Bad Bet

With Slots, the Budget Wins -- But the Economy's a Loser

LAS VEGAS

As a professor and gambling researcher here in the Oz of odds, I've done many studies on the gaming industry and its economic impact around the world; as you read this, in fact, I'm on my way to Japan and Macau for some summer research into the casinos there. And so, last year, when Pennsylvania lawmakers began considering whether to allow slot machines at racetracks and other locations around the state, two interested parties sought my advice. Gov. Ed Rendell's office asked me to estimate the volume of state revenues that could be generated by the machines, and a citizens group asked me to analyze the potential wider economic impact.

Like many of their counterparts in Maryland, the District of Columbia and elsewhere around the country, leading Pennsylvania politicians see slot machine gambling as an easy way to pick up dollars for financing programs and balancing budgets. And they're right: The machines do make a lot of money, and they can be taxed. For the Rendell report, I based my calculations -- which I'll explain below -- on a total of 30,000 machines in Pennsylvania. They could reliably be expected to produce $3 billion a year in profits for the machine owners. The legislation provides for these profits to be taxed at a rate of something like 34 percent, easily allowing the state to realize $1 billion in new annual revenues. This impressive number must have been useful to the pro-slots governor, for when the legislation passed, it authorized not 30,000 machines, but more than 60,000. That should mean at least $2 billion in annual revenues. And that represents a lot of reduced property taxes.

For the citizens group's report on wider economic impact, however, I looked at much more important questions: Do the dollars and cents add up to economic sense? Would the introduction of slot machines actually be good or bad for the towns that get them?

Those questions had a very different answer -- and it's an answer that politicians looking to bulk up their budgets ought to take note of.

To understand why, let's follow the money.

Begin with this estimate: Each slot machine -- and I'm using the term to mean all kinds of slots, video lottery terminals and similar machines -- can be expected to win approximately $100,000 from players every year. That's how much the machine keeps after it pays out all those winnings and jackpots that successful players never stop talking about. (This is the average for machines in Atlantic City; slots in Illinois and Connecticut actually average net revenues of more than $150,000 each per year.)

That hundred grand is money that comes out of someone's pockets. Whose? Well, in Las Vegas, 90 percent of gambling revenue comes from tourists and visitors. They stay here for an average of four days, spending more money on non-gambling activities -- hotel rooms, restaurant meals, shows, shopping -- than at the tables and machines.

This reliable influx of cash has fueled an amazing economic boom in Vegas, growing every year since the 1950s (with the exception of 2001 and 2002, when fear of terrorism kept more Americans close to home). But it's only possible because the money comes from outside the region; without those out-of-towners, Las Vegas's own population of 1.7 million would support about four or five casinos, and maybe 7,000 or 8,000 slot machines. But we have almost 200 casinos and more than 150,000 machines. We need those visitors.

The situation is very different in Pennsylvania, Maryland and the District, which have more than enough residents -- some 13 million adults -- to occupy all the slot machines that have been proposed for all the venues. No slot owner is going to have much incentive to market outside the area. The mid-Atlantic region could certainly produce another $7 billion to $10 billion in gambling revenues without taking a penny away from what is now being spent in Atlantic City. Furthermore, as more regional venues authorize some form of gambling -- Delaware and West Virginia already have -- there will be less incentive for anyone to travel very far to play the slots.

But every new venue will definitely lure more local folks to gambling. As the research proves, the average American adult spends (that is, loses) $350 each year in games of chance. Those living in casino jurisdictions lose twice that much. Among Nevadans, the average is more than $1,000 a year.

In short, it's likely that the local populations of the three venues will produce virtually every penny of the revenues collected by these machines. And they will divert more of their disposable income, which might otherwise go to other local businesses, to the slots.

That's where the money comes from. Where does that $100,000 a year go? Let's take a hypothetical slot machine in downtown Philadelphia. If all the money taken from the gamblers in Philly stayed there, it would be a wash, and we could leave the debate up to the moralists and the politicians. But it just doesn't work that way.

First, the machine owner had to buy the machine. Typical cost: $15,000. Average market life for each machine: three years. Thus, Philadelphia spends (loses) $5,000 of that $100,000 a year. (Who gains it? Nevada, mostly. Two companies -- IGT of Reno and Bally's of Las Vegas make 80 percent of all the slot and video lottery machines in the United States.)