Ohio bets internet cafes siphon off casino profits

Sweepstakes operations have sprung up in malls and storefronts, such as this one in Toledo. Backers say the sweepstakes aren’t gambling but a retail promotion.

COLUMBUS — Ohio’s casinos are falling far short of producing the tax revenue originally projected, leaving cities, counties, and schools millions of dollars shy of what they were told they would receive when Ohio voters approved casino gambling in 2009.

It’s uncertain why gross casino-tax revenue is likely to be $904 million short over two years or why schools would get $101.4 million less, counties $152.2 million less, and Columbus $4.7 million less from casinos in the 2014-2015 fiscal years than predicted by the state and prospective casino owners during the 2009 campaign.

But some people have an idea: Internet-sweepstakes cafes.

Ohio’s 820 sweepstakes operations, which have sprung up in strip malls and empty storefronts, are unregulated. They pay no tax and have neither standards for payouts nor any accountability.

The estimated number of sweepstakes computer terminals in Ohio exceeds the 8,000 or so regulated slot machines approved for casinos in Toledo, Columbus, Cleveland, and Cincinnati. Columbus and Toledo casino officials recently decided to add more table games and cut back on slots.

Matthew Schuler, executive director of the Ohio Casino Control Commission, said his job is not to stand up for casinos or to protect their revenue, but he said he is concerned about ‘ensuring the integrity’ of casino operations and finances built into state law.

Internet cafes could account for as much as $1 billion a year wagered in Ohio, about one-fourth of the roughly $4 billion a year total gambled at casinos, ‘racinos,’ lottery games, horse tracks, and Internet cafes. No statistics are available to support the $1 billion figure, but Attorney General Mike DeWine and gambling experts cite figures from sweepstakes operations in other states.

An analysis of casino revenue from five other states that compare slots and table games provides more evidence that sweepstakes operations are eroding casino revenue. The Casino Control Commission found that Ohio casino patrons play slots far less than their counterparts in Indiana, Illinois, Kansas, Missouri, and Pennsylvania. Slots provide about 85 percent of casino revenue in those states, compared with 70 percent in Ohio.

The Ohio General Assembly is considering House Bill 7 — legislation aimed at essentially regulating Internet cafes out of business. A similar measure failed in the fall after sweepstakes employees showed up in force at the Statehouse.

Chuck Blasdel, a lobbyist and former state legislator, said he thinks casinos are using Internet sweepstakes as a “scapegoat” to blame for their lower-than-expected revenue. Mr. Blasdel represents Pong Marketing & Promotions, an Ontario, Canada, firm that provides phone cards and computer software for sweepstakes operators.

“This is clearly an attempt to end the industry through a regulatory scheme to make the business model not economically feasible,” he said. “A lot of these are small-business owners who have invested a significant amount of money, in some cases their life savings.”

Mr. Blasdel said the sweepstakes aren’t gambling but a “retail promotion” in which customers get a phone card or Internet time that gives them a chance to play games.

“We don’t feel the folks that are coming in and buying telephone cards are the folks that are going to casinos and betting hundreds of dollars.”

In connection with the 2009 ballot issue that legalized casinos, the Office of Budget and Management and the Department of Taxation performed an analysis projecting the gross revenue the casinos would generate. The analysis also projected the money that would be sent to local governments from the 33 percent in taxes that casinos pay on their gross revenue. The state’s projections were similar to estimates by the gambling industry and the University of Cincinnati.

The bottom line: Ohio’s four casinos were expected to generate $1.42 billion annually in gross revenue, or $1.95 billion if video lottery terminals were not added at racetracks. Such terminals have been added — a racino is open at Scioto Downs — so the relevant estimate is $2.84 billion for the two-year state-budget period.

By comparison, estimates in Gov. John Kasich’s proposed budget project casino revenue at $1.94 billion.

That means fewer dollars for counties, cities, and schools.

Columbus Budget Director Paul Rakosky said City Auditor Hugh Dorrian “took an extremely conservative approach in calculating the amount we expected to come in from casinos.” As a result, Columbus officials did not rely on money that might not materialize.

David Varda, chief of the Ohio Association of School Business Officials, said less money is not good news for schools. “At this point, I don’t think it’s a big deal because I don’t think anybody had really counted on those revenues. They may have to adjust their estimates downward in their five-year forecasts.”