Delaware is bailing out its casinos. Wait, what?

Total gambling tax revenue
Total gambling tax revenues by state, 2001-2011 (University of Nevada Las Vegas Center for Gaming Research. Revenue in millions.)

Earlier this week, Delaware's casinos got a surprise windfall. Just days after saying no to tax breaks, Gov. Jack Markell (D) proposed that $8 million of the state's budget surplus be distributed amongst its three struggling establishments, to forestall the layoffs that at least one of them had threatened.

That would seem to defeat the purpose of casinos: Generating revenue for states. The problem is, for the past decade, almost every state in the nation has tried to cash in--and gamblers aren't keeping up. Twenty-three states have now legalized commercial casinos, and revenues are back to 2007 levels after taking a dip during the recession. Twenty-eight states have Native American-owned casinos, where revenues have been essentially flat since 2007. Almost all new gambling facilities take revenue away from somebody else, and one state's explosive growth is another's stagnation.

Delaware is a prime example. Neighboring Pennsylvania went from none in 2006 to 11 casinos making more than $3 billion in 2012, while Maryland opened two casinos over the past two years and more than doubled its revenues. And it's not the only nearby state in trouble. Even before Hurricane Sandy barreled into Atlantic City, its gambling industry was in a long decline, and even a state-of-the-art new facility went bankrupt.

Atlantic city's declining gambling revenue
Atlantic City's declining revenue. (University of Nevada Las Vegas Center for Gambling Research)

"Pennsylvania and Maryland had provided a substantial amount of the business for the casinos around there, and when they get their own casinos, all things being equal, people will gamble closer to home," says Joseph Weinert, an analyst with Spectrum Gaming. "The whole purpose of those states legalizing casinos to begin with is to keep their residents' tax dollars in state. Delaware's in a pickle, there's no two ways about it."

It's the same sad song in the Midwest, where casinos have raced to open in Ohio; Connecticut, where customers have been vacuumed up by new facilities in New York, and Missouri, hit by Kansas' three new casinos since legalizing gambling in 2007.

So there's clearly diminishing overall utility to state governments as markets near their saturation points. But a state like Delaware, which derives eight percent of its budget from gambling revenue, feels it can't afford to let neighboring states drink its proverbial milkshake entirely. So what to do?

There are two kinds of weapons in this unproductive arms race: Legalize more and different kinds of gambling, and offer lower tax rates to keep casinos in business, even if it means collecting less overall.

Native American casino revenue
Native American casino revenues leveling off, despite more facilities opening. (National Indian Gaming Commission)

Delaware has tried the first strategy, legalizing sports betting in 2010. It also became the first state to legalize a full range of online gaming last year; Steven Light of the University of North Dakota's Institute for the Study of Tribal Gaming Law & Policy speculates that the $8 million bailout might be a bridge to help the three casinos survive until the Internet starts minting money. But both of those tactics only work until neighboring jurisdictions catch up--New Jersey is hot on Delaware's heels.

The second strategy, lowering taxes, might save Delaware's gambling industry from total collapse, and keep a few thousand people employed. It's already got one of the highest effective tax rates in the country, at 56.9 percent, with neighboring jurisdictions in the same ballpark. But that likely won't generate additional business. A recent study on the elasticity of the casino tax base in Illinois found that--surprise!--gross receipts roughly correspond with tax rates.

At the end of the day, geography is destiny: The winners in this new world of ubiquitous gambling will be those with casinos close to large population centers (hence the hot competition to build a new facility in National Harbor, across the river from Washington D.C.). Gaming industry advocates like to point to Las Vegas, saying it's possible to create a destination that people will travel to with rock-bottom tax rates and massive development. But Delaware isn't going to create an east coast Vegas. And it's probably a better idea, as the News Journal advised, to pick up and move on.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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Neil Irwin · June 19, 2013