July 5, 2021 Land-Based

Time on our Side

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Citing pivotal examples of the evolution of Las Vegas from its shadowy underworld reputation, Jeffrey Silver, of counsel at Dickinson Wright, PLLC, explains how some key people and decisions put the city on a more fortuitous path.

There was a TV commercial from a few years ago using the slogan “What a difference a day makes” that depicted a rather rough-looking and casually dressed man who was applying for an important job the next day. He walked into a clothing store that advertised 24-hour tailoring and was measured for a new suit. The next day arrived and the man walked confidently into his interview suitably dressed and was immediately hired.

The gaming industry in Nevada could say the same thing about itself. Maybe several years rather than overnight, but there have been some events that rapidly evolved, which have been transformational.

The only thing I knew about the gaming industry before being appointed in 1975 by Governor Mike O’Callaghan to serve as the Las Vegas Board Member of the Nevada Gaming Control Board was that gaming had been legalized in 1931, presumably to help its sluggish economy recover from the Great Depression. But I also realized that Nevada faced a reputational dilemma because it was the only state with legalized gambling, and the only people who knew how to operate casinos were the ones who had been doing it illegally, many of whom were reputed to be connected with organized crime. Wise guys were entrenched. As the Governor explained to me on the day my appointment was announced, he wanted me to do my best to help “clean up the industry.” I was a prosecutor, so I knew tough times were ahead.

The Federal government was never keen on upstart Nevada actually legalizing the very thing that the FBI had been so actively trying to eliminate. Nevada had no friends in Washington and certainly none in the DOJ. The FBI regularly rotated Las Vegas Bureau Chiefs, lest they be compromised or corrupted. Almost every casino executive, the pillars of our community, was being wire-tapped by the FBI and it was difficult to fend off various attempts by the feds to legislate Nevada’s gaming industry out of existence. In a few instances, classmates came to school tearfully reporting that their dads had been arrested.

One major effort by Washington politicians to shine a light on the mob’s gaming roots was orchestrated by Senator Estes Kefauver, who had aspirations of running for President. This was 1951, about the time that television was becoming the new electronic marvel. The Senator decided that he and his Committee would delve into the activities of the Mafia and its negative impact on American society. These hearings were the first real news shows ever broadcast on those new black and white TV sets, giving the hearings much more drama than they probably deserved.

The Senators subpoenaed reputed mobsters and asked pointed questions about the tentacles of organized crime in gambling, most particularly in bookmaking, sports wagering, and the “race wire,” where illegal bookmakers obtained odds and other information like morning lines for the racetracks around the country, and used Las Vegas legal books to layoff wagers.

Even though the answers were, “I respectfully decline to answer the question on the grounds that it may tend to incriminate me,” the audience was transfixed because they had never seen real mobsters face-to-face. One of the more celebrated events of the Kefauver hearings took place in the courtroom of Federal Courthouse in Las Vegas, which is the current location for the National Museum of Organized Crime and Law Enforcement (Mob Museum).

At the conclusion of the Senator Kefauver “road show,” there was a clamor among many politicians to do something to curb organized crime’s influence and involvement in the gaming industry. Of course, all the blame fell on hapless Nevada, which stood alone as the outlier in giving the mobsters legal sanctuary. They proposed a bill calling for a 10% excise tax on all gaming wagers placed in America, legal or illegal, which would have put Nevada’s legal casinos out of business, and destroy a fledgling tourist economy that had only recently begun to supplant mining and activities at Nevada’s Atomic Testing Range as the largest state employer.

According to UNLV’s William S. Boyd Law School gaming law professor Greg Gemignani and tax attorney Brenda Roubidoux Taylor, “The average win retained by Nevada’s casinos from 2000-2018 was about 7.6% of all amounts wagered. A 10% tax would have exceeded all revenue retained by a Nevada casino from wagering and, thus, threatened to end the legal and regulated gaming industry.”

Standing up for Nevada was its Senator, Patrick McCarran, a Democrat, who represented the state between 1933 and 1954.While elected from a state with only a few hundred thousand inhabitants, he had substantial seniority and was on many important Senate committees. He was also able to maneuver the excise tax discussion into excluding traditional casino games from the original bill and then, while stalling its passage as long as he could, allowed a compromise bill, which imposed the dreaded 10% Federal Excise Tax only onto race and sportsbook operations.

Throwing the race and sports books under the proverbial bus seemed a small enough sacrifice since their overall contribution to state tax revenue was small, and the casino operators had no stake in their profitability. Although the race and sports industry was decimated by the tax, after all, this type of wagering was nothing more than an amenity. More importantly, to those “do something” advocates, the tax could become a tool for the IRS to use against illegal bookmakers who refused to incriminate themselves by reporting the tax on their illegal wagers. So while 21 of 24 of the state’s stand-alone race and sports books (turf clubs) closed, McCarran became a hero for saving the casino industry and they named the Las Vegas airport after him. (He also served as a ranking member of the Senate’s Aviation Committee.)

In 1974, the Federal Excise Tax on race and sports wagers was reduced to 2% and in 1983, it was reduced to .25% (with the illegal operators still required to pay the 2%). The reduction in 1974 was the catalyst that allowed Frank Rosenthal enough profitability margin to open the largest ever race and sports book at the Stardust Hotel. The success of this operation became the model for all future casino bricks-and-mortar sports wagering establishments that were to come (minus, of course, the allegations of skimming and illegal layoff bets).

I began by writing about attitudes toward gaming and their changes, both gradual and immediate that occurred with the passage of time and upon the happening of certain events. For example, in 1977, New Jersey became the second state to offer legalized casino gambling, and for the first time in almost 50 years, Nevada finally had an ally in Congress.

Other states looking to bolster revenues for special projects or to respond to recessionary cycles also gave gaming a hard look. At first, it was the riverboat states whose population, it was believed, perceived gambling to be an immoral enterprise. But in those states, gaming was legalized so this form of entertainment could be enjoyed, but only on a boat in a navigable waterway. State politicians steadfastly maintained the fiction that gambling itself never really occurred in their state, except for the occasional connection with the dock. However, the US Corps of Engineers had a different view and after a few “accidents,” they soon declared the gambling boats to be a hazard to navigation. Thus ended the three-hour cruise up the river. But rather than abandon the argument, the states found another means to retain their casinos and tax revenues by requiring the boats or barges to keep the casino portion floating with water pumped in from that qualifying river.

Over time, other states began to legalize casino gambling for other reasons, either related to tourism, to offer opportunities for the Native American communities or simply for the revenue possibilities. Today, gambling in one form or another (including lotteries) is allowed in 48 states (except Utah and Hawaii).However, I mentioned there was at least one important event that changed the entire landscape for acceptance of gaming overnight.

On May 14, 2018, the US Supreme Court in its Decision in Murphy v. NCAA declared unconstitutional the Professional and Amateur Sports Protection Act (PASPA) that had precluded every other state except Nevada and three other states with limited sports wagering (Oregon, Delaware and Montana) as the only ones authorized to conduct sports wagering. It was a 6-3 decision written by conservative Justice Sam Alito. At the time of the decision, the American Gaming Association (AGA), which supported the overturn of PASPA, estimated that there was over $150 billion a year gambled on sports in the US, of which 97% of the wagers were illegal.

In the following three years, we have seen sports wagering spring forth almost to the point of making casino gaming their amenity, at least in terms of the promotional hype. Currently, the research department of the AGA reports that sports wagering is live and legal in 21 states and the District of Columbia. It is legal but awaiting operational regulations in nine states, and there is pre-filed legislation in four states awaiting action by state legislatures.

The National Conference of State Legislatures issued a report in March 2021 and their survey revealed that New Jersey, aided by their quick approval of mobile sports wagering platforms, had the largest sports wagering market in calendar year 2020 with over $49.4 million in state tax revenues. During that same period, Pennsylvania brought in $38.7 million in tax revenue, again three-fourths of which were derived from mobile wagering devices. By comparison, during this same period, Nevada with its 88-year head start and 6.75% gaming tax (plus the .25 Federal Excise Tax) collected only $17.7 million in total sports wagering tax revenue. (I would note that Nevada will be considering possible regulation changes allowing for remote sign up for mobile wagering accounts, which seems to have enhanced the customer participation in other jurisdictions.) Because there are still Federal laws pertaining to the interstate transmission of wagering information, also known as the Wire Act, sports wagering must be confined to the borders of each individual state using geo-location and geo-fencing technologies.

Tax rates for sports wagering vary widely from 5% to 20% and states such as Illinois and Pennsylvania imposed $10 million initial license fees, which were gladly paid by prospective operators. Nevada has always claimed that its lower tax rates permits the bettors to receive more favorable wagering odds than states requiring a higher tax, but the old saying of “we only make a little on each sale, but we make it up in volume,” was never more true than in this instance.

The most noticeable change I have seen is the acceptance and the embracement of sports wagering by the leagues and the networks. As a former hotel executive who was not permitted to use game broadcasts on a large screen during Super Bowl parties for its customers, I found that restricting our use to nothing larger than a standard 60-inch television screen to be quite hypocritical when considering that at the same time NFL encouraged discussion of point spreads in their national telecasts. The NFL even denied permission for the Las Vegas Convention and Visitors Authority to purchase a commercial during the game.

Now we have the NFL, MLB, NBA, NHL and their respective teams to provide official data and advertising support as major partners and endorsers of the various casinos and online sports operators. That acceptance of the gaming industry is a sea change from where I began.

 

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