Policy Initiative Spotlight: Gambling Your Way out of Debt

Thirty U.S. states projected budget shortfalls for FY 2013, and the options for bridging these gaps without major cuts to services such as education or transportation are dwindling. Dollars from the federal Recovery Act, which provided some fiscal relief for state treasuries over the past few years, largely ran dry at the end of 2011.

So many statehouses looking for much-needed revenues, but loathe to hike taxes, are examining whether to legalize or expand existing gambling or "gaming" within their borders. Twenty-three states currently permit some form, whether a simple lottery, so-called "racinos" (gambling race-tracks), or full-fledged casinos. States often pursue them in this order.

In March, New York Governor Andrew Cuomo reached a handshake agreement with legislators to legalize Vegas-style casinos in the Empire State. The proposed deal would amend the state constitution (Reuters), which currently only permits gambling at Native American establishments, such as Foxwoods, and designated racinos like the Aqueduct Racetrack in the borough of Queens.

Cuomo, like many politicians pushing similar proposals, trumpeted the move as a victory for local economic development, "This is a process that will ultimately put thousands of New Yorkers to work, drive our economy, and help keep billions of dollars spent by New Yorkers on gaming in the state," he said.

But many economists say such claims are contingent on a number of factors and come with several often understated offsets and costs. Casinos often "cannibalize" other forms of spending that contribute to state coffers (including other forms of gambling, like the lottery) and can divert money from more productive economic activity. For instance, money lost at the blackjack table could just as easily have been spent on a consumer good or other form of entertainment. It could also simply have been saved for investment. New casinos also typically entail higher state infrastructure costs and increases in funding for gambling regulatory bodies.

Critics also assert that casino gambling constitutes a regressive tax (NYT) that takes money from the same citizens who can least afford it. Warren Buffett has referred to gambling as a “tax on ignorance.” Some, of course, may gamble away money that would have otherwise been spent on food or housing.

Analysts encourage policymakers to know their local market before opening the doors to any new gambling facilities. A top international city like New York may stand to attract new gambling dollars from foreign tourists as well as capture revenues from locals that currently head across the border to Niagara Falls or Atlantic City. But a state like Kentucky, which is also looking at legalizing casinos, may not be so lucky. While Kentucky casinos may keep local gamblers from fleeing across the Ohio River to the craps tables in Indiana, they're unlikely to establish a gambling "destination" in the state.

As more and more states legalize casinos, a zero-sum paradigm begins to emerge. States and localities that count on casino taxes will inevitably suffer, as the gamblers they once relied on are lured across borders.  A recent study by McKinsey & Co. says that the debt-ridden city of Detroit (WSJ) stands to lose some $30 million in annual casino tax revenue by 2015, as newly-legalized casinos in neighboring Ohio take root. New Jersey (Atlantic City) is experiencing a similar plight following Pennsylvania's decision to legalize casinos in 2010, and, of course, stands to suffer more as the roulette wheels begin to spin in New York.