Legalizing Casino Gaming to Fund Homes for Native Hawaiians
by James Mak, UHERO, February 19, 2021
Times are hard at the state legislature as lawmakers grapple with the fiscal crisis caused by the COVID-19 pandemic. Several bills to legalize some form of gambling in Hawaii have been introduced this session to generate more tax revenue. Although most have died (a bill to create a state lottery in Hawaii survives), the lure of a new source of money is still keeping the idea alive.
This is not the first time state lawmakers have looked to gambling, especially casino gaming, as a new source of revenue. It has been a controversial topic since statehood. The number of gambling measures introduced in the legislature rose whenever the state government encountered money problems. During the economic doldrums of the 1990s, 110 measures to legalize some form of gambling were introduced between 1990 and 1997. None passed. Hawaii and Utah are the only states that have not legalized gambling in some form.
To minimize the perceived negative social impacts of land-based gambling, lawmakers then even considered potentially less harmful shipboard gambling and directed the Legislative Reference Bureau to conduct a study of the social effects of gambling on floating vessels. Arguably, the biggest concern over gambling is problem or pathological gambling. The 1994 study concluded that “it is unlikely that [Hawaii] resident problem or pathological gamblers can fully indulge their compulsion with restricted local gambling. They and other serious but non-problem local gamblers would probably continue to gamble in unrestricted mainland casinos.” In other words, limited legalized gambling in Hawaii is not going to make problem gambling worse.
An essay by First Hawaiian Bank Chief Economist Leroy Laney and University of Hawaii Professor of Business Administration David McClain in Volume II of Price of Paradise (1993) concluded that “…casino gambling would be disastrous for Hawaii’s image, and for its people”. They argued that “the principal reason for the Islands’ success with tourists, and tourism’s claim to a significant market niche, rests on the unique Hawaiian culture. Casino gambling would represent a distinct and perceptible conflict with that culture…” The authors also feared that legalizing gambling would attract organized crime to Hawaii. They hinted at the possibility that most of the money generated by casinos will come from local residents, not tourists. The few residents who might be dissuaded from going to Las Vegas because they can now gamble at home “simply wouldn’t do enough for the local economy to justify tampering with our image.” Thus, “on cultural, criminal, social, and perhaps financial grounds, then, casino gambling is not for Hawaii.”
Some residents question whether the state government should be promoting gambling on moral grounds. However, nationwide, acceptance of gambling has been growing. The Gallup poll found that 28% of American adults polled in 2018 said gambling is morally wrong, down from 34% in 2003.
Gambling in Hawaii and the Rest of the U.S.
It is not a coincidence that residents of Hawaii and Utah gamble much less than residents in other states where gambling is legal. In 2018, the National Council on Problem Gambling (NCPG) conducted a survey on gambling and gambling experience for the nation and for each state. The survey found that, nationwide, 73% of the respondents participated in “any past year gambling activity” compared to 57% of Hawaii respondents and 50% for Utah. The state with the next lowest gambling participation rate was Alabama at 63%. The survey also found that nationwide 37% of the respondents said they spent money “on any activity at a casino” in the past year compared to 27% for Hawaii and 29% for Utah. The lowest casino activity participation rate among all states was 22% for Vermont and Virginia. Not surprisingly, Nevada residents led the nation with the highest participation rate in casino gambling at 72%; Arizona residents were a distant second at 53%. The survey confirms what is widely known: Hawaii residents do gamble. The survey results also suggest that if Hawaii legalizes gambling, more Hawaii residents will gamble.
Hawaiian Homes Commission Proposal for Casino Gaming
One proposal that has attracted the most media and public attention during the current legislative session is authored by the Hawaiian Homes Commission (HHC)/ Department of Hawaiian Home Lands (DHHL). The bill, if passed, would allow limited casino gaming in the form of a “single integrated resort property” on Hawaiian home lands designated for commercial use in Kapolei, Oahu. The purpose is to create a dedicated revenue source for the Department of Hawaiian Home Lands to accelerate the pace of housing development on Hawaiian home lands for Native Hawaiians who are 50% or more Native Hawaiian by blood quantum and whittle down the lengthy list of applicants waiting for residential leases. HHC notes that the passage of the federal Indian Gaming Regulatory Act of 1988 has been a boon to Native Americans living on Indian reservations on the mainland.
Housing for Native Hawaiians
Housing for Native Hawaiians became the center piece of federal legislation, the Hawaiian Homes Commission Act of 1920 (HHCA). The act assigned over 200,000 acres of “very marginal” public lands to the Hawaiian Homes Commission to administer. Initially, HHC could lease these lands either as agricultural or pastoral land to Native Hawaiians who had to be at least 50 percent Native Hawaiian by blood quantum. The annual lease rent regardless of the size of the parcel was $1 for a term of 99 years. In 1923, Congress amended HHCA to permit HHC to lease half-acre house lots. According to Sumner La Croix, “The HHL program had been deftly transformed from a program emphasizing the value of labor on small family farms into a housing program that provided free house lots and neighborhood infrastructure to Hawaiian families willing to build a home and wanting to live in an exclusively Hawaiian community.” The Hawaii Admissions Act (1959) made the Hawaii Homes Commission Act a part of the State’s constitution and established a trust relationship between the state and the federal government for the program. HHCA became state law.
A 2017 U.S. Department of Housing and Urban Development (HUD) study estimated that HHCA beneficiaries (defined as the number of households on the waiting list plus the number of households already on homelands) totaled 20,500 households, or approximately 30 percent of all Native Hawaiian households in Hawaii.
From early on the demand for Hawaiian home land house lots exceeded the numbers available resulting in long waiting list of applicants. According to the HHC there are currently 28,000 eligible Native Hawaiian applicants who have been waiting—some for decades–for residential leases. HHC estimates that it would require over $6 billion in infrastructure funding alone to develop land and lots to whittle down the current waiting list of applicants; and that does not include more money to provide services to nearly 10,000 current lessees. At present levels of financial support from the legislature, HHC estimates that it would take at least another 100 years to meet the housing needs of its beneficiaries. Gaming revenues could make a difference.
HHC’s Proposed Integrated Resort
Mindful of the potential negative social impacts of unrestricted gambling on the community and powerful political opposition to legalized gambling, HHC proposes to limit its development to a single integrated resort in Kapolei on HHC/DHHL commercial land. The casino is expected to produce at least $30 million per year in additional revenue to develop house lots and build homes for beneficiaries on the wait list.
According to the gaming consulting firm, PwC, three elements distinguish integrated resorts (IRs) from other gaming developments: (1) Integration of one or more major casinos and gambling operations with hotels and other leisure and entertainment amenities, fine dining, luxury shopping, conference facilities, and even theme parks; (2) appeal to gamers and non-gamers as well as to locals and tourists; (3) huge size. In the U.S. the Venetian in Las Vegas (completed in May 1999 at a cost of $1.5 billion) and the adjoining Palazzo (also known as the Palazzo at the Venetian, completed in late 2007 at a cost of $1.9 billion) are integrated resorts. Together they offer more than 7,000 hotel suites, more than 200,000 square feet of casino space, almost 1 million square feet of retail space and 2.3 million square feet of meeting, convention and exhibition space.
Integrated resorts are “mushrooming around the world.” Japan, South Korea (Inchon International Airport), and Athens (Greece) are among the latest to embark on integrated resort developments. Some countries/jurisdictions that formerly were staunch opponents of casino gaming now allow integrated resorts to be built, but with significant restrictions to discourage locals who wish to gamble. For example, Singapore citizens and permanent residents must pay a hefty “entry levy” of S$150 (=US$112.50, based on January 19, 2021 exchange rate) good for 24 consecutive hours to enter casino premises. In Japan the national or prefectural (or local) government will impose a casino entrance fee and limit the number of weekly and monthly visits individual residents can make to the casinos. South Korean nationals will not be allowed to enter the casino at Inchon International Airport.
HHC/DHHL’s proposed bill has been deferred by the House of Representatives, all but killing it in the House this year; the Senate’s amended version is also dead for this session. The issue may come back next year. For future reference, it is worthwhile to consider which provisions in the original HHC casino resort proposal have merit and which do not.
HHC’s Integrated Resort Proposal: The Good and the Not-so-good
A laudable idea from HHC proposal is a high “wagering tax rate” of 45% imposed on gross gaming revenues (GGR) at its resort. (GGR is the difference between what the players wager and the amount they win.) Assuming that the licensee has to pay additional ground rent, then HCC’s proposed 45% wagering tax would be one of the highest tax rates levied on gross gaming revenues among jurisdictions with commercial casino gaming. In Macau—the “gambling capital of the world”— the government taxes GGR at a rate of 35%; other charges levied on GGR raise the effective tax rate to 39%. In Singapore the effective tax rate is 12% for “VIP gaming” and 22% for the “mass market.” In Bermuda, the casino gaming tax is 10% of GGR. The tax rate will be 30% for the Japanese integrated resorts when they open for business. Among U.S. states, Nevada has some of the lowest tax rates. Casinos in Nevada are subject to a tax rate of 6.75% on gross gaming revenues exceeding $134,000 per month and lower rates apply to revenues below that threshold. Among U.S. states with graduated tax rates, Oklahoma has a 50% effective tax rate on annual casino gaming revenues of more than $70 million; Illinois also has a 50% effective tax rate but at a higher gaming revenue threshold of $200 million. Some states set much higher tax rates (exceeding 50%) on electronic gaming device revenues than on table games.
HHC’s proposed high wagering tax is justified by the fact that the recipient of the gaming license will be granted a monopoly on casino gaming for the first 20 years as the State “shall not authorize any additional gaming in the State during the initial 20-year license period.” Thus, if the state plans to limit the number of casinos permitted, it should extract some of the monopoly/excess profits from its licensee. Moreover, a go-slow approach in allowing the proliferation of gaming might appease those who want to discourage residents from gambling and allow time to evaluate the actual effects of casino gaming in the state.
HHC’s proposal also has several shortcomings. First, HHC proposes to share the wagering tax revenue derived from the proposed resort with the state government, but the City and County of Honolulu, which no doubt will bear some of the impacts of the development, is left out of the revenue-sharing formula.
Second, the proposal is sorely lacking in information on the attributes of the resort. For starters, there is no information on the size of the resort. While it may not be reasonable to expect HHC to produce firm data at this stage of planning, but right now there is no information. One might infer from the proposal that the resort will be a modest operation. For example, HHC requires the licensee to invest at least $50 million to develop and construct the proposed resort, a paltry sum compared to the billions of dollars being spent on new integrated resorts elsewhere. The truth is that integrated resorts around the world are massive properties. A huge project would have island-wide and not just neighborhood impacts. To gain political acceptance, the developer should first gain the support of the community. HHC’s bill would essentially grant the to-be-created gaming commission freedom to do what it thinks best.
Third, the Department of Hawaiian Home Lands selected the site in Kapolei because it owns the land there. There is a saying in real estate development, the top three determinants of success are location, location, and location. Is Kapolei the best location for a mega-casino resort? The planned location is not in or near Waikiki where most of the tourists are. Will most of the players likely be local residents who divert money from other household expenditures and, as Governor David Ige opined, “not provide economic value to our community”? Gaming expert, William Eadington (p.188), observes that “Jurisdictions that are able to become net exporters of gambling services—by attracting a high proportion of their customers from outside the region—will be able to generate considerably greater incremental local economic benefits than those jurisdictions whose casinos cater predominantly to local clientele. In similar fashion, casino markets that cater primarily to tourists or other nonresidents will experience less visible negative social and political impact than those whose customers are their neighbors.” The decision on where to locate a resort should not be determined primarily by whether or not you own the site.
Finally, a 5-4 vote by HHC board members is not a resounding support for the proposed resort. Despite the fact that DHHL has a formal beneficiary consultation policy, it did not widely consult its beneficiaries until after its proposal was rolled out. HHC should have held public hearings, talked to neighborhood boards, received comments, and submitted a bill that survived broad community input because the potential effects of casino gaming (good and bad) would spill over beyond the resort site to the entire community. Many Hawaii residents may agree that the end goal of the bill is worthy. Increasing affordable housing even to one subgroup of the state’s population benefits the whole community. To the extent factual information allow, HHC needs to convince Hawaii residents that legalizing restricted casino gaming is also in the best interest of the entire community.