Competition, Public Policy, and Ethics: States Battle for the Same Casino Gambling Dollar.

INTRODUCTION

Legalized casino gambling in the United States occurred only in Las Vegas, Nevada from 1931 until 1978. (In this report, casino gambling" refers to commercial casino gambling and does not refer to any type of charitable casino-style gambling.) In 1978, New Jersey opened

casinos in Atlantic City in order to invigorate the dilapidated seaside resort. The restriction of casino gaming in the United States to these two sites stood until the U.S. Congress passed the Indian Gambling Regulatory Act (IGRA) in 1988. The IGRA established a statutory foundation for tribal gaming operations in order to promote economic development on tribal lands. Suddenly, states found casino gambling within or surrounding their boarders, as numerous casinos opened on tribal lands across the United States thereby ending the traditional restrictions on casino gambling sites.(Maryland Joint, 1995)

In 1989, Iowa legislators legalized river boat casino gambling. Iowa's decision created a chain reaction in the Midwestern United States. By 1993, Illinois, Indiana, Missouri, and Mississippi legalized casino gambling.(Maryland Joint, 1995)

Many state legislative bodies view legalized gambling as a panacea for state fiscal health. However, casino gambling incurs costs for states which may counteract increased tax revenues. Unfortunately, the evidence regarding the actual benefit or cost of casino gambling for states remains inconclusive due to the varying degrees of success in states that recently legalized casino gambling. There is also a lack of impartial research on the topic.

Increasingly, state legislatures bet on casino gambling to alleviate state budget crunches. Some legislators find casinos especially attractive, as casinos increase state tax revenues without raising constituent tax rates. Currently, ten states allow non-tribal casino gambling and many additional states, including Maryland, introduced legislation to legalize casino gambling. This research examines primary factors state legislatures should contemplate when devising a cost-benefit analysis of casino gambling while supplying data and experience from other casino states. This research does not include casino gambling on tribal land but focuses on state sanctioned non-tribal casino gambling. The experiences presented exclude Nevada, as Las Vegas statistics distort the projection of potential economic benefits new casino states may expect to derive from casino gambling. In addition, this paper examines the issues Maryland faces as it considers legalizing casino gambling.

COSTS AND BENEFITS

States have realized a tax revenue jackpot of up to hundreds of millions of dollars by legalizing casino gambling, but how much the casino industry costs the states greatly affects the actual value of the income. The casino industry lures state legislatures with the assurance of increased tax revenues. State tax rates on casino gross revenue range from 8 percent to 20 percent. In 1994, South Dakota, taxing at a rate of 8 percent, collected more than $3.67 million; Illinois, taxing at a rate of 20 percent, collected more than $236.4 million in casino tax dollars. (Maryland joint, 1995)

Although these figures may appear to be a lucrative addition to any state budget, Dr. Steven Gold, former Director of the Center of the Study of the States, posits that the revenue potential of casinos needs to be viewed in relation to a state's total tax revenue. For instance, in 1991, New Jersey collected $246 million from casino tax revenue and an additional $50 million in casino and slot machine licenses. This $296 million total represents only 2.5 percent of New Jersey's $11.6 billion tax revenue for the year. On the other hand, casino tax revenue comprises a more substantial percentage of the tax base in a state such as Mississippi which received an estimated 8 percent of its state tax collections from the casino industry. (Gold, 1995) Thus, the economic impact of $200 million in casino tax revenue varies state to state depending on the state's total tax revenue.

WHOSE MONEY IS BEING CAPTURED?

From a state's point of view, casinos capture two types of funds; 1) in-state money that may currently have been spent at out-of-state casinos, and 2) out-of-state money. Casino income generated by out-of-state visitors increases the state's economic gain. (Maryland Joint, 1995) Gold (1995) contends that out-of-state casino customers more frequently make non-casino expenditures at hotels, restaurants, and other recreational facilities outside the casinos, thereby stimulating the non-casino economy as well.(Gold, 1995)

States attract more nonresident than resident gamblers with varied degrees of success. In Colorado, during the summer 40 percent of gamblers are tourists, but during the rest of the year, 90 percent of gamblers come from the Denver area. (Colorado, 1996) Mississippi, on the other hand, established itself as a destination resort for gamblers from Florida and Tennessee. Mississippi draws about two-thirds of its casino patrons from out of state, but Mississippi officials realize that if Florida ever legalizes casino gambling, Mississippi casinos will lose their destination resort appeal. (You Bet, 1996)

Due to the reactionary spread of casinos through neighboring states, as evidenced in the Midwest, state legislators cannot assume that neighboring states will not follow a lead of legalizing casino gambling. When commenting on the legalization of casino gambling in Illinois, Governor Jim Edgar stated, "If Iowa hadn't done it, perhaps we wouldn't have done it. If we hadn't done it, perhaps those other states wouldn't have done it."(You Bet, 1996) States cannot count on being the sole provider of regional casino gambling and reaping the economic benefits of a large out-of-state clientele.

THE SUBSTITUTION EFFECT

Edward Granlich, an economist at the University of Michigan stated:

   ... added spending for casino gambling must come from somewhere. The
   studies normally just treat the added spending as a gain, without
   considering that spending on other business and even other types of
   gambling will fall in response to the introduction of casinos.(Maryland
   Joint, 1995)

Casinos cannibalize funds used for saving, recreation, race track betting, charitable gambling, and state legalized lottery games.(Golg, 1995) The substitution effect of casino gambling clearly impacts the horse racing industry. Quad Downs, a standard bred racing track in Illinois near two of Iowa's riverboats, closed after its patronage declined by one third within one year.(Maryland Joint, 1995) From 1994 to 1995, track betting in Iowa fell from $101.3 million to $83.4 million.(Gambling, 1996) Moreover, Arlington International, a thoroughbred racing track outside Chicago, reduced its number of planned racing days by 60 percent due to a 15 percent decline in attendance in the two years after riverboat casinos opened in Northern Illinois.(Maryland Joint, 1995)

The substitution effect on charitable gambling and lottery revenues, though not as dramatic, appears to exist. Iowa's charitable gaming income dropped from $56.9 million to $52.5 million from 1994 to 1995.(Gambling, 1996) In addition, state lottery revenues fell 8.5 percent and lottery profits fell 10.5 percent from fiscal year 1994 to fiscal year 1995. Although the revenues states collect from casinos more than cover lottery revenue losses, such losses should be included in a cost-benefit analysis.

Local businesses and restaurants may also feel negative effects from local casinos. According to the Restaurant Association of Maryland which lobbies against legalized casino gambling, the number of restaurants in Atlantic City declined from 243 to 146 within ten years of the opening of casinos. In Minnesota, after a tribal casino opened, restaurant owners within a 30-mile radius reported declining sales of 20 to 50 percent. A 1993 Statewide survey of Minnesota's restaurants, hotels, and resorts shows that 62 percent indicated that the loss of discretionary recreation dollars negatively impacted their businesses.(Gambling Fact, 1995)

CASINO GAMBLING AND CRIME

Crime rates may also increase for casino based localities and their neighboring communities. Although some communities report no rise in crime, crime increases substantially in many areas. The most comprehensive study performed on the effect the opening of casinos has on crime rates focused on Atlantic City. The study controlled for wealth, unemployment, size of police force, and population increase. The study concluded that the levels of all crimes except larcenies were higher during post-casino years 1978-1983 than in the pre-casino period of 1974-1977. Localities within a 30-mile radius of Atlantic City along non-toll routes also incurred higher levels for the same crimes than other jurisdictions. Violent crimes increased 78 percent, burglaries increased 41 percent, and vehicle theft increased 30 percent during the post-casino era.(Friedman, 1989)

Tunica County, Mississippi also experienced higher levels of crime during the post-casino era. The court filings in the county increased from 1,200 to 12,000 since casinos opened in 1992. Felony indictments rose from 13 in 1992 to 172 in 1995.(Casino, 1996) Besides the obvious costs of increased crime, greater expenditures on police and the court system, studies also found that increased crime rates often lead to decreases in property values.(Buck, 1991)

THE COST OF COMPULSIVE GAMBLING

Nationally, compulsive gamblers comprise 0.77 percent of the population, but when gambling emporiums are located near a population, the percentage of compulsive gamblers increase two to seven times.(U.S. Congress, 1995) Since casinos opened, in Mississippi, the number of gambling Anonymous Chapters increased from zero to eleven.(Casino, 1996) Phone calls to Iowa's problem gambling hotline increased 175 percent from 829 during the first six months of 1995 to 2,281 during the same period in 1996.(Gambling, 1996)

In addition to creating personal and financial problems for themselves, problem gamblers also cost the state money. According to the Wisconsin Policy Research Institute, the average casino problem gambler cost the state $10,113 a year in theft, counseling, welfare, bad debts, and other problems.(Casinos Take, 1996) If the number of compulsive gamblers in a state that opened a casino increased only 2.6 percent to 2 percent of the population, a state with a population of two million people, compulsive gamblers could be expected to cost the state over $404 million.

CASINO GAMBLING POTENTIAL IN MARYLAND

Over the past several years, Maryland legislators introduced bills that would authorize casino gambling in land-based or dock-side facilities. During the 1996 legislative session, legislators introduced a bill, that would authorize slot machines at Maryland's race tracks and off-track sites. (The bill did not pass.)

In August 1996, Governor Parris N. Glendening vowed to veto any bill that would expand legalized gambling in Maryland after receiving public criticism for considering allowing slots at the racetrack. Although it appears that expanded legalized gambling legislation will not pass this year, it cannot be ruled out as a potential hot issue for 1997 or future legislative sessions. It is likely that legislators will at least introduce legislation to allow slots at the racetracks during the 1997 legislative session. House Speaker Cas Taylor favors legalized gambling and would like to see slot machines at an of T-track betting site in his economically depressed hometown of Cumberland, Maryland.(Schmoke, 1996)

SLOTS AT THE RACETRACKS

In late December of 1995, Delaware Park racetrack installed slot machines and formed the first "racino" in Delaware. In early January 1996, Dover Downs racetrack also installed machines. Through June 30, 1996, slot machine net proceeds totaled $76.7 million, bringing the state about $16 million in revenue and increasing the prize-money reserves at both tracks by $8 million. For the racetracks, the extra money enables owners to offer higher purses thereby making the racetrack more enticing to powerful stables.(Delaware, 1996)

Claiming Maryland tracks will be destroyed by neighboring Delaware racinos, the Maryland racing industry continues to pressure the Maryland legislature to legalize slot machine wagering at Maryland tracks. Ocean Downs, a harness track one hour from Dover Downs, suffers more from Delaware racinos than other Maryland tracks, as track attendance dropped 30 percent and betting dropped 40 percent.(Glendening, 1996) On the other hand, Joseph DeFrancis, owner of Pimlico and Laurel racetracks in Maryland, may have a difficult time proving that his tracks are on the brink of financial ruin. During 1995, the tracks made $4.2 million in profits, a substantial increase from 1994, due in part to simulcast and off-track betting.(Profits, 1996)

Mahtesian (1996) says gambling opponents view slot machines at the tracks as the first step toward casino gambling all over the state. Considering that casinos gain the substantial percentage of their winnings from slot machines, differences between racinos and casinos do seem small. For example, in Colorado, 92 percent of casino winnings are generated by slot machines; in South Dakota slots generate 89 percent of total casino winnings.(Maryland Joint, 1995)

Although slot machines would bring increased revenues to racetracks, racinos contain the potential to kill the racing industry over a longer period of time. On the whole, people who travel to the racetrack to play the slots do not go to watch the races. Placing slots at the racetracks does not address the primary cause of the failing racing industry, which is its failure to market the sport to attract a younger generation of fans.(Mahtesian, 1996) If the racing industry does not attract new fans, it will fail with or without the slots. On the other hand, with slots on site, attracting younger people to horse racing may become increasingly difficult and may never be viewed as a priority. In a scenario with slots at the racetrack and no new generation of fans, racing will either become a gambling side shot like magic acts in Las Vegas, or it will be eliminated. Allowing slots at the racetrack and not addressing the horsing industry's real problems, may ultimately harm the industry legislators desire to assist.

COMMERCIAL GAMING IN MARYLAND

In 1995, Maryland legislators passed legislation to create the Joint Executive-Legislative Task force to Study Commercial Gaming Activities in Maryland. The Task Force studied the economic potential of casino gambling in Maryland. The Department of Fiscal Services (DFS) and the Department of Business and Economic Development (DBED) both conducted studies regarding the potential economic impact of casinos in Maryland at three specified sites. The agencies projected widely varying results. Using a tax rate of 8 percent, DFS estimated state casino taxes to be $75.9 million, and DBED estimated state casino taxes at $182.4 million.(Maryland Joint, 1995) In fiscal year 1996, Maryland's total state tax revenues (includes personal income tax, sales tax, and corporate income tax) equaled more than $5.93 billion.(Figures, 1995) Even using DBED's estimation of $182.4 million, state casino taxes would only comprise 3 percent of Maryland's total tax revenues.

Taking into account many factors including potential competition from neighboring states, the substitution effect, and potential increases in crime, the Task Force concluded that the evidence did not convince them that casino gambling would bring substantial net economic benefits and suggested that the State strengthen its current prohibitions against casino gambling. Aware of the reactionary nature of casino legislation, the Task Force recommended that Maryland negotiate an interstate compact with neighboring states, with the goal of prohibiting the expansion of casino gambling in the mid-Atlantic region.(Maryland Joint, 1995)

CONCLUSION

Casino gambling does not guarantee states large net economic benefits. In fact, Nobel Prize-winning economist, Paul Samuelson, warns:

   There is a substantial economic case to be made against gambling. It
   involves simply sterile transfers of money or goods between individuals
   creating no new money or goods. Although it creates no output, gambling
   does nevertheless absorb time and resources. When pursued beyond the limits
   of recreation ... gambling subtracts from the national income. (U.S.
   Congress, Senator, 1995)

Ethical factors such as the cannibalism of other industries, increase in crime, and the cost of compulsive gamblers subtract from the net economic gain the casino industry can bring to a state in the form of increased tax revenues. Whether or not these factors negate the economic benefits of casino gambling varies from state to state. In Maryland, the Joint Legislative-Executive Task Force to Study Casino Gambling Activities in Maryland found casino gambling to be a bad bet for Maryland.

The debate regarding whether or not to legalize casino gambling in non-casino states will undoubtedly continue. Legalizing casino gambling appears to be a quick fix to state budget problems. Unfortunately, quick and easy fixes that are supposed to solve large, complicated problems often prove to be poor policies. It may behoove states to consider other options of stimulating their economy.

REFERENCES

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"Casino County." (24 July 1996) The New York Times.

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"Colorado Has Case of Gaming Fever." (21 July 1996) Rocky Mountain News.

Delaware Tracks Hit Pay Dirt With Slots." (4 August 1996) The Washington Post.

Figures from Maryland General Assembly. (June 1995) 1995 Fact Book.

Friedman, Joseph, Simon Hakim, and J. Weinblatt. "Casino Gambling as a `Growth Pole' Strategy and Its Effects on Crime," (1989). Journal of Regional Science, (29)(4), 622.

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"Gambling Fact Sheet." (3 February 1995). Restaurant Association of Maryland.

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Gold, Steven. (30, July 1995) "Are Casinos a Windfall for State Budgets?" State Fiscal Brief 5, 1-2.

Mahtesian, Charles. (September 1996) "Slot Machines in the Grandstand." Governing, (9)(12).

Maryland Joint Executive-Legislative Task Force to Study Commercial Gambling Activities in Maryland. (December 1995) Final Report of the Joint Executive-Legislative Task Force to Study Commercial Gaming Activities in Maryland, pp. 52-60.

"Profits Soared at Maryland Racetracks Last Year." (19 March 1996) The Baltimore Sun.

"Schmoke, Taylor, Press Glendening to Back Slots." (30 July 1996) The Baltimore Sun.

U.S. Congress, Senate, Senator Paul Simon. (31 July 1995) 104th Congress, 1st session, Congressional Record, No. 125, S10914.

"You Bet! It's the $482 Billion National Past Time." (3 March 1996) The Washington Post.