Gambling in Texas

A Four Part Series

This is a five-part series in the Texas Republic News on various issues related to gambling legislation. The Series:Tuesday, March 10: Part One – The Legislative AgendaWednesday, March 11: Horse Racing and Slot MachinesThursday, March 12: Indian Casinos and their ImplicationsFriday, March 13: Is Gambling a Good Bet for Texas?

Part Four – Is Gambling a Good Bet for Texas?

By James Aalan BernsenTexasRepublicNews.com

Casino gambling is a compelling issue, because it crosses political boundaries. While many conservatives oppose it, many of the more libertarian ones argue for it. While many liberals support it, many of the most ardent advocates for the poor are strongly opposed.

In this series, we have looked at two of the biggest issues related to proposed casino gambling in Texas; now it’s time to turn back to the question overall and weigh some of the issues surrounding it, since gambling is an inherent trade off of promised riches versus social costs.

These are the arguments for bringing casino gambling to Texas:1. Economic Development. In addition to the horse industry issue (discussed in Part

II), proponents claim it will bring new jobs to Texas and stop the drain of the millions of dollars from our state to neighbors like Louisiana and Oklahoma.

2. Casino gambling will bring much needed tax revenue to the State of Texas, which can be invested in education or other priorities.

3. If the people of Texas want to gamble, let them gamble. Government has no business enforcing morality against the wishes of the voters.

Let’s take a look at each in turn:

Economic DevelopmentThe parking lots of casinos in Louisiana and other neighboring states are frequently jam-packed with cars, and many of those are the cars of Texans. A recent study by Texans for Economic Development (TED) – a pro-gambling lobby group – claims that Texans wagered $2.4 billion in seven states: Nevada, Mississippi, Louisiana, New Mexico, Oklahoma, Colorado and Arizona.

Bringing gambling dollars home, TED argues, would recapture $1.8 billion of that money for Texas. It would also generate an additional $1.5 billion in new business revenue and create jobs at the casinos.

The gambling proposal by Senators Rodney Ellis (D-Houston) and John Carona (R-Dallas) would authorize two casinos in Dallas and Harris Counties, one in Bexar County and one in Travis County. SB 1084 would also authorize gambling for each of the three existing Texas Indian tribes, as well as at the states’ five horse-racing tracks and two dog-racing tracks, for a total of 16 casinos across the State of Texas.

Overall, supporters believe it will bring an economic benefit of $50 billion a year and create 300,000 new jobs, a spokesman for Sen. Ellis told the Dallas Morning News.

Tax RevenueThat same spokesman also pegged the potential revenue to the State of Texas at $3.25 billion to $4.5 billion. This is a significant increase from past estimates – roughly double – from previous legislative sessions. That’s because the “footprint” of casinos in the Ellis-Carona bill is larger than in any previous legislative session.

Where are these numbers coming from? Authors of the bill presumably studied gambling in other states, considered the size and population of Texas, and weighed the money leaving the state currently. So, are these numbers feasible?

Let’s look at Nevada – the home of the very kind of “destination casinos” that supporters of the legislation want to bring to Texas. The entire state of Nevada – whose economy evolves around little else – earns about $1 billion in tax revenue a year in good years. And gambling, apparently, is not recession-proof. Nevada has seen its tax revenues plummet in recent months and the cash-strapped Nevada legislature has seized half of its sales tax reimbursements to businesses.

Texas is much larger than Nevada, but it is inconceivable that the state could market itself as a destination for gambling to rival that state. For Texas to come anywhere near the projected revenues, the vast majority of gambling revenue must come from within. What does it take to put in to get $3-4 million out?

Gambling taxes don’t work like other taxes. In fact, most states soak their casinos with draconian, near 50 percent taxes on slot machine revenues – which make roughly 70-90 percent of casino income.

The Texas bill would place a 35 percent tax on slot machines and 15 percent on other gaming operations. The taxable value of gambling the state would need to have to generate that proposed tax return would have to be around $12-15 billion.

But people don’t go to casinos just to lose. They go to win, and if they don’t win frequently – in fact, very frequently – they won’t come back. So most casinos have to invest a large portion of the money spent back into the prize pool – 80 to 90 percent in

most cases. So the actual amount wagered can be dramatically higher. Pro-gambling groups often use this higher number – the Baptist General Convention estimated $51-200 billion from earlier versions of the bill.

This number is shocking, but it does not necessarily represent the funds taken out of the economy, because many of the funds are repaid in prizes and theoretically go back into it. However, this is only true for the gamblers as a group, and is rarely true of the average gambler. A few big winners obscure the fact that the majority of people go home with nothing.

For this study, since it is both the source of the tax income and any potential drain on the economy and therefore social services, we will focus on the money lost, not the money wagered. This represents funds taken directly out of Texans pockets. We will use this number - $12-15 billion in evaluating the social costs and the state’s “gaming capacity” later.

If the people of Texas want to gamble, let them gambleOne of the most compelling arguments for increasing gambling is evidence presented that indicates that it has the great support of many Texans. After all, who can argue with democracy?

A recent poll by Bacelice and Associates that basically tested the Texas pulse for the provisions of the Ellis-Carona bill found 63 percent of respondents supported the idea. Yet every one of the questions asked by the pollsters was about a positive effect of the legislation, and it did not include any information skeptical of those claims or presenting the many negative effects of gaming.

In politics, this is called a push-poll: one which asks misleading questions in order to gain a pre-planned result.

Arguments against legalized gambling

Among some of the things the poll doesn’t ask are some of the biggest reasons most Texans have historically opposed gambling, as well as policy reasons why even receptive legislators have voted it down in the past. The arguments against casino, slot-machine style gambling:

1. The revenue projections to the state are entirely unrealistic and no accounting is made of the corresponding costs that come with gambling.

2. The danger of a dramatic expansion of unregulated gaming is real.3. Welfare, entitlement programs, unemployment and crime increase in proportion

to the increase of gambling.

Deconstructing the Revenue NumbersSB 1084 and its House companion, HB 1724 promise $3-4.5 billion in revenues to the State of Texas, and as we have seen, the majority of this revenue is expected to come

from people who are not currently gambling today. Put up against the $1 billion that Nevada earns by taxing slot machines, and it doesn’t seem likely. But the numbers become more of a fairy tale when you look at nationwide numbers: the entire U.S. tax revenue from commercial casinos is only $5.79 billion, according to the pro-gambling American Gaming Association. (See chart below)

This number does not include racetrack casinos ($2.2 billion) or Indian casinos. Indian casino tax revenue amounts to around 2/3 of the commercial taxes, roughly $4 billion a year. This gives a total of tax revenue from gambling in the U.S. at just over $12 billion.

For Texas – which has less than 10 percent of the population of the U.S. – to achieve 30 percent of the nation’s tax revenue from gambling is just not feasible, especially when one considers the trends in gambling revenue nationwide. Early on, a few casinos hit it big, and the states that taxed them did so as well. But as gambling becomes more common, the winning and their tax revenue thins out.

For Texas to save its $1 billion annually from going to Louisiana, one must assume Louisiana will lose at least the majority of that tax revenue. But some gamblers will

continue to go out of state. Texas may open a casino in Harris County, but is it really likely Texans will cancel their honeymoons in Vegas to go to Houston instead?

Texas currently has a lottery, whose proceeds – far below the rosy predictions of the early 1990s – go to education. Evidence from other states shows clearly that the introduction of gambling takes money away from the state’s lottery. Estimates for Texas put the number as high as $1 billion, which cuts the overall increased revenue from gaming by 1/3.

The danger of gambling expansion is realPart III of our series shows clearly that when it comes to Indian gaming, Texas is betting on an inside straight: the idea that something that has happened in dozens of other states will not happen here.

This is unlikely. The law is weighted on the side of Indians and casino developers who back them. Gambling will expand, and chances are, it will expand untaxed. That has been the experience of California, which sees billions of dollars taken from the pockets of its citizens and reaps hardly anything in taxes. This, in fact, is one of the key reasons for California’s massive budget shortfall. It pays the costs of gambling, but doesn’t get the benefits of it.

The costs of gamblingMany who subscribe to a strict libertarian philosophy argue that citizens should have the right to gamble, because if they lose, it’s their own fault. This may be so, but the cost of that fault is borne by all of the taxpayers, whether they gamble or not.

The social costs, from crime, economic distress and family issues that result from gambling are admitted by all. The only question is how big are they, and whether or not they outweigh the supposed benefits of gambling. According to a 2005 study by two economics professors, one from the University of Illinois and one from the University of Georgia, the cost is around $13,500 a year per pathological gambler. Spread out to the whole of society (pathological gamblers are estimated at a conservative 1.5 percent) that would amount to $200 per Texan. If this number were used, the costs of state resources to treat gambling would wipe out the proposed tax revenue.

Some of the costs that researchers Earl Grinols and David Mustard found:

Apprehention and increased crime costs Adjudication (criminal and civil costs) Incarceration Lost productivity on the job Lost time and unemployment Bankruptcy Suicide Illness Therapy/Treatment Costs Unemployment, Medicaid, food stamps and other entitlements.

Family costs (Divorce and separation)

Other researchers dispute the size of the cost, but there is general agreement that the costs are real, and this realization crosses party lines.

In Texas, the leading conservative think tanks such as the Texas Public Policy Foundation (TPPF) and the leading liberal ones, such as the Center for Public Policy Priorities (CPPP), agree that gambling is a bad bet from a cost-to-the-state view.

“Gambling has high social costs,” wrote Dick Lavine, the director of the CPPP in a recent policy paper. “Gambling can cause addictive and destructive behavior much like alcohol and drugs.”

Furthermore, Lavine asserts that taxing gambling is regressive: it hits the poor hardest. In Texas, there is a direct correlation between per capita income and per capita lottery sales. The five Texas House districts with the lowest income spend 2-3 percent on average on lottery tickets. The top five House districts in terms of income, spend about 0.3-0.5 percent.

And for all the supposed economic benefits of gambling, not all Texas business leaders agree. Greg Gallaspy, the Executive Director of the Paseo del Rio Association (The San Antonio Riverwalk), said gambling would have a huge negative impact on the state’s existing tourism, including the riverwalk, the United States’ Number One tourist destination.

“We have over 100 hotels, restaurants and bars that will be directly impacted,” Gallaspy said. “We already are a destination, we do have resorts.”

Gambling revenue, he argues, isn’t just created out of thin air, and a lot of it will come from poaching off existing businesses and industries.

The last wordGambling is addictive, but it is not the players who are the poster children for this new craze, but the states who embrace it. In the last two decades, 20 states have embraced casino gambling, and have bet their futures on it.

Slot machines – the generator of the overwhelming majority of casino income – are not just addictive, they are specifically designed to be addictive. Modern slot machines are not simple games of chances like the old machines of the past which randomly stopped a rolling cylinder. They are advanced computers with highly complex algorithms which can actually change the odds on the fly as players play. In fact, as a May, 2005 U.S. News and World Report expose (“Secrets of the Casinos”) pointed out, casinos often employ other tactics – such as keeping rooms intentionally dark and piping in certain scents – which directly target the brain in order to encourage gamblers to play longer – and lose more.

Slot machines and casinos are not addictive by accident, they are addictive by design. For the State of Texas, which once successfully sued cigarette manufacturers for merely marketing an addictive product, the establishment of such casinos would be the ultimate in hypocrisy.

And if it’s all marketed to the voters for a hypothetical tax revenue windfall that is clearly over-optimistic at best, and downright disingenuous at worst, Texans will have good cause to wonder if the return on the investment will really be worth all the costs. After all, this is one bet that the State of Texas really can’t afford to lose.