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A cautionary tale about expanded gambling

Wonkblog:

Earlier this week, Delaware’s casinos got a surprise windfall. Just days after saying no to tax breaks, Gov. Jack Markell (D) proposed that $8 million of the state’s budget surplus be distributed amongst its three struggling establishments, to forestall the layoffs that at least one of them had threatened.

That would seem to defeat the purpose of casinos: Generating revenue for states. The problem is, for the past decade, almost every state in the nation has tried to cash in–and gamblers aren’t keeping up. Twenty-three states have now legalized commercial casinos, and revenues are back to 2007 levels after taking a dip during the recession. Twenty-eight states have Native American-owned casinos, where revenues have been essentially flat since 2007. Almost all new gambling facilities take revenue away from somebody else, and one state’s explosive growth is another’s stagnation.

Delaware is a prime example. Neighboring Pennsylvania went from none in 2006 to 11 casinos making more than $3 billion in 2012, while Maryland opened two casinos over the past two years and more than doubled its revenues. And it’s not the only nearby state in trouble. Even before Hurricane Sandy barreled into Atlantic City, its gambling industry was in a long decline, and even a state-of-the-art new facility looks headed toward bankruptcy.

“Pennsylvania and Maryland had provided a substantial amount of the business for the casinos around there, and when they get their own casinos, all things being equal, people will gamble closer to home,” says Joseph Weinert, an analyst with Spectrum Gaming. “The whole purpose of those states legalizing casinos to begin with is to keep their residents’ tax dollars in state. Delaware’s in a pickle, there’s no two ways about it.”

It’s the same sad song in the Midwest, where casinos have raced to open in Ohio; Connecticut, where customers have been vacuumed up by new facilities in New York, and Missouri, hit by Kansas’ three new casinos since legalizing gambling in 2007.

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At the end of the day, geography is destiny: The winners in this new world of ubiquitous gambling will be those with casinos close to large population centers (hence the hot competition to build a new facility in National Harbor, across the river from Washington D.C.). Gaming industry advocates like to point to Las Vegas, saying it’s possible to create a destination that people will travel to with rock-bottom tax rates and massive development. But Delaware isn’t going to create an east coast Vegas. And it’s probably a better idea, as the News Journal advised, to pick up and move on.

One can certainly argue that Delaware’s situation is not at all like Texas’ would be. It’s a short drive from Maryland and Pennsylvania to Delaware, so when those states allowed gambling and casinos sprung up, it was likely just too much competition in a limited geographic area for them. That won’t be a problem in Texas, since even though we’re surrounded by gambling states, it’s too far for many people to drive. Still, I’d be concerned that the market for gambling – casinos, slot machines at racetracks, whatever – is inherently limited, perhaps more so than we think. In addition, the existing casinos aren’t going to give up their Texas customers without a fight. I remain largely ambivalent on the question of whether or not to expand gambling in Texas, but I also remain skeptical of the claims that they will bring a bonanza to us. As with the Lottery, we should be very wary about getting dependent on any revenue from this kind of source.

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