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gambling revenue taxes

Time for the biennial annotation of gambling bills that will not pass

This one is creative, I’ll give it that.

Rep. Joe Deshotel

A Texas lawmaker has proposed subsidizing the state’s underfunded windstorm insurance and flooding assistance by building casinos in coastal counties.

State Rep. Joe Deshotel filed the bill on Dec. 7 to cover the cost of the Texas Insurance Agency by proposing to tax licensed casinos, Galveston County Daily News reported . The measure would give the Texas Lottery Commission the authority to issue six licenses to operate casinos across six counties.

The proposal would generate an 18 percent gaming tax of a casino’s revenue and use some of the money to ensure the windstorm association has sufficient capital to cover its insured deficits and operating expenditures.

Deshotel, who first filed a similar bill in 2015, said this latest iteration would send part of the tax to a flooding assistance trust fund. The governor’s office could then use the trust fund for emergency assistance during natural disasters like Hurricane Harvey.

“Just like the lottery, where a portion of funds go to public education, this is a need that’s underfunded,” Deshotel said. “If the lottery helps education, we can help with the problem of windstorm, which is disproportionately paid for by the coastal counties.”

It’s not just a bill – Rep. Deshotel has filed HJR 36, a “constitutional amendment authorizing the operation of casino gaming in certain coastal areas of this state by licensed persons to provide additional money for residual windstorm insurance coverage and catastrophic flooding assistance in the coastal areas”. There is a bill as well, HB494, since all constitutional amendments need enabling legislation to go with it. That means of course that this needs a two-thirds majority in both chambers to pass, and I don’t think I need to tell you what the odds are of that. Tying it to revenue for windstorm insurance is brilliant, but it still has to overcome the fact that some people oppose gambling in any form, and some people who support gambling only support it in the form of slot machines at horse-race stadia. A good idea, and perhaps a sign that we’ll see some Is This The Year That Texas Finally Expands Gambling stories (spoiler alert: no, this is not the year), but not much more than that.

LSG hearing on expanded gambling

The Legislative Study Group held a hearing on Wednesday to start the discussion about the various proposals for expanded gambling in Texas that will be brought to the Lege next year.

Racetrack and casino interests that want to expand Texas gambling dangled promises of new tax revenue before lawmakers Wednesday, but faced tough, skeptical questions from Democrats about the economic benefits and social costs.

“Could I make a suggestion to you? Don’t pretend like there’s not a downside. Somebody needs to talk about how we’re going to mitigate the downside,” Rep. Garnet Coleman, D-Houston, told Jack E. Pratt Sr., chairman of the Texas Gaming Association, which is pushing a proposal that would include destination resorts with casinos.

[…]

Their questions ranged from details of the $1 billion to $1.5 billion projected annually in new state tax revenue to the likely bidding process for casino licenses, as well as the people likely to play and whether they can afford it.

Rep. Lon Burnam, D-Fort Worth, said the hearing was meant to make public the private conversations that are occurring about the possible legislation for the 2011 session. He said he would like to get updated revenue figures besides those generated by the interests involved.

Racetrack and casino interests testified, as did gambling opponents from the Texas Baptist Christian Life Commission. At this point, I’m just glad to see decent information getting out there. If people are going to be called upon to vote on this next year, they should have as much accurate data at their disposal as possible. Texas Politics and First Reading have more.

The gambling industry is ready for the next legislative session

Bad budget times are fertile ground for those who want to see an expansion of gambling in Texas.

“We are planning to lay out our case again to the Legislature,” said Duane Galligher, a spokesman for the Texas Gaming Association, which led the push to bring Las Vegas-style casino gambling to the state during the 2009 Legislature. “Anytime the state is looking for additional revenue, gaming always gets a more serious study. We believe this will generate a substantial amount of revenue.”

Galligher cited previous studies showing that 68 percent of Texans would approve the proposals, despite resistance in the state Capitol. Studies over the past several years have shown that revenue for casino gambling would generate between $3 billion to $4.5 billion in state and local tax revenue, he said.

Sen. Rodney Ellis, D-Houston, a leading sponsor of the 2009 casino gambling bill, has also said that he plans to revive the bill, presenting it as a huge revenue generator that could put billions into public schools and highways. The Fort Worth Stockyards have long been eyed by gambling interests as a potential site for a casino.

“If we’re going to ask Texas families to sacrifice in these tough economic times, I think it’s the responsibility of the Legislature to consider all reasonable options to help generate revenue,” Ellis said.

Remember, the gambling industry never sleeps. Doesn’t matter that neither candidate for Governor is much of a fan, they’re out there working it. You have to respect that. Again, not to rehash old debates, the main point is that even if all their dreams come true in 2011, it still won’t help with the current situation. I agree with Sen. Ellis that we need to consider all reasonable options for generating revenue, I just don’t think this one should be in the top half of the priority list.

Poker bill dies

Last night at midnight was the first major deadline in the House. Any bill that had not been passed on second reading was officially dead for the session, though some may get reincarnated as amendments to already-approved bills. About three quarters of the 5000 bills filed in the House suffered this fate, including some high profile ones such as the concealed-carry on campus bill and, I’m sad to say, HB222, the poker bill.

A proposed constitutional amendment to legalize casino gambling never made it onto the calendar. Sponsors had said they would not ask it to be set unless there were enough votes to pass. They never reached the necessary 100 votes.

The bill to legalize poker games at horse and dog tracks had a chance of getting on the calendar, but sponsor Rep. Jose Menendez, D-San Antonio, said he was pulling it off because Gov. Rick Perry’s staff assured him the governor would veto it.

“Sometimes you flush good will if you put a dead bill out on the floor,” Menendez said, explaining his decision to withdraw the measure without debate.

And with that, none of the bills that would have authorized an expansion of gambling made it through.

Their chances looked better than ever this year, with a strapped state budget and a new House speaker with interests in a San Antonio racetrack.

But in the end, lawmakers say, the expectation of federal stimulus dollars kept the state from getting desperate for money. And the major casino gambling legislation needed 100 votes in the 150-member House, a threshold that the bill’s sponsors couldn’t reach in such a divided chamber. And even if the poker bill had passed, Gov. Rick Perry probably would’ve vetoed it.

“We came into the session billions of dollars short. The stimulus pulled us out of dire straits,” said Menendez, D-San Antonio. “If we were cutting school budgets and not giving teachers raises, we would see a lot more willingness.”

Gambling opponents say it’s easy to blame the bill’s failure on a budget bailout. But they argue that the real reason gambling gets no traction session after session is because it’s bad policy.

Suzii Paynter, with the Baptist General Convention’s Christian Life Commission, said the promises of jobs and tax revenue that supporters make are exaggerated.

“Gaming legislation has failed because the more people look into the promises that are made, the more weaknesses they see in the proposal,” Paynter said.

I think there’s some merit to the argument about stimulus money having an effect. I certainly thought the gloomy budget picture at the start of the session would act as a catalyst for gambling proponents. The real test will come next session, when everyone is already expecting a huge deficit and a fight over the rainy day fund, and no stimulus package to come to the rescue. I do agree that the claims of jobs and tax revenue are overstated, but they’ll likely look a lot more tempting when the alternative is deep, slashing cuts to needed programs.

Response from the racetracks

When I wrote my earlier post about how much revenue expanded gambling would generate for Texas, I said I’d be more than happy to do a similar exercise for someone on the pro-gambling side of things. Sure enough, I got an email from Mike Lavigne on behalf of Texans for Economic Development, who sent me a copy of a study done by TXP that examined the question for the horse racing interests. I’ve uploaded it here (PDF) for your perusal. The main thrust of the argument is as follows:

Texans are already gaming at a high level. Based on data from a variety of sources, including state gaming commissions, convention and visitors bureaus (CVBs), and other academic studies, TXP has estimated the current gaming revenue in a seven-state region that is attributable to Texans at approximately $2.3 billion during 2007, the equivalent of about 3.8 percent of the national total. This is the assumed universe of current Texan gaming; while there undoubtedly are individual instances of Texans gaming elsewhere in the country, it does not appear to be significant.

The Innovation Group was engaged by Texans for Economic Development to estimate the size of Texas’ gaming market. A summary of their results follows. As the table indicates, the total Texas market approaches $4.2 billion in gaming revenue at full implementation. However, there is still leakage out of state, as some Texans will continue to game elsewhere.

A significant share of the revenue that would occur in Texas with the implementation of racinos would be recaptured from other states where Texans currently game. Measurement of the volume of this spending is done through subtracting the leakage out-of-state ($840.2 million) from the $2.4 billion figure, yielding recaptured spending of approximately $1.8 billion.

They estimate a total of about $3.4 billion in gambling revenue, which when taxed at 30% (the rate for racetracks is higher than what has been proposed for casinos) yields about $1 billion a year for the state. They make other claims as well about related economic activity and employment, which I’ll leave to you to examine.

I remain basically skeptical of the claims made here – I think some of these projections are optimistic, especially the ones made separately about the economic benefits for other businesses that flow from expanded gambling. I also think it’s foolish to rely on gambling revenue for anything other than “found money” – the Texas Lottery should be an object lesson there. Finally, there is a moral case to be made against expanded gambling, and I think we greatly underestimate the social costs associated with it, which the state does precious little to mitigate. I’ve got a future post planned for that, since it’s outside the scope of this one. Having said all that, I can at least see where the racetracks’ numbers are coming from, and while I think they’re sunny, they’re comprehensible and reasonable. We can argue over these numbers because they’re here to be argued over, which remains more than I can say for the casino interests, whose claim that they would generate $3 billion for the state looks even more ludicrous to me based on this.

I also asked Lavigne in an email exchange after he sent this to me about the bleak picture the racetracks have painted for their industry today, and why they would be a better vehicle for capturing the “leakage” than regular casinos. Here’s what he said, reproduced with permission:

The Racing Commission did indeed paint a glum picture. There is no denying the shape the industry is in right now. The primary reason is that purses in Texas are so low, there is no incentive for breeders to breed in Texas. If they take the same horse and breed it in Louisiana, NM or OK they will be eligible for much larger prizes. A large chunk of the money made in this bill will go toward growing purses here that will be competitive with not only with our neighbors, but with the eastern seaboard, where racing has had a lot more success. This model is the reason our industry in Texas has fared so poorly. When parimutuel wagering was legalized in Texas, there were very few (if any) racinos in our bordering states.

We don’t oppose the proposal for regular casinos on its face, but we do object to the disparate tax rates. That would surely kill any chance racinos would have to be successful.

As to why we think racinos would better capture the money than casinos? I think that is the wrong question. Both would be able to get at that money. We do have to look at political reality though. What is more palatable to the legislature? Full on casino gambling overnight? Or a smaller expansion at existing sites with legal wagering already taking place.

The Governor and many Republicans have repeatedly said that they do not want to expand the footprint of gambling. We believe our proposal is a more modest one.

The most important thing to remember about these figures is that the Comptroller will ultimately make the decision as to how much money these proposals would raise. She will do her own math.

So there you have it, the case for racinos. My thanks to Mike Lavigne for engaging me on this. If someone with the casino interests wants to show me their numbers, I’ll be more than happy to do this for them as well.

Finally, on a related note, whatever reservations I have about casino and/or racetrack gambling, I do support an expansion of legalized poker in Texas. HB222, introduced by Rep. Jose Menendez as the Poker Gaming Act of 2009, would establish poker as a “game of skill and not a lottery or gift enterprise prohibited by the Texas Constitution” and would thus allow for the creation and regulation of legalized games. In particular, it would allow establishments that hold a license to serve alcoholic beverages issued by TABC or a license issued by the Racing Commission to have the ability to host the game of poker. There was a hearing for this bill yesterday in the House before the Licensing and Administrative Procedures committee. I have no issues with this bill and support its passage.

How much money would expanded gambling generate?

Throughout this session, every time the subject of expanded gambling in Texas comes up, along with it comes some kind of projection of how much revenue it might generate. Those estimates always come from the proponent of that form of expanded gambling, and as expected are wildly optimistic. For example:

Texas Insider, February 13:

“Our breadth of support cuts across all lines of gender, race and party,” said Tommy Azapardi, Executive Director of Texans for Economic Development. “In these economic times, voters are very motivated by the 53,000 new jobs and the billion dollars a year for state coffers racinos could generate for the state.”

Texas Politics, February 23:

Proponents say casinos in Texas could generate anywhere from $3 to $4.5 billion per year.

Houston Chronicle, February 25:

Backers of Joint Resolution 31 and Senate Bill 1084, the broad gambling legislation, said their proposal would bring in at least $3 billion a year in new state and local revenue.

So how realistic is any of this? Well, consider this.

During 2008-09, the [Economic Forum] expects gaming taxes to drop from $804 million to $715 million, an 11 percent decline. Gaming revenues will increase by 3.3 percent to $739 million in 2009-10, and by 3.9 percent to $767 million in 2010-11, according to the forum.

That’s from Nevada, a state which has more gambling than we do or would even if HJR 31 passes. The $715 million in gaming revenue comes from a gross gaming revenue tax of 6.75% (it’s actually slightly less than that, but this is close enough), which in turn implies statewide gambling revenues of about $10.5 billion. If you assume the casinos’ margin is seven percent – that is to say, a total 93 percent payout on all bets – that means gamblers dropped a total of about $150 billion at Nevada casinos.

So the question is, do we think Texas casinos will generate more than Nevada’s? HJR 31 sets the revenue tax at 15%, so we could generate as much tax revenue on less than half the amount – about $4.8 billion, or $68 billion in bets at the same payout rate. To get all the way to $3 billion, though, you’d have to have the casinos take in $20 billion, which in turn is about $270 billion in bets. I don’t think that’s going to happen.

By the way, a little further Googling led me to this article, which suggests that gross casino revenue in Louisiana is about $2.5 billion. That strikes me as a better comparison to Texas – note that Louisiana has 13 riverboat casinos and one land-based casino, while HJR 31 would call for 12 casinos in Texas – and would generate $375 million in gambling taxes at 15 percent.

Now of course, the casinos have other ways to make money for themselves (food, drink, hotel occupancy, entertainment, etc) and for the state (sales taxes, hotel taxes, alcohol and cigarette taxes (assuming smoking would be legal in the casinos, which I’m guessing would not be the case), property taxes, business margins taxes, etc). I don’t know what the components are to that $3 billion figure for the casinos, or the $1 billion figure for the “racinos” (I still hate that word). It’s entirely possible – likely, really – that I’m not comparing apples to apples. But at least you can see where my numbers are coming from. It would be nice if the gambling industry could do some of the same kind of calculation, and show their work, so that a proper comparison, as well as a judgment of their projections, can be made.

Full disclosure: The two Nevada links came to me from Teresa Kelly of Texans Against Gambling, after she commented via email about an earlier post of mine. That was the inspiration for this post, though the rest of the research is mine. I’ll be more than happy to do a similar exercise for someone on the pro-gambling side of things if they want to as well.