SHELBYVILLE — Late on a Friday afternoon Donald Freed, 76, plays one of the many electronic slot machines at Indiana Grand Racing and Casino and takes a slow pull on a cigarette.

His wife Cindy takes a pack from her jacket pocket and lights up, too. The retired couple spends hours testing their luck with the slots. It’s a weekly ritual they’ve repeated since the casino opened six years ago next to a horse track on a stretch of farmland south of Indianapolis.

“If I couldn’t smoke, I’d go someplace else,” says Freed, who makes a two-hour round trip from his home in Trafalgar, Ind., to the casino. “We smokers ain’t got that many places left to go.”

Lawmakers banned smoking in most public places three years ago but exempted the state’s casino industry, which pulls in revenues of $2.2 billion a year. Now ailing, the casinos are fighting to protect that exemption.

Proponents of widening the smoking ban to include casinos say it is one of several steps needed to improve the physical health of Hoosiers — one in five of whom smoke. The gaming industry argues that removing one of the last vestiges of indoor smoking threatens their already wobbly economic health.

“We can’t afford to lose any more of our customers,” says Jim Brown, chief operating officer of Centaur Gaming, which owns the state’s two horse track casinos, Indiana Grand and its sibling, Hoosier Park Racing and Casino in Anderson.

Brown worries about his industry while sitting at a table in the Shelbyville casino’s swank piano bar. It fronts a newly renovated steakhouse designed to appeal to a more upscale crowd than the casino’s brew pub, where patrons can engage in off-track betting.

There’s an empty ashtray on every table.

“Getting rid of smoking just isn’t something that resonates with our customers,” Brown said.

He points to Illinois, where gaming revenues dropped 20 percent when the state banned smoking in casinos in 2008.

The Federal Reserve Bank of St. Louis, which studied the decline, concluded that $400 million plunge in revenue in 2009 was directly linked to casinos forcing their customers to extinguish their smokes. The loss reverberated, with $200 million less in state tax revenues and another $14 million in lost dollars to local communities.

Legislation to end the exemption for Indiana casinos is part of the bigger House Bill 1235 that also regulates e-cigarettes and bans the sale of tobacco products in stores with pharmacies.

But it comes as Indiana’s gaming venues lobby to loosen other tight rules on their industry while also fending off growing competition from neighboring states.

Last year, Indiana’s 13 gaming properties posted their lowest annual “win” — the difference between what they pay out and what they take in — since 2003, when there were three fewer casinos in the state.

According to Indiana Gaming Insight publisher Ed Feigenbaum, who closely tracks the industry, a 9 percent drop in revenues last year represented the largest percentage decline in the state’s 20-year history with gaming. It marked the fifth consecutive year of loss.

It wasn’t just less money being bet, Feigenbaum said. Fewer people were betting. For the first time since Indiana legalized casino gaming, the number of gamblers dropped to under 20 million last year.

Among the patrons who do return time and again are Jeff Karr and Dawn Coomer. The couple from Columbus, Ind., visit Indiana Grand about once a month, always on a Friday for the all-you-can-eat seafood buffet. He’s a smoker. She’s not.

Getting out of his car on a recent Friday, Karr pulled out a pack of Camels and lit one.

His reaction to hearing about the proposed smoking ban: “I’m against it,” he said. “But I’m not sure it would make that much of a difference. We’d probably still come.”

Coomer agrees. When gambling she avoids sitting near smokers. The casino’s high ceilings and massive ventilation system minimize her exposure to their smoke. She could sit in the small non-smoking section of the casino, where most seats are empty, but she doesn’t. She’d rather be with the crowd.

The change she’d rather see would have to come through another piece of legislation up for debate this session. It would allow for live dealers at state’s two racetrack casinos, where table games are now run by computers. Brown estimates it would create five new jobs for every computer-run game replaced. The proposal, so far opposed by Republican Gov. Mike Pence, would also would allow the state’s riverboat casinos to become land-based.

“People feel like machines cheat them,” Coomer said. “I think they’d spend more money when there’s a live dealer. You just feel more engaged.”

Protecting the health of dealers and other casino workers is one of the reasons for expanding the smoking ban cited by proponents.

Rep. Ed Clere, R-New Albany, chairman of the House Public Health Committee, said the estimated cost to the state of ending the casino exemption — about $200 million in lost tax revenue, according to the Legislative Services Agency — will be offset long-term by reduced health care costs.

He also argues that Indiana casinos face some of their toughest competition from the smoke-free casinos in Ohio, which opened two years ago.

That point is clouded by the recent actions of some Ohio’s casinos, which no longer see their mostly smoke-free venues as having a competitive edge. At least three casinos have sought permission for regulators to add slot machines to designated smoking areas. To lure patrons in, they now advertise with the slogan: Smoke free or smoke freely.

The proposal to ban smoking in Indiana casinos could be snuffed out quickly. Clere’s sweeping tobacco bill, which contains the measure, was assigned not to his committee but instead to the House Public Policy Committee chaired by Rep. Tom Dermody, R-LaPorte.

Dermody is author of the legislation aimed at making the state’s casinos more competitive. He thinks extending a smoking ban to gaming venues works against his proposal.

“That’s a concern to me, given the competition they face and with their revenues declining,” he said, adding that he’s sympathetic to health concerns. “But I think we need to leave it to the casino industry right now to decide what’s best for their industry.”

A message left with the public relations department at Horseshoe Southern Indiana in Elizabeth seeking comment was not returned as of press time.

— Maureen Hayden is the CNHI state reporter, Reach her at mhayden@cnhi.com. Follow her on Twitter @MaureenHayden