP Partial Chapter Excerpt

Introduction An industry once thought to be recession-proof is showing that no industry is immune from this economic

• downturn. While faring better than many other industries, for the fi

rst time gambling revenues are falling in several of the forty-eight states with some form of gambling. Certainly, some sectors and regions have been hit harder than others have been, but on the whole, gambling revenues are declining or at least growing more slowly than ever. In turn, states that rely on revenues from gaming have seen their funds decrease. Despite this downturn, in the past year at least twenty-fi ve states have proposed or considered proposals to expand gambling in reaction to budget woes. Everything—from expanding state lotteries to commercial gaming, and even Internet gambling—is on the table. Even Hawaii, which is one of only two states without legalized gambling, seriously considered legalizing gambling during its 2010 legislative session. At the national level, Internet gambling, currently illegal in the United States, is now being considered as a taxing opportunity. Tribal gaming has also been hit by this downturn. While tribal gaming did post some growth in 2008, it was the industry’s slowest annual growth in reported history. Despite a declining or stalled growth in tribal gaming revenue, the increasing fi nancial pressure on states has not only caused them to consider an expansion of commercial and state gambling, which would be detrimental to the tribal market, but also turned their atten- tion toward tribes as a potential revenue source through revenue-sharing demands. All this is occurring at a time when some tribal casinos are being shuttered, major defaults of tribal debt have occurred, and lending to tribes for economic diversity has stalled. Gaming Policy and Economics The History of Tribal Gaming Before enactment of the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. §§ 2701-2719, some tribes entered the gaming market by operating high-stakes bingo halls to raise revenue to support tribal government. Long rooted in traditional social games, this new type of tribal gaming helped these tribes achieve some level of success and provided a “tax base” by which they could support their government and people. With this suc- cess came legal challenge, and in 1987, the United States Supreme Court ruled in California v. Cabazon Band

• f Mission Indians, 480 U.S. 202 (1987), that tribes had the right to operate gambling facilities independent of

state regulation. In Cabazon, the Supreme Court held that neither the state of California nor Riverside County could regulate the bingo and card game operations of the Cabazon Band of Mission Indians and the Morongo Band of Mission Indians. Cabazon, 480 U.S. at 221-22. The decision clearly established that states, absent express con- sent by Congress, do not possess the authority to regulate gaming on Indian land, because it would infringe

• n a tribe’s right of self-governance.

Subsequently, many other tribes opened gaming facilities. This growth, combined with the tension from the Cabazon decision, led to increased efforts for federal legislation to govern and regulate Indian gaming. In 1988, Congress passed IGRA “to provide a statutory basis for the operation of gaming by Indian tribes as a means of promoting tribal economic development, self-suffi ciency, and strong tribal governments.” Congress also believed that tribal gaming would subject the tribes to undue infl

• uence. Under what some considered

patriarchal policy, Congress included in IGRA sections “to shield [a tribe] from organized crime and other corrupting infl uences, to ensure that the Indian tribe is the primary benefi ciary of the gaming operation, and to assure that gaming is conducted fairly and honestly by both the operator and players.” See 25 U.S.C. §2702.

Understanding Gaming Law Issues: Under Pressure: How Economic and Regulatory Strains Threaten to Undermine Tribal Gaming Christine M. Masse, Miller Nash LLP Partial Chapter Excerpt

Congress also established the National Indian Gaming Commission (NIGC) to oversee that policy and fur- ther regulate tribal gaming. Consistent with IGRA, tribal gaming is different from commercial gaming. Hosted by a government that answers to its constituents (i.e., tribal members)—rather than a corporation that seeks profi t and answers to its shareholders—it is conducted by an inherent sovereign nation to serve the needs of its people. With fewer

• pportunities to raise “tax revenue” (i.e., most tribes do not have free-fl
• wing revenues from property or sales

taxes), governmental gaming must be used to fund tribal government operations or programs, provide for the general welfare of tribal members, promote tribal economic development, donate to charitable organizations, and fund operations of local governmental agencies. See 25 U.S.C. § 2710(b)(2)(B)(i)-(v). IGRA also created classifi cations of gaming. Traditional games are under the jurisdiction of the tribe and considered Class I gaming. Class II gaming encompasses games of chance, including bingo, pull-tabs, lot- teries, punchboard, and other games similar to bingo, whether live or electronic, in which players bet against

• ther players. Class II gaming also includes an electronic game played on a linked video gaming device that is

connected to a central computer system. Class III games are any form of gaming besides Class I and Class II games, including electronic gaming devices with random-number generators (e.g., slot machines) and house- banked table games. A fi nal component of IGRA gave states the authority to limit and regulate certain forms of tribal gaming in the state. Class I and II games may be operated by tribes without any agreement with the state in which they

• perate. Class III gaming, however, requires a tribe to enter a compact with the state. Tribal-state compact

negotiations have become heated as some states leverage the process to capture an increasing share of tribal gaming revenues, and other states refuse to negotiate compacts altogether. As described below, tribes may be willing to share gaming revenue with states that offer signifi cant benefi ts to the tribes—such as exclusivity in a geographic area—as opposed to states where commercial and state-run gambling activities directly compete with tribal casinos. IGRA has created more certainty in tribal gaming and led to signifi cant growth in gaming facilities. By 2008, 237 tribes operated 442 tribal gaming facilities in twenty-eight states. This represents less than half of the 564 federally recognized tribes in the United States. The most recent data available shows that Indian gam- ing makes up 28 percent of the total gaming market in the United States. But there continues to be disparity in the performance of tribal casinos—42 percent of gaming revenue was generated by only 6 percent of all Indian gaming facilities. See Alan Meister, Casino City’s Indian Gaming Industry Report (2009-2010). Much of this disparity is centered on location—many of the most successful tribal gaming properties are in close proximity to major population hubs. State Gaming States are also major players in the gaming market. States derive the bulk of gambling revenues from two main sources: state-operated lotteries and casinos. State lotteries as we know them are fairly modern. There were no legal, government-sponsored lotteries operating in the United States from 1894 to 1964. The fi rst legal lottery in the twentieth century was the New Hampshire Sweepstakes, which began on March 12, 1964. Now, state lotteries capture about 22 percent of the gaming revenue in the United States. In many places, lotteries appear to be more politically palatable than income, sales, or property tax increases. Lotteries can be marketed as fun and exciting opportunities for the public much more readily than other taxes. States also regulate and tax commercial casinos, another 40 percent of the market. While many of these state revenue-generation programs are not “taxes” per se, in times of economic crisis, states increasingly turn to society’s vices in order to plug their budget holes. Many states have increased their

Understanding Gaming Law Issues: Under Pressure: How Economic and Regulatory Strains Threaten to Undermine Tribal Gaming Christine M. Masse, Miller Nash LLP Partial Chapter Excerpt

cigarette taxes, their liquor excise taxes (or, in control states where all liquor must be purchased from state-run stores, the number of stores), their gambling taxes, or, as discussed here, the profi ts of their state-run lotter- ies. State Lotteries The primary source of gaming revenue to state governments is lotteries. In fact, some forty-three states and the District of Columbia currently operate state lotteries (only Alabama, Alaska, Hawaii, Mississippi, Nevada, Utah, and Wyoming do not operate lotteries). In 2007, overall state revenues from lotteries totaled approxi- mately $18 billion, up from $8.8 billion in 1993. Much of this increase in total revenue is attributable to the emergence of video lottery terminals (VLTs) and to new states legalizing the lottery between 1993 and 2007. After adjusting for infl ation, however, a vast majority of states saw declines in lottery revenue collections in the last two years. For states that base their budgets on prior years’ lottery revenues, this decline has led to budget gaps at a time when the states can least afford it. And yet, states continue to look to gambling expan- sion as a means of fi lling these budget gaps. Casino Revenues 1. Commercial Casino Taxation Casinos also provide signifi cant income to the states. Currently, twelve states have legalized commercial casi- nos, with Nevada leading the way with approximately 19 percent of all state revenue from casinos nationwide (despite a tax on casino activity of only 6.75 percent). These tax rates vary widely from jurisdiction to jurisdic- tion (e.g., compared to Nevada, Pennsylvania taxes its casinos at 55 percent), but state and local revenue from casinos declined by 8.5 percent overall from fi scal year 2008 to 2009. This decline is attributed to a number of factors, including the economy, competition, and smoking bans enacted in several states. The fastest-growing type of gambling in the last couple of years has been the racetrack-casino, or “racino,” a hybrid facility that operates a racetrack and slot machines, table games, or VLTs. Racinos currently operate in twelve states, and total state revenues have more than doubled since 1997. 2. Tribal Casino Revenue-Sharing Like state gaming revenues, tribal gaming revenues cannot be taxed. While under IGRA it is illegal for states to tax tribal gaming revenues, see 25 U.S.C. § 2710(d)(4), many tribes have entered into state compacts that include a “revenue-sharing” component to either state or local government. To avoid being a tax, this revenue sharing must be in exchange for something—often exclusivity or some other benefi t. In 2003, the Ninth Circuit decided one of the very few cases examining state demands for revenue sharing, In re Indian Gaming Related Cases, 331 F.3d 1094 (9th Cir. 2003). In that case, which concerned the revenue-sharing provisions in the compacts negotiated under Governor Gray Davis, the Ninth Circuit upheld the revenue- sharing provisions in light of the meaningful concessions on the part of the state as well as the provisions’ consistency with IGRA’s goals. The extent to which a state can demand revenue-sharing provisions in tribal-state compacts has again come to the forefront in California. Governor Arnold Schwarzenegger won the governorship in 2003 and shortly thereafter negotiated deals with several tribes calling for more than $9 billion for the state’s general fund over the next twenty years in shares of gambling revenue. Those tribes looking to expand their gaming opera- tions did agree to revenue sharing with the state—most recently, Governor Schwarzenegger signed a compact

Understanding Gaming Law Issues: Under Pressure: How Economic and Regulatory Strains Threaten to Undermine Tribal Gaming Christine M. Masse, Miller Nash LLP Partial Chapter Excerpt

with the Pinoleville Pomo Nation in Mendocino County providing 15 percent revenue share with the state in March 2010. But other California tribes looking to amend their compacts have refused to enter revenue shar- ing and are embroiled in litigation with the state.

For more information email Christine Masse, Miller Nash LLP, christine.masse@millernash. com or visit Aspatore Books at http://www.aspatore.com/store/bookdetails.asp?id=1016 for information on the publication Understanding Gaming Law Issues.