U.S. States Feel the Pain of Recession

U.S. States Feel the Pain of Recession

In an interesting article over the weekend the Wall Street Journal explored the impact of recession on the US gambling industry, and what states are doing to combat the accompanying drop in tax returns. Strangely, the article did not bring legalised internet gambling and its potential contribution to state revenues into its study.

Author Conor Dougherty wrote that tax revenues from land casinos, slot machines and lotteries is falling for the first time in many of the 48 states that have grown to depend on gambling as a crucial source of income. Quoting statistics from the American Gaming Association, he reveals that revenue contributed by commercial casinos to state and local governments was down 2.2 percent in 2008 to $5.7 billion. In many states, the declines have continued.

"Eight of the 12 states that allow commercial casinos saw their take of gambling revenue fall in the fiscal year ended June of this (2009) year, compared with the same period a year ago," the WSJ article reports, quoting data from states and the Nelson A. Rockefeller Institute of Government at the State University of New York.

"In five of those states, including Illinois and Nevada, gambling income fell by a greater percentage than the state's overall revenue did. Nevada's gambling-tax revenue fell 15 percent in the fiscal year ended June '09 compared with the same period a year earlier. That contributed to a drop of 10 percent in the state's overall revenue," the article continues.

Lotteries have also been adversely impacted; in a sampling of 20 state lotteries, including California and Illinois, 14 had recorded recent year-over-year drops in revenue.

The declines have been a rude awakening for US states accustomed to rising tax contributions as gambling has expanded. In the past, states saw total gambling revenue including casino games, lotteries and horse-racing wagers rise 65 percent from fiscal year 1998 to $23.9 billion in 2008. Overall state revenue over the same period grew to $774 billion, up 65 percent.

A weak economoy, and the recession's impact on the gambler in terms of lower spending and a reluctance to travel to gamble, combined with a more competitive gambling industry are principal reasons for the decline. And declining gambling revenues have exacerbated falling sales- and income-tax receipts, forcing states to slash spending as they try to balance budgets.

"Gambling revenues are declining across the board, and states can no longer count on gambling when it comes to closing budget gaps," said Lucy Dadayan, a senior policy analyst at the Rockefeller institute.

The Wall Street Journal piece takes a look at the extent to which individual states depend on gambling revenues. In Nevada, about 30 percent of the state's general fund comes from gambling, whilst in Delaware, it is about 8 percent. Utah and Hawaii are the only two states without some form of legal gambling.

In general, gambling income - including state lottery-ticket profits and taxes on commercial gambling revenue - has made up a growing share of state budgets. Though each state has its own way of collecting and distributing the money, gambling revenue has helped states fund expanding budgets, education, and to lower other taxes that have a broader consumer impact, such as property taxes.

U.S. commercial casinos saw gambling revenue slump 5 percent to about $33 billion in 2008 compared with 2007, according to the AGA. The figure doesn't include American Indian casinos, and it has deteriorated since.

Competition between neighbouring states has seen the gamblers' dollar spread more thinly across competing options, the article notes. New Jersey, the home of Atlantic City and the second-largest gambling state, after Nevada, has been hit hard by competition from neighbouring Pennsylvania, which over the past year has added several thousand slot machines. New Jersey's share of casino revenue fell 14 percent in the fiscal year ended in June versus a year earlier.

"Commercial casinos also are competing with the expanding number of American Indian casinos, which now exist in 28 states," Dougherty reports. "Tribal casinos don't pay taxes, though several states have forged agreements that pay them a share of the casino's revenue.

"Revenue at the 405 tribal casinos tracked by the National Indian Gaming Commission grew 2.3 percent to $26.7 billion in the fiscal year ended September 2008, compared with $26.1 billion from 391 casinos in the year-earlier period. That compared with revenue growth of 5 percent and 10 percent in the previous two years."

Rick Mazer, a regional president for Harrah's Horseshoe Casinos, discussed reductions in wagering levels on slots and told the WSJ writer: "People are afraid. They're concerned about their retirement and their portfolio. Even though sometimes their income hasn't changed, their wealth in their mind has changed."

Cities that have successfully grappled with the problem include Chester, Pennsylvania, where gambling revenue has allowed the city to balance its budget and set up a rainy-day fund. "This fiscal year about 30 percent of the city's $41.2 million budget will come from the slot machines at the Harrah's Chester casino and racetrack, roughly equal to the city's police budget," Dougherty found.

"Without Harrah's the city would be in a dire financial situation," said Thomas Moore, chief of staff to Chester Mayor Wendell N. Butler Jr.

The National Conference of State Legislatures reports that lawmakers in at least 14 states have considered expanding gambling as an alternative to raising property or income taxes. Slot machine and other gambling offerings installed at racetracks - generically dubbed "racinos" - has been one solution to be explored. Five of a sample of nine states with racinos saw revenue increase in the fiscal year ended June, according to the Rockefeller Institute.

In Pennsylvania, where gambling-tax revenue has risen as the state added slot machines over the past year, state representative Bill DeWeese recently introduced a proposal to add table games such as blackjack and craps to the state's slots-only locations. With a $3 billion budget deficit and many legislators resisting calls to raise taxes, DeWeese says gambling is one of the few areas that can be tapped. "It would be a substantial amount of help to our state in this very challenging moment," he says. "There's no difference, in my view, in putting $20 in a slot machine and putting $20 on a blackjack table."

But with gambling revenue falling, Nevada is taking a different tack. To close their budget gap this year, Nevada legislators voted to increase sales and payroll taxes.

And there's always the possibility that a legalised and regulated US Internet gambling regime as envisaged by Congressman Barney Frank's HR 2267 proposal currently in Congressional committee could make a worthwhile contribution to state coffers.

In an independent study in September last year the respected international financial advisory services group Pricew­ate­rho­use­Coopers estimated that up to $51.9 billion could be realised in tax revenues over a ten year period if Internet gambling was legalised in the United States.

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