In the summer of 2019, video gambling operators were poised to push into Chicago for the first time.
The Illinois General Assembly had just passed a massive gambling bill — quickly signed into law by Gov. J.B. Pritzker — that would allow more video gambling machines, with higher maximum bets and higher payouts.
Chicago Mayor Lori Lightfoot, meanwhile, was looking for ways to bridge an $838 million budget deficit. She had few options for raising significant new revenue that didn’t first require action from state lawmakers.
Video gambling companies saw opportunity. Lobbyists started working the city to lift its ban on video poker machines. Operators reached out to Chicago businesses interested in installing gambling terminals. Rick Heidner, whose Gold Rush Gaming has machines in nearly 500 venues, pressed his case with the mayor at a budget town hall meeting, Politico reported.
Then suddenly video gambling was all over the news, and not in a good way.
Heidner’s name was among many that appeared on a federal search warrant executed at the office of state Sen. Martin Sandoval in September. A Chicago Tribune story raised questions about whether Gold Rush should have been granted a license in 2012 to operate the machines.
State Rep. Luis Arroyo was charged in October with attempting to bribe an unnamed state senator to support legislation to regulate and tax “sweepstakes” machines, which operate under the radar in Chicago and other municipalities. Arroyo, who has since resigned his House seat, was working his side job as a City Hall lobbyist.
Lightfoot took a pass, but the machines aren’t going away, and neither are the city’s budget problems.
Should Chicago allow video gambling? Should it continue to allow sweepstakes machines? Should anyone? Let’s break it down:
What is the current environment in Chicago re: video gambling?
Video gambling was legalized in Illinois in 2009 through the Video Gaming Act (VGA). The legislation included a provision that allowed for home rule municipalities to opt out of legal video gambling. At the time, Chicago had an ordinance banning video gambling, and the city kept its ban in place despite the new state law. The gambling bill that passed this summer expanded the original VGA by increasing the number of video gambling terminals permitted per licensed establishment (up to six at retail establishments with on-premises liquor licenses and up to 10 at licensed truck stops), and increasing the tax rate on revenue from 30% to 33% (and eventually 34% in 2020). Most of that tax goes to the state’s Capital Projects Fund, while local governments receive only 5% of the cut.
Chicago still has not legalized video gambling, but has seen a proliferation of “sweepstakes machines” throughout the city. These machines look, sound and work a lot like video gambling machines, but aren’t classified as such. One key difference is that no payment or purchase is required to use a sweepstakes machine. For example, some machines allow players to enter personal information (e.g., name, email address) instead of cash to receive a limited number of free plays. (Payment for continued play is required once the original free credits have been used.) Another difference is that these machines pay out coupons instead of cash. Although these machines typically advertise coupons for merchandise or other prizes, they are more often exchanged for cash.
Because they operate in a grey area of the gambling legislation, sweepstakes machines are able to escape regulation and taxation. Profits directly benefit only the machine operators and the businesses that house them. Unbound by the VGA provision that restricts video gambling terminals to businesses with liquor licenses, sweepstakes machines can be found not only in bars and restaurants, but also convenience stores, gas stations and even laundromats. This also means that patrons under 21 (Illinois’ legal gambling age) could be using these machines, and business owners are not legally obligated to verify their age before use.
How much revenue does video gambling currently generate?
At the end of FY 2019, Illinois had 32,033 video gambling terminals, more than any other state with legalized video gambling outside of casinos. In total, the terminals brought in nearly $1.6 billion in taxable income, yielding $478 million in tax revenue for state and local governments.
The number of terminals in operation and the tax revenue collected from video gambling terminals has increased every year since their legalization. (Source: Commission on Government Forecasting and Accountability)
Would video gambling provide a feasible revenue stream for Chicago?
It is reasonable to assume that legalizing video gambling in Chicago would generate revenue. Net income per terminal per day has increased every single year, which suggests that the overall increase in revenue each year isn’t solely a function of increased supply of video gambling terminals. More people want to play, and more people are spending more money at these terminals. Since 2012, over $6.5 billion has been spent on video gambling in Illinois.
Bringing video gambling to Chicago, which represents over 20% of the state’s population, would almost certainly generate revenue. Chicago residents seem to have an appetite for gambling. When comparing municipalities of similar size and with comparable inventory of video gambling terminals, municipalities located closer to city limits easily outearn municipalities located farther away.
According to the Illinois Gaming Board’s monthly reports, Bedford Park, a village of 580 people located just outside Chicago’s western border, has 39 video gambling terminals that brought in $4.1 million in September 2019. Beecher, a Will County village of nearly 4,500 people located about half an hour from Chicago, has 40 video gambling terminals that brought in about $1.4 million during that same time. Franklin Park, a village of over 18,000 located just outside Chicago, brought in $1.9 million with 49 video gambling terminals in September 2019, compared to the $1.5 million brought in through 50 terminals in Macomb, a city of over 21,000 in western Illinois.
Another factor to consider is the revenue cannibalization from casinos. Except for a bump in earned revenue following the opening of Rivers Casino in Des Plaines, casino revenues across Illinois have been in steady decline since 2013. Meanwhile, video gambling revenue has gone up every year since video gambling was legalized in 2012.
Legalizing video gambling would almost certainly hamstring the already weak proposals for a casino in Chicago. This is especially problematic because the proposed higher privilege tax rate on a Chicago casino (33.5%) has the potential to bring in more revenue for the city compared with the 5% it would get from video gambling revenue.
Would legalized video gambling be a sound public policy for Chicago?
Legalizing video gambling in order to create a revenue stream is going after low-hanging fruit. The policy change would unquestionably generate cash, but given the industry’s dependence on economic conditions and a vulnerable customer base (people with lower incomes and lower levels of education tend to gamble more), it would ultimately be an unreliable source of income from year to year. There isn’t enough data or research to suggest that video gambling promotes overall economic growth for communities in the form of job creation or attracting new businesses to an area. This doesn’t even factor in the social impacts — compulsive gambling and crime, for example — of bringing convenience gambling into a community. Video gambling revenue might help plug a hole in the short term, but it isn’t a sustainable, reliable source of revenue, and legalizing video gambling doesn’t build community capacity or increase economic opportunities.
Here’s how we see the options.
1. Legalize video gambling
Chicago could repeal its long-standing ordinance and make video gambling legal within city limits, allowing the city to tap into a new revenue stream.
If that sounds too simple, that’s because it is. Video gambling isn’t necessarily the quick fix that some hope it would be. In order to bring legal video gambling terminals to Chicago, the city would first need to address the sweepstakes machines. These machines bring their owners revenue without any associated taxes and fees, so why would an owner voluntarily switch to installing legal (and regulated) video gambling terminals?
The city could declare sweepstakes machines illegal. Municipalities such as Mundelein and Rolling Meadows have already preemptively passed ordinances banning sweepstakes machines after recently opting into the VGA. To get rid of the existing machines already in place throughout Chicago, the city would need to devote resources to identify and locate these machines, none of which are registered or searchable from any publicly-available database.
The other option would be for the city to bring sweepstakes machines under the umbrella of legal video gambling, subject to licensing and taxing requirements. This presents an added layer of regulatory complexity. Regulators would not only be tasked with finding such machines, but also with vetting the owners, since some sweepstakes machine operators are people who were deemed ineligible for video gambling licenses.
Legalizing sweepstakes machines might also have the unintended effect of harming local businesses. The machines benefit small businesses by bringing in more customers and more revenue. But the fees and taxes associated with legal video gambling terminals on top of revenue sharing with three different entities (state, city and terminal manufacturer) might prove too burdensome for small business owners to continue operating the machines.
Here’s the deal breaker: None of the above matters if the city wants to have a casino. Having both a casino and legal video gambling within the city isn’t sustainable, as statewide trends have indicated that video gambling will cannibalize casino revenue. Any policy on one will have a direct impact on the other.
2. Keep the ban — and outlaw the sweepstakes machines, too
Chicago could continue to outlaw video gambling within city limits. But going this route doesn’t mean that business as usual would be wise.
No matter what course of action the city takes with video gambling, it cannot allow sweepstakes machines to continue to operate without any form of oversight. An industry that operates in the shadowy grey area of the law is an open invitation to bad actors. A municipality that chooses to ignore sweepstakes machines risks having a lot of dirty laundry to clean up — and no revenue.
Gov. Pritzker has asked the Gaming Board to propose legislation to tighten the rules on video gambling, including possibly banning sweepstakes machines altogether. That would be a smart move.
Sweepstakes machines — video gambling with a different name — present direct economic competition to a proposed Chicago casino. They also cast public skepticism and doubt over legal forms of gambling. Even if the state continues to turn a blind eye to them, Chicago can and should take a harder line by eradicating and banning sweepstakes machines.