States Double Down on Gambling in Quest for Revenues
Policy + Politics

States Double Down on Gambling in Quest for Revenues

Katoly Arvai/Reuters

In an earlier era, there was just one Sin City. In today’s America, there are dozens, and the number is climbing ever higher. In the wake of the Great Recession, at least 10 more states have entered the gambling game, enacting new gaming laws in hopes of generating much-needed revenue. The recent flurry underscores the seismic shift in the U.S. gambling landscape over the past quarter-century. All told, if a guy is feeling lucky, he can now hit the blackjack tables or slots in 22 states, at 566 different casinos, plus another 460 on Indian reservations, according to a new report from the American Gaming Association.

And these numbers are continuing to grow: Ohio and Massachusetts are among the states that will host casinos for the first time before the end of this year, and other states are considering similar moves as they look for ways to replenish their depleted coffers.

The question is, does it work?

The Growth of Gambling
In 1978, Atlantic City opened its first casino, becoming the second gambling market, after Nevada, in the U.S. and setting a precedent for redevelopment of downtrodden areas. Since then, new laws have usually emerged in bursts that coincide with troubled economic times.

“During recessions or periods of fiscal crisis, there tends to be a lot more legislative interest [in gambling],” says Bill Eadington, an economist and director of the University of Nevada-Reno’s Institute for the Study of Gambling and Commercial Gaming. “In economically hard times, the fiscal argument carries considerably more weight [than the moral one].” States can become even more motivated when they see their own residents spending loads of money at casinos just across the border in a nearby state, or in Canada – money they could be keeping for themselves.

Creative lawmaking and enforcement subsequently bred riverboat casinos, racetrack casinos (“racinos”), and resort casinos (which must be attached to hotels and other activities, like golf courses). Indian reservations came out in full force in 1988. Many states now allow standalone casinos, and gambling has grown into a $37 billion business as of 2010, up from $22 billion in 1999. Including food and other non-gaming spending, casinos are a $50 billion a year industry.

The Winners
Gambling, excluding lotteries, generated almost $7.6 billion in tax revenues for states and localities in 2010, according to a report published last year by the American Gaming Association. Proponents argue that the total economic impact is far greater, with hundreds of thousands of jobs generated, and an economic ripple effect for nearby communities.

Pennsylvania stands out as a particular success in the new wave of gambling operations. With a tax rate of 55 percent on all slot revenues and 16 percent on table games, in addition to what casinos pay in standard corporate taxes, the state now brings in more revenues from gambling than even mighty Nevada, at $1.3 billion to the Silver State’s $835 million in 2010.

Another winner is the Biloxi, Miss. area, with a gambling industry made up of casinos that are now among the largest employers and taxpayers in the state. Other states that have created a sizable revenue stream from gambling include Rhode Island, West Virginia, South Dakota and Indiana, all of which bring in at least 5 percent of all revenues via gambling.

State gambling revenues are most often allocated to education programs, a move that “makes gambling a lot more politically palatable,” says Eadington. In Pennsylvania, for example, according to a spokesperson at the Pennsylvania Gaming Control Board, 34 percent of gambling tax revenue goes toward education. In New York, that number is 100 percent.

The Losers
Education earmarks don’t always stick, though, once the gambling industry is firmly in place in a state, says Eadington. In Pennsylvania – where gambling tax revenues are used, in part, for property tax relief – the promised benefits haven’t fully materialized. Last year, Pennsylvania residents, on average, received a roughly $200 rebate on their property taxes thanks to the revenue collected from the gaming industry. Even so, the rebates in many cases have been much smaller than originally promised back in 2004 when the state debated the introduction of legalized gambling – and property taxes continued to rise.

For this and other reasons, not everyone sees gambling as a win-win for states. Many experts today believe that the industry in America has reached its saturation point. In other words, a new casino now isn’t going to create new money for the industry, it’s simply going to take money away from existing gaming sites. Revenues in Las Vegas have fallen 15 percent since 2006, while in Atlantic City, they’ve fallen a staggering 36 percent during that time, according to reports from UNLV’s Center for Gaming Research. These two cities remain the largest gambling markets in the country, but especially in the case of Atlantic City, there’s little reason to expect a reversal of fortune. “Ultimately they need to look for other ways of generating revenue, hopefully without raising taxes,” says Lucy Dadayan, senior policy analyst at the Rockefeller Institute of Government.

But even in thriving new markets, the windfall can be short-lived, says Dadayan. This happens for two reasons. First, much of the initial revenue comes from one-time fees to the government. Second, the novelty of a new nearby casino can wear off quickly for those who are not dedicated gamblers. Dadayan points to Pennsylvania’s casinos as an example of this phenomenon. At Harrah’s Chester Downs, a racino on the Delaware River near Philadelphia, monthly tax payments from slots regularly reached $15 million soon after it opened in 2007. More recently, that number has been more likely to hover around $12 million.

In addition, says Eadington, gambling revenues generally put only a small-to-moderate dent in state budgets. “In almost no cases can casino gaming resolve budgetary problems,” he says. “Nevada would be about the only state you could make that case for.” Despite its recent falloff, 12.5 percent of that state’s overall revenues come from gambling. In a more typical state, that number is around 2 or 3 percent.

Next Moves
Despite the maturing of the market, the gambling revolution is far from over. Urban markets are next: Boston has a mega-casino in the works, Chicago is mulling one, and developers have bought up land in Miami with the intention of opening a large venue there.
In addition, the Justice Department shifted its position on online gambling late last year, paving the way for legalization, especially of online poker. Illinois has already started the process, and it remains to be seen how such legislation would impact brick-and-mortar casinos.

Whether or not it’s a winning hand, it would seem, states will continue to double down on their bets that gambling can be a source of economic gains.