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Aiming to fend off competition from gaming halls in neighboring states, Connecticut's casino-owning Indian tribes struck an agreement with Gov. Dannel P. Malloy to limit the taxes they pay on free slots promotions.
The agreement surfaced Tuesday in connection with the House of Representatives' passage of a $20.5 billion budget deal for the 2012-13 fiscal year.
Chuck Bunnell, the Mohegans' chief of staff, said the provision stems from an agreement among "the three governments (the state and the two tribes)" to raise from 5.5 percent to 11 percent the threshold on the amount of free-play promotions exempted from the state's 25 percent cut of the casinos' monthly slots-machine revenue.
In the first nine months of the current fiscal year, which began July 1, 2011, slots players at the Mashantuckets' Foxwoods Resort Casino redeemed $62 million worth of free-play coupons, of which $9.1 million was forwarded to the state. In the same nine months, Mohegan Sun patrons redeemed $45.6 million in offers, of which $4.2 million was sent to the state.
The state believes raising the threshold could result in the loss of up to $15 million in revenue in fiscal 2013.
But in theory, at least, the higher threshold would lead to more free-play offers, enabling the Connecticut casinos to better compete with out-of-state casinos and slots parlors that enjoy higher thresholds - or no thresholds at all, Bunnell said. And the more slots play the Connecticut casinos generate, the more tax revenue that flows to the state.
In New York, the first 10 percent of a casino's free-play promotions are exempt from taxes. In Pennsylvania, free-play promotions are not taxed, which also will be the case in Massachusetts, where the Bay State's first three casinos and a slots parlor have been authorized but not yet built. Rhode Island's slots parlors issue "promotional points" for free slots play.
"The impetus for this was watching how aggressive properties in other states were using (free play)," Bunnell said. "Pennsylvania's going after the same New York gamblers we are. We've got to be able to compete with them."
According to Bunnell, the chairmen of the tribes - the Mohegans' Bruce "Two Dogs" Bozsum and the Mashantuckets' Rodney Butler - raised the subject of taxing free play with Malloy and his administration soon after he took office last year. The parties readily agreed that the threshold needed to be changed, Bunnell said.
"We really appreciate that the governor, the attorney general (George Jepsen) and the House understand that this is about jobs and keeping Connecticut competitive," he said.
The tribes have long held that free play constitutes marketing rather than wagering and as such should not be taxed. When Foxwoods introduced its free-play program in 2006, then-Attorney General Richard Blumenthal filed suit, contending the state was entitled to the same 25 percent share of free play that it claimed on a regular slots "win" - the amount the casinos keep after paying out prizes.
Mohegan Sun rolled out its version of free play in 2007, and both tribes agreed to escrow 25 percent of the face value of the free-play coupons and credits they issued while the suit was pending.
In the 2009 settlement of the suit, the tribes agreed to pay the state $25 million in escrowed funds and to start paying 25 percent of the value of redeemed free-play offers that exceeded the 5.5 percent threshold.
"This was an easy one," Bunnell said of the tribe-state negotiations. "We have a different attorney general and all the states around us are taxing at different levels. … Everyone understood that if we don't do this, we lose market share."
If the Senate rejects the provision in the budget plan, the Mohegans plan to press their case in court, he said.