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Drop in Gambling Revenue Means Big Loss for States

As fewer play slots or lotteries, lawmakers look to raise taxes

Lady Luck has stopped smiling on America’s state legislatures.

For most of the past decade, the 48 states that allow gambling enjoyed a surge in revenues from megamillion-dollar lotteries, casinos, riverboat gambling and the hot new trend, “racinos”—slot machines housed inside racetracks. Now, some lawmakers are looking anew at the unpopular alternative of raising sales or income taxes to pay for services such as education and mass transit.

A Gallup Poll estimates that about half of Americans play the lottery, and analysts say older people are more likely to visit slot machine parlors or casinos, because they have more time to spend on leisure activities.

But now, as the country copes with the worst recession in a generation, the cards have turned. Across America, revenues from lotteries, casinos and other gaming enterprises have fallen sharply. According to the American Gaming Association, gross state revenue from casinos alone declined 4.26 percent, to $32.6 billion, in 2008.

“You are seeing decreases in gaming revenues across the board,” said Ian Pulsipher, a policy specialist who tracks gambling for the National Conference of State Legislatures in Denver. As gaming proceeds decline, he said, “state revenues are in a really tough spot. It’s further evidence that there aren’t any more easy options to solve tough fiscal problems.”

Why states love gambling

The decline comes as many states have grown to rely on gaming revenues as a relatively painless way to replenish their coffers.

According to a study published last year by the Rockefeller Institute of Government, state revenue from gambling, after expenses, totaled $23.3 billion in fiscal 2006-07, up from $14.9 billion in fiscal 1997-98. That’s nearly half the amount that states collect in corporate income taxes.

But gambling revenue was already slowing even before the full effects of this recession hit last summer, the Rockefeller study noted. As gasoline prices began to rise last year, sales of lottery tickets began to soften.

“The goose is no longer laying such golden eggs,” said Lucy Dadayan, a senior policy analyst for the Rockefeller Institute who follows gaming. “The reason for the decline is simple: People don’t have enough money to go to a casino or even to buy lottery tickets.”

This year, lottery revenues have fallen 5 percent in California and 7 percent in Florida as fewer people buy scratch-off tickets or bet on numbers in a drawing. And both Las Vegas and Atlantic City, N.J., cities where casino gaming drives the local economy, are reporting decreases in tourism and revenue.

In March, for the second straight month, Atlantic City casinos set a record for the biggest monthly revenue drop in the 30-year history of legalized gambling there, falling 19.4 percent compared with the previous March. One of the reasons for the decline, however, is that neighboring Pennsylvania has authorized slot machine gambling at racetracks and is seeing a jump in gaming revenue of nearly 15 percent.

The revenue declines across the country put the lie to the myth that gaming revenues are immune to recession, said Jacob Oberman, casino consultant for CB Richard Ellis in Las Vegas. “This recession is different from 2001,” he said in an interview. “In this recession, people’s household worth has been negatively affected.”

“What was fueling gaming revenue growth was the fact that people were taking out home equity loans, refinancing and selling their homes at big profits. They were using their houses as ATM machines. Now,” he said, “people owe money. We’ve seen a complete 180 in terms of people’s personal disposal income.”

While younger people might drop a few thousand dollars during an occasional weekend visit to Las Vegas, older Americans constitute the vast majority of those making weekly pilgrimages to slot machine parlors or local casinos, Oberman said.

What happened in Kansas

Perhaps no state more clearly illustrates the potential for declining gambling revenues than Kansas. Lottery sales in late March were down 4 percent from the same week a year ago, and the weak economy has stalled construction of one of two casinos that the state was counting on to provide $57 million in revenue by fiscal 2010.

Last November, Las Vegas-based Harrah’s Entertainment withdrew its extensive development plans just a few months after winning the rights to develop a $560 million resort casino in Sumner County. In withdrawing, Harrah’s cited the global economic outlook and the credit squeeze. The bidding for casino construction was reopened in April, and three new bidders are vying for development rights.

Dadayan of the Rockefeller Institute said that as gaming revenues dry up, states may be forced to raise conventional taxes. “Already we know that there are about 10 states planning to increase their income and sales taxes,” she said.

In California, where lottery revenues are also down, voters will be asked in May to help balance the state budget by allowing higher payouts. Proponents of Proposition 1C argue that if the state is allowed to make bigger payouts—they are now limited to 50 percent of the amount wagered—it will increase interest, draw more customers and ultimately bring in additional revenues.

This so-called modernization proposal would also allow the state to sell bonds for $5 billion of lottery revenue it hasn’t received yet. If the measure fails, however—and polls show it trailing—Republican Gov. Arnold Schwarzenegger will find it even more difficult to keep his state’s budget in balance.

Michael Zielenziger writes about business and the economy. He lives in the San Francisco Bay area.

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