The Impact of Hurricane Katrina on Mississippi's Casino Industry

Article excerpt

ABSTRACT

This research analyzes the impact of hurricane Katrina on gaming revenues and taxes in Mississippi. The magnitude and duration of the losses resulting from Katrina are empirically estimated with ARIMA forecasting models. Both state and local tax losses are estimated by region within the state. The findings include a substitution effect between the gaming regions in Mississippi after Katrina closed the majority of Gulf Coast casinos. The substitution effect leads to a reallocation in local tax revenues between the regions within the state and an offset of the negative impact at the state level. The overall shortfall and recovery time are shown to be far less than early estimates. The research concludes with a discussion of the potential for far greater losses if gaming laws are not further modified.

INTRODUCTION

Katrina hit the Mississippi coast as a Category 3 storm on August 29, 2005. The hurricane devastated businesses and residents of the Mississippi coastal area. Responsible for over 231 fatalities and $100 billion in damages in Mississippi alone, Katrina is classified as one of the most catastrophic natural disasters in U.S. history (Penick and Riley, 2006). This paper analyzes her effect upon one industry critical to the economy of Mississippi, casino gaming. The casinos are strategically important; they are one of Mississippi's largest employers and taxes on gaming revenues added more than $330 million annually to state and local coffers prior to Katrina. When she came ashore, the Gulf Coast casinos, primarily built on barges, were all either heavily damaged or destroyed. Infrastructure in the area, the lifeblood of the casinos, was also heavily damaged. In this paper, we estimate and analyze the amount of lost gaming revenues, lost taxes from those gaming revenues, and the duration of the recovery period for casino gaming. Our findings include a surprising substitution effect and an example of effective governmental intervention.

The paper begins with a profile of the state's casino industry, followed by data and methodology sections, respectively. We then present results and conclusions.

MISSISSIPPI CASINO INDUSTRY PROFILE

In 1990 legislation in Mississippi was enacted that allowed gaming on navigable waterways. The first casino opened in mid-1992. Many of the earliest Mississippi casinos were categorized as a form of riverboat gambling (Roehl, 1994). By the late 1990's casinos with large facilities and adjoining hotels, restaurants, and entertainment venues began to appear. Mississippi now ranks as the third largest casino market in the United States, after Las Vegas and Atlantic City, respectively. The Mississippi Gaming Commission estimates more than 50 million people visit the state's casinos each year. Furthermore, of the more than 50 million people who patronize Mississippi's casinos annually, approximately 81% come from southeastern states.

Mississippi's casino industry is divided into three reporting regions: Gulf Coast, North River and South River. Hurricane Katrina's impact was felt in all three regions in 2005. The North River region had 10 casinos operating with 594,000 square feet of gaming area prior to the hurricane. The North River region is centered in Tunica, Mississippi. Tunica is located in the far northwestern corner of the state, just south of Memphis, Tennessee. Approximately 74% of the North River region's patrons originate from the Southeastern U.S. Prior to Katrina, Mississippi residents accounted for only 13% of the North River's total patrons.

The South River region is located in Vicksburg and is by far the smallest. Before Katrina, a total of 7 casinos operated in the region with 1 88,000 square feet of gaming area, and Mississippi residents accounted for 55% of its total clientele. The South River and North River regions are often combined for reporting purposes. Combined, they are the largest in terms of gaming revenue. …