Removing pokies

All’s quiet on the western front as Labor ponders its position on poker machines ahead of the March election.

What if and when pokies are reduced or removed from communities, players gamble at casinos instead? Will the community be better off? The consensus view seems to be confining pokies to a couple of enclaves will solve all problems. Will it?

The parliamentary select committee into Future Gaming Markets reported at the end of September. The written submissions were already on the public record, as were the transcripts of the public hearings. The minutes of the Committee’s meetings published at the time of the Report’s release revealed additional written evidence mainly from correspondence with interested parties.

One additional piece of evidence not mentioned in the Report was an eight page note from Treasury on the estimated economic impact to State tax receipts if EGMs were removed from hotels and clubs and a $1 bet limit was imposed on casino EGMs. It was a study worthy of more attention than it received.

Modelling was done by Treasury. It was a spreadsheet exercise where changes in player expenditure and hence taxation receipts were estimated using three scenarios, each containing two stages.

The first stage was the removal of EGMs from pubs and clubs. Stage two was the imposition of a $1 bet limit on casino EGMs.

The closing down of EGMs in pubs and clubs will result in a ‘migration’ effect as some players travel to casinos to continue their addiction. Three scenarios termed low, medium and high impact were modelled with different levels of migration.  The lowest level of migration was termed the high impact model where overall EGM player expenditures were most affected.

Furthermore, of the player spending that didn’t migrate to casinos, each of the three scenarios assumed different levels of substituting the previous EGM spending with additional Keno spending. The high impact model had the least substitution. In other words players ended up spending less on gaming.

Overall the high impact model showed the largest fall in player expenditure/losses.

When the second stage comprising the imposition of a $1 bet limit on EGMs, which are now all assumed to be in casinos, EGM player spending again fell with some diverted to Keno. Each of the three scenarios assumes different player spending falls/ keno substitution.

Again the high impact model shows the greatest change in player spending.

So that’s what was modelled by Treasury:

1.      Confining EGMs to casinos with three different sets of migration/ Keno substitution assumptions termed low, medium and high impact scenarios.

2.      Introducing a $1 bet limit with differing player behaviour responses/Keno substitution for each of the three scenarios.

The modelling outcomes were presented in a table resembling a dog’s breakfast, which may be one reason the Committee didn’t mention them in its findings. It was a little difficult to follow.

The outcome for the low impact model has been reconfigured to include Keno as that is where the substitution activity occurs. Also included was the Community Support Levy CSL, for all intents and purposes a tax that applies to EGMs in pubs and clubs, but not to those in casinos.

$ million	Tax rate existing (1)	Existing situation (2)	Low impact model		Changes +/-
			Casinos only      (3)	Casinos only & $1 limit        (4)	Casinos only     (5)	Introduce $1 limit (6)	Total (7)
Player losses
EGMs total		190.1	137.3	132.2	-52.8	-5.1	-57.9
Keno total		36.5	84.1	87.9	47.6	3.8	51.4
Total player losses		226.6	221.4	220.1	-5.2	-1.3	-6.5
Taxes
Tax EGM	25.88%	49.2	35.5	34.2	-13.7	-1.3	-15.0
Tax Keno	5.88%	2.1	4.9	5.2	2.8	0.2	3.0
Comm Support Levy	4.00%	4.6	0.0	0.0	-4.6	0.0	-4.6
Total tax		55.9	40.5	39.4	-15.4	-1.1	-16.5

The existing situation in col 1 is self explanatory. It relates to player expenditure for 2015/16. EGM losses were $190.1 million ($114.2 million in pubs and clubs and $75.9 million in casinos), whilst Keno losses, almost all in pubs and clubs were $36.5 million. Existing taxes were $55.9 million including CSL.

Now the low impact model assumes a high level of migration to casinos as EGMs are removed from pubs and clubs. Almost all the remaining player spending in diverted to Keno in pubs and clubs. Col 2 shows the outcome and col 5 the changes. The changes are minimal. There is not much of a reduction in player losses.

Taxes on the other hand fall by $16.5 million, for two reasons. The substitute activity Keno is lowly taxed and CSL does not apply to casinos.

When the additional change of introducing a $1 bet limit are modelled (col 4) the result only shows minor changes (col 6) in both player losses and government revenue.

The overall changes for the low impact scenario are shown in col 7, player losses down by only $6.5 million but government taxes and levies down by $16.5. The winners are the operators.

The high impact model shows less migration to casinos, and less substitution of Keno, so that overall player losses are reduced.

$ million	Tax rate existing (1)	Existing situation (2)	High impact model		Changes +/-
			Casinos only     (3)	Casinos only & $1 limit       (4)	Casinos only       (5)	Introduce $1 limit    (6)	Total       (7)
Player losses
EGMs total		190.1	119.8	97.6	-70.3	-22.2	-92.5
Keno total		36.5	54.1	59.6	17.6	5.5	23.1
Total player losses		226.6	173.9	157.2	-52.7	-16.7	-69.4
Taxes
Tax EGM	25.88%	49.2	31.0	25.3	-18.2	-5.7	-23.9
Tax Keno	5.88%	2.1	3.2	3.5	1.0	0.3	1.4
Comm Support Levy	4.00%	4.6	0.0	0.0	-4.6	0.0	-4.6
Total tax		55.9	34.2	28.8	-21.7	-5.4	-27.2

Player losses fall by $69.4 million, $52.7 million due to taking EGMs out of pubs and clubs and $16.7 million due to the $1 bet limit. Revenue to government falls by a total of $27.2 million.

In percentage terms player losses are reduced by one-third and government revenue by one –half.

The Committee all agreed that the CSL should apply to EGMs in casinos. So let’s do that. Also let’s see what would happen if the Keno tax rate was increased by 15%, leaving it still below the existing EGM rate, and EGM taxes were increased by 10%. To make it simpler let’s just look at the move of EGMs to casinos, without the subsequent $1 bet limit change. This is what the high impact model would look like:

$ million	Tax rate		Existing situation (3)	Casinos only    (4)	Changes +/-        (5)
	Existing (1)	New (2)
Player losses
EGMs total			190.1	119.8	-70.3
Keno total			36.5	54.1	17.6
Total player losses			226.6	173.9	-52.7
Taxes
Tax EGM	25.88%	35.88%	49.2	43.0	-6.2
Tax Keno	5.88%	20.88%	2.1	11.3	9.1
Com Support Levy	4.00%	4.00%	4.6	4.8	0.2
Total tax			55.9	59.1	3.2

Player losses show approximately a one-quarter reduction of $52.7 million. Government revenue actually increases by $3.2 million. The migration to casinos is assumed to be 60% for players living within 50km of a casino, plus 2.5% for those living further away. For the remainder of player spending that hasn’t migrated to casinos, 25% is assumed to be spent in pubs and clubs on Keno.

EGM player expenditure in casinos is modelled to reach $119.8 million. Given there are 1,185 EGMs in casinos that’s $100k per EGM per annum.  Currently the figure is about $60k per EGM. There will be pressure to shift some of the freed-up EGMs from pubs into casinos. So far those favouring the shifting of EGMs to casinos haven’t reflected on the likelihood that EGM numbers in casinos will increase. The trade off for the removal of EGMs from the community is likely to be a cranking up of casinos as EGM venues. Confining EGMs to casinos doesn’t solve all the social ills. Out of sight, out of mind is not necessarily an optimum solution.

If the migration and substitution assumptions are realistic and removing $114.2 million of EGM spending from pubs and clubs only leads to players being better off by $52.7 million, then that implies $61.5 million, or 54%, migrates back to gaming, either EGMs in casinos or Keno in pubs and clubs.

Professor John Mangan submitted a detailed study (Removing poker machines from hotels and clubs in Tasmania: Economic considerations) to the Future Gaming Markets Committee where he modelled three scenarios if EGM were removed from the community. One scenario, Scenario number 3, assumed 50% of player spending would migrate to casinos. This is similar to Treasury’s high impact model which shows about 54% migrating back to gaming.

Prof Mangan’s findings were that spending on activities other than gaming would be better for the economy.  Under Scenario 3 he found there would be;

·         $21 million extra annually in net additions to gross state product

·         $11 million extra annually in wages, profits and dividends 

·         183 extra FTE jobs across the economy.

Prof Mangan commented on his Scenario 3:

“The results, though still positive, are smaller. The lesson here is that the more spending is retained in some form of gambling, the lower the benefits to the economy from redirecting poker machine spending from hotels and clubs. “

The Federal Group in correspondence to the Committee were critical of Prof Mangan’s approach. They argued:

“ .......there is no evidence that a reduction in gaming machine expenditure by removing EGMs from pubs and clubs would result in spending distributed throughout the whole economy.”

The Federal Group provided no evidence for that assertion. Presumably the unspent amounts will remain hidden under a bed somewhere.

The Federal Group also rejected a central tenet of Prof Mangan’s study, by claiming:

“.... the idea that gambling displaces other activity is not supported by any evidence...”

That is absolute nonsense. Of course it displaces other activity. Money spent on gambling would otherwise be spent elsewhere.

And finally the Federal Group stated there was no evidence FTEs involved in EGM activities in pubs and clubs was 200 as stated by Prof Mangan. This figure was obtained by this writer from a case study presented to the Committee by the Dixon Group, from a submission by the Federal Group to a 1993 parliamentary inquiry. both crosschecked with the writer’s own experience. Prof Mangan used this figure. This was all presented to the Committee in evidence and was included as part of Appendix D, page 198 of the Committee’s final report. No industry representative has explained why the figure may be incorrect.

The Federal Group has had many opportunities to specify the exact number of FTEs directly involved with EGMs but have always ducked the question. Worse still they deliberately misled the Committee on the level of FTE employees engaged with EGMs. Rather than breaking up employee functions across gaming, accommodation, bars, bottles, food, management, support  etc, if a venue falls within the ABS statistical definition of gaming, then all employees are claimed by Federal Group to be gaming employees. It’s blatant dishonesty. Federal Group wrote a letter to the Committee on 23^rd September when the final report was being finalised claiming 792.4 FTEs were direct gaming jobs. Absolute bullshit. Not if gaming is defined by ordinary usage.

The Federal Group are deliberately overstating the number of gaming FTEs, presumably to support its position of importance in the economy so the effects of any changes are exaggerated.

It may be useful to briefly compare and contrast the only two studies that have looked at the effects of removing EGMs from pubs and clubs, one by Treasury and the other by Prof John Mangan.

The Treasury modelling simply aimed to estimate the likely effects on government revenue. Three scenarios were modelled with assumptions varying from over 90% migration/substitution with casinos/Keno to approximately 50%. Prof Mangan also modelled three scenarios varying from nil migration to 50% migration to casinos. Prof Mangan used an input-output model to estimate ripple effects throughout the State, effects on employment, wages, gross state product etc. It was broader more sophisticated model than Treasury’s estimates of tax changes.

The models were quite different but they did share common ground with each having one scenario with similar assumptions of approximately 50% of spending on EGMs in pubs and clubs, again ending up as gaming outlays, either in casino EGMs or Keno in pubs and clubs. The Committee did consider whether to recommend removing EGMs for the community before deciding by a majority to recommend a reduction, so it is a little surprising not to see more discussion of the findings presented by the two studies.

With common ground in the middle, the two modellers’ assumptions range from almost all EGM spending returning to gaming as per Treasury’s low impact model described above, to John Mangan’s Scenario 1 where all EGM spending in pubs and clubs is disbursed throughout the community.

If Treasury’s low impact model accurately describes reality, then there are few savings for players.  Casino EGMs will double in turnover terms requiring more EGMs to meet the increased demand. This would shift a problem rather than solve it.

There is no doubt there will be some migration to casinos and some substitution by Keno. Whether Treasury’s high impact model is accurate or not, it is likely to be closer to reality. This puts John’s Mangan’s Scenario 3 described above which uses similar assumptions, as being reasonably realistic.

Even so, if EGMs are reduced or shifted completely from communities, it may be a pyrrhic victory if EGM gaming migrates to casinos before the parameters that determine harm and inequity have been properly addressed. It’s the locals that play EGMs in casinos, not tourists. Excessive returns to operators, inadequate returns to players, the addictive nature and speed of machines, fair returns to government and the equitable treatment of gaming whether in casino enclaves or in the wider community all need solving with this once in a lifetime opportunity to correct past mistakes.