Do state governments have a gambling addiction?

Many states are turning to legalized gambling to help fill holes in their budgets. But gambling revenue is not a long-term fix for budget problems.

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    Patrons play blackjack during the first day of table games at Hollywood Casino at Penn National Race Course in East Hanover Township, Pa. on July 13. Many states are expanding legalized gambling in an effort to generate more revenue.
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New England, settled by Puritans centuries ago, has gambling fever. Several states are grappling with efforts to expand gambling and harvest the resulting tax revenue.

The Massachusetts legislature is hammering out details of a bill to bring two or three resort-style casinos to the state to supplement its lottery and racetrack betting parlors. In Maine, developers have already put down a deposit on a site for a casino, which is subject to voter approval in November. A similar initiative was just vetoed by Gov. Donald Carcieri (R) in Rhode Island, prompting talk of an override by the legislature.

While supporters of legalized gambling point to much-needed tax revenues and thousands of casino jobs, opponents are lining up against gambling expansions, and not just with moral arguments. They cite recent evidence that gambling revenues may be neither a quick fix nor a long-term solution for state budget gaps.

Recommended: Online gambling 101: What the new gambling expansion means for states

How does gambling generate money for states?

Lottery proceeds, taxes on gambling profits, and licensing fees for new facilities make up the bulk of gambling revenues for states. The tax rates tend to fall between 20 and 50 percent.

States allocate gambling proceeds in different ways, but common targets for the money include education, infrastructure, local government, and treatment of gambling disorders.

Lotteries, casinos, and combination racetrack-casinos (or "racinos") are the biggest sources of gambling revenue for states. Traditional betting on horse and dog races – parimutuel wagering – is also legal in 40 states, but its contribution to state revenues has fallen with its declining popularity.

How important is gambling revenue?

Gambling provides, on average, between 2 and 3 percent of states' revenue, excluding federal funding, according to the Rockefeller Institute, a New York think tank. Nevada relies on this revenue source the most, with 13.6 percent of its own-source funds coming from gambling in 2007.

Supporters of Massachusetts' gambling bill in the state Senate say the new casinos would generate as much as $355 million a year. By contrast, the budget gap that lawmakers closed with cuts this spring was about $300 million. Some money would arrive fairly quickly, too: Each new casino operation would pay a $75 million licensing fee to the state right away.

Besides money for states, are there other reasons to expand gambling?

For Massachusetts state Sen. Joan Men­ard (D) and others, casino jobs are a more important economic factor than tax revenue. She likens the potential influx of new jobs – as many as 15,000 for three Bay State casinos, according to another state senator – to a stimulus effort. "A resort casino is economic development," Sen­a­tor Menard told The Boston Globe. "I have 10,000 people in a city of 96,000 looking for work."

What are the economic drawbacks of legalized gambling?

The moral argument against gambling has been around since the first wager. But there are also economic arguments against states expanding the practice and using it as a revenue source. A Rockefeller Institute study last year found that, over time, gambling revenues grow more slowly than the expenditures of the programs (such as education) that they fund. That means reliance on gambling revenues can worsen deficits.

There are more immediate drawbacks to gambling, which critics say disproportionately hurts the less-well-off. The vast sums spent on legalized gambling – more than $90 billion a year, or about nine times Hollywood's annual box office receipts – would galvanize the flagging economy if used more efficiently, says John Kindt, a business professor at the University of Illinois.

"That's lost consumer activity that's not buying food, clothing, cars, refrigerators, and so on," Mr. Kindt says. Because of economic multipliers – the effects of consumer spending flowing through the economy – every $100,000 spent in slot machines results in $300,000 in economic losses, Kindt claims.

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