States are betting on gaming to score a revenue windfall.
By Jackson Brainerd
With state budgets still lagging pre-recession revenue levels, lawmakers hope to score a windfall by expanding legal gaming. Revenues from gambling offer an appealing alternative to the politically unpopular, increasingly undoable and invariably conflict-laden effort to hike taxes. Gambling raised $27.7 billion in fiscal year 2015 for state and local governments. Sounds good. But it represents a relatively small portion of most state budgets, somewhere between 2 and 2.5 percent.
The lure of new revenue has played a role in the legalization and expansion of state gambling for years. Since 2001, casino gambling of some sort has spread from nine to 24 states. In the last eight years alone, six states have legalized casino operations, two have legalized racinos (racetracks with casinos) and two have legalized lotteries.
Several more legislatures considered, but did not pass, legislation to legalize or expand gaming this year. Lawmakers in three of the six states that do not have lotteries—Alabama, Hawaii and Mississippi—considered bills to allow them. And, although initiatives to allow casino gambling failed to make the ballots in Arkansas and Nebraska, initiatives to expand commercial casinos did make the ballots in Massachusetts, New Jersey and Rhode Island. Only Rhode Island’s passed, however.
Big Bucks! Quick Bucks!
Gambling certainly has the appearance of a cash cow. Revenue flows in for the first few years of legal gambling, but how long that growth continues is less predictable. Traditional forms of gambling are not doing much to boost state budgets in the long term, according to an April 2016 report by the Rockefeller Institute. Revenue from casinos and racinos increased only 1.1 percent between 2014 and 2015, while lottery revenues declined by 0.7 percent in real terms during that period.
If states are looking to gambling to balance their budgets, they may be rolling the dice themselves. “Future growth in gambling revenue will not keep pace with tax revenue or spending,” says Lucy Dadayan of the Rockefeller Institute. “If gambling revenue is intended to support part of the overall budget, gaps may emerge in future years.”
An Oxford Economics study found that casinos generated $38 billion in federal, state, local and gaming taxes in 2013. The UNLV Center for Gaming Research has also reported an eye-popping statistic: “In 2014, Americans spent over $70 billion on lottery tickets, more than they spent on music, books, sports tickets, video games and movie tickets combined.”
As state gaming tax collections suggest, however, the gambling industry is experiencing some fiscal sluggishness. Overall, commercial casino revenues have grown, though unevenly, every year since 2009. Yet, Caesars Entertainment Corp. is facing bankruptcy, and five casinos in Atlantic City have folded. The Trump Taj Mahal was the latest to close its doors, leaving 3,000 workers without jobs.
Not all of these problems can be pinned on the general economy; after all, personal incomes and consumer spending in the U.S. were gradually rising as these high-profile casinos were making headlines. Rather, market saturation, changing demographics and the popularity of online fantasy sports have been shaping the casino industry’s current landscape as well.
Competition is on the rise. When a Burger King restaurant opens across the street from a McDonalds, it might bring in a few new diners with ads for, say, the new Mac n’ Cheetos. But it will also poach customers who otherwise would have eaten at the Golden Arches.
It’s this kind of turf battle many casinos are fighting. Increasingly, they battle for the same pool of gamblers, while the potential new pool of millennials gravitates toward more interactive games that require skill to play.
Those in the casino industry, however, see these factors as challenges rather than threats. The gaming industry, which exploded during the 1990s, is experiencing “maturation, not saturation,” says Andrew Smith, with the American Gaming Association. Competition is an inevitable part of any healthy free-market economy, and ultimately ensures the best possible customer experience, he says.
Competition: Alive and Well
The uptick in casino revenue in 2015 was due largely to the introduction of gambling in Maryland and Ohio, not to growth in existing gaming states. States looking to expand gambling face competition from other states’ commercial operations and the tribal industry, which had 425 casinos in 28 states at the end of 2012 and accounts for 41 percent of the total U.S. gaming industry. With so many options, growth comes more from “cannibalizing” neighboring states’ gaming activity than from creating large numbers of new players.
The numbers are particularly striking in the Northeast and Midwest. New Jersey’s commercial casino industry hemorrhaged money between 2006 and 2015, as revenue fell by half—from $5.2 billion to $2.6 billion, according to UNLV’s Center for Gaming Research. Meanwhile, New Jersey’s neighbors were winning. Pennsylvania opened casinos in late 2006, and revenues grew to $3.2 billion by 2015. Maryland’s share went from $50.8 million in 2011 to $419.6 million in 2015. In the Midwest, Indiana’s casino revenue fell from $2.8 billion in 2010 to $2.1 billion in 2015, while in Ohio, where casinos didn’t open until 2012, revenue grew to $1.6 billion in 2015.
Expanding gaming always introduces the threat of cannibalization. Rhode Island’s proposed new casino, for example, is to be built very close to the state’s border with Massachusetts to offset the loss of revenue to a tribal casino opening in Taunton, Massachusetts. How will that affect gaming in the surrounding areas? The ratings agency Fitch has expressed concerns about the impact it could have on the remaining casinos in Atlantic City.
Certain lottery games appear to be growing stale. The Texas Lottery Commission, for example, reported that Powerball participation rates dropped 14.6 percent from 2013 to 2014, then another 20.1 percent from 2014 to 2015. Analysts cite “jackpot fatigue” to explain lethargic revenue. When jackpots become mind-bogglingly large—like the Powerball’s record $1.59 billion cash prize last January—players scoff at the chance to win a paltry multi-million-dollar award.
Casinos are shifting to more interactive games by replacing slot machines with table games such as blackjack, craps and roulette.
This affects revenue in the 20 states with commercial casinos that offer only table games, since they’re typically taxed at a much lower rate than slot machines. In Pennsylvania, for example, slots are taxed at 54 percent, while table games are taxed at 16 percent. Even though the state’s gambling operators made less money overall in 2014, their after-tax income was the same as in 2013 because more people played table games.
“The trend of revenue shifting from gaming machines to table games is expected to continue across the nation,” according to the accounting and consulting firm RubinBrown. “We are already seeing this trend emerge in Maryland, where both Maryland Live! and Horseshoe Baltimore are replacing gaming machines with table games to accommodate the increased demand.”
States also lose revenue when gamblers wager online. A report commissioned by the Pennsylvania Legislative Budget and Finance Committee noted that, “in 2012, iGaming revenues from U.S. residents were $3 billion, and online poker revenues were $212 million, the vast majority of this flowing to offshore betting companies.”
Even though the U.S. Department of Justice decided in 2011 that the Wire Act of 1961 outlawed only sports betting, not gambling over the internet, states have been slow to legalize and regulate it. Delaware, Nevada and New Jersey are the only states that allow iGaming. Still, iGaming and limited-stakes gaming accounted for most U.S. gaming growth in 2015. Through July, New Jersey’s five internet casino operators took in $112.2 million, which was well on pace to surpass the previous high mark of $148.9 million, set last year.
Four states proposed online gaming measures in 2016, and the Massachusetts Gaming Commission recently voted to form a panel to study online gaming. California enacted the Internet Poker Consumer Protection Act to establish a framework to authorize intrastate internet poker. Pennsylvania passed a budget that included $100 million from gambling expansion, even though a measure authorizing online gambling was not included in the final bill.
Online lotteries are gradually appearing in the states as well. In 2016, Kentucky joined Georgia, Illinois and Michigan as the only states to allow online lotteries. Six states considered them in 2015, and Massachusetts did so in 2016. Minnesota began selling lottery tickets over the web in 2014, only to suspend sales the next year after opponents raised concerns about predatory gambling. Michigan’s online lottery has projected it will bring in an additional $480 million for the state’s School Aid Fund over eight years. Georgia’s lottery reported $1.3 billion in online game sales in FY 2014, but did not report a number for FY 2015.
As with casinos, the “millennial problem” also affects lotteries. “Simply put, millennials don’t play the lottery, and won’t anytime soon,” Massachusetts Senator Jennifer Flanagan (D) says.
What millennials do play is daily fantasy sports. Research has shown that nearly two-thirds of players are 35 or younger.
Are fantasy sports a form of online gambling? Legal opinions vary. States have been quicker to address the legalization and regulation of fantasy sports, in most cases by exempting them from laws that apply to illegal forms of gambling.”. In 2016 alone, 33 states had introduced measures to legalize the game, and, as of October, eight had enacted them. The regulation of fantasy sports, however, seems unlikely to result in a windfall of new revenue.
Projections for the industry suggest that total annual revenue will reach $2.5 billion by 2020. Most state legislation thus far includes only upfront fees, with a taxation component yet to be factored in. The office of New York Governor Andrew Cuomo (D) estimated the state’s yield from a recently enacted bill to legalize and regulate daily fantasy sports to be $4 million. A fiscal impact statement for Indiana’s fantasy sports bill projected the state would take in between $250,000 and $3.75 million in initial licensing fees.
For its part, the industry sees opportunity for growth. More casino operators and gaming manufacturers are “stepping up their games,” says Smith of the gaming association. The casinos are bringing in more creative games, betters shows, better food and better customer service. On the horizon, he says, are variable-payback games in which winnings depend in part on skills, rather than luck. Another idea new to the U.S., though popular in Asia, is stadium-style blackjack, in which as many as 150 players use individual electronic terminals in a game run by a live dealer.
Expanding gaming opportunities generates plenty of interest, but it’s not without naysayers. Some casino operators want to reduce competition—Sheldon Adelson’s Sands Bethlehem, for example, is lobbying against online gambling in Pennsylvania—while some citizens and interest groups have ethical concerns about government-sponsored gambling.
But just as gambling has been dogged since America’s colonial days by accusations of negatively impacting society, it has also been perennially pursued as a revenue-raising tool.
The expansion of gaming has certainly benefited many state budgets in the short term, but it has also caused gaming activity to dwindle in states that have historically relied on it for revenue. While online gaming and daily fantasy sports can surely replenish some of these losses, it is uncertain whether they’ll do much to improve the long-term ability of legal gambling to meet revenue expectations and support state budgets.
States might want to heed the advice they offer citizens: Play responsibly.
Jackson Brainerd is a policy associate in NCSL's Fiscal Affairs program.
Casino: A room or building where gambling games are played. (Also the title of an epic crime drama starring Robert De Niro and Joe Pesci.)
Daily fantasy sports: A subset of fantasy sports that finishes competitions over the span of a day or week. In traditional fantasy sports, competitions last the length of an entire season.
Fantasy sports: Online game in which participants assemble imaginary or virtual teams of real players of a professional sport. These teams compete based on the statistical performance of the selected players in actual games. The performances are converted into points that are compiled and totaled according to a roster selected by each fantasy team’s manager.
Internet gambling/iGaming: Online gaming opportunities include poker, casino games, sports betting and lotteries.
Jackpot fatigue: The lack of interest in gambling by lottery players and other gamers when lottery jackpots are relatively small. Players tend to wait until jackpots are loaded before playing.
Limited stakes gaming: Games in which a limit is placed on the amount that can be wagered. Typically includes video gaming or video lottery terminals.
Racino: Combined racetrack and casino.
Table games: Games like blackjack, craps and roulette that are played on a table and operated by one or more live dealers, such as a croupier or poker dealer.