By Steven Pearlstein
Friday, October 5, 2007

What does it say about the state of Maryland that for the last 22 years, the most urgent and persistent political issue -- the question that has spawned hundreds of legislative committee hearings, consumed hundreds of hours of legislative debate, generated millions of dollars in campaign contributions and lobbying fees and pitted party against party, the governor against the legislature, the House against the Senate -- what does it say that all this has been over slot machines?

The Great Slots Debate started out innocently enough, as a way for VFW posts and Kiwanis clubs on the Eastern Shore to raise money for their charitable activities and give folks something to do on a Saturday night. Then, suddenly, racetrack owners grabbed on to slots as the way to save Maryland's storied thoroughbred industry. At some point someone got the bright idea that slots could be the jackpot from which to fund Maryland's schools and universities. Now a Democratic governor who opposed slots has concluded that they are necessary to help plug a gaping budget gap, while Republican legislators who once supported slots are saying no way.

Perhaps this is a good moment to take a deep breath, get out our public finance textbooks and think a bit more rationally about slots and the rest of Gov. Martin O'Malley's ambitious fiscal plan.

Let's start with the good news: Maryland is now the richest state in the union, while its state and local tax burden is only average. As a general proposition, that means Maryland can afford another couple of billion dollars annually to fund transportation infrastructure, education, environmental cleanup and health care for those who cannot afford insurance.

You have to wonder, then, why the governor, like so many of the Democratic presidential candidates, decided to structure and sell his program as a tax cut for the middle class rather than as a program to deliver vital services that a solid majority of Marylanders value and want. For Democrats to try to beat Republicans at the tax-cutting game is not only bad policy but political folly.

O'Malley should get lots of credit for proposing to drag into the 21st century a state income tax whose upper bracket starts at $3,000 in income, and whose marginal rate on the highest-income households is 4.75 percent. The governor would establish six brackets with the highest rate, 6.5 percent for households with incomes above $500,000. But in an overzealous bid to pander to the "beleaguered middle class," O'Malley needlessly left money on the table by throwing an income tax cut, on top of a modest property tax cut, at households with incomes between $150,000 and $300,000.

And while O'Malley had no choice but to propose an extra penny on the sales tax -- at $768 million a year in 2009, it would be the single biggest revenue raiser -- he could have easily raised another $200 million by applying the tax more broadly to personal services. There may be good political reasons to tax tanning salons and apartment landlords but not barbershops and dry cleaners, but even the governor can't come up with a good policy reason.

And it's too bad the governor didn't take the offer of political cover from business leaders and environmentalists to propose adding a dime to the gasoline tax, rather than dribbling out the increases through an automatic inflation index.

I mention all of these just to point out that there are other ways to raise additional revenue that are consistent with good tax policy and wouldn't put the state at a competitive disadvantage with its neighbors. It is simply incorrect to argue that slots are the only way.

What is true, however, is that voters would never divert $100 million in taxes to provide a $100 million annual subsidy to the Maryland horse racing industry, its 18,000 alleged jobs and 638,000 acres of farmland. But that is a totally separate issue raising different questions, for which slot machines once again are not the only answer.

To begin with, it is not obvious that the best way to rebuild a fan and bettor base for horse racing is to bus old ladies to the track to spend their time with one-armed bandits while never laying eyes on a filly.

Nor is it accurate to say that all 18,000 jobs and 638,000 acres will disappear if Maryland's top breeders have to truck their horses to tracks in other states -- in fact, they do it all the time. Moreover, if you do the math, that $100 million subsidy works out to $5,555 per job "saved" every year, or $157 an acre each year, which by economic development or land conservation standards is pretty expensive.

A more successful strategy, it seems to me, would involve selling off Pimlico and using the proceeds to rebuild a genuinely classy track at Laurel, with six-week meetings in the spring and fall, including the Preakness. The complex might also include year-round riding, training and veterinary programs, a steeplechase course, auction facilities and a small conference center.

No doubt there would be a need to subsidize these facilities and the race purses to attract top horses and jockeys. But for that, wouldn't it make more sense to expand the network of off-track betting venues that could not only generate revenue for the state but also begin to rebuild interest and excitement in horse racing?

If there were additional need to provide modest subsidies to Maryland horse farms, that could be done through conservation easements that would assure the state's money was being used to preserve green pastures rather than line the pockets of track owners.

For the rest of us, there are a couple of clear advantages to this more modest, market-based approach.

The first is that it would avoid the inevitable "arms race" with Delaware and Pennsylvania, which already have slots at their tracks, and would respond to any new competition from Maryland by using more and more slot revenue for luring gamblers and less and less for public education.

And the other? We could finally all move on to something other than slot machines.

Steven Pearlstein can be reached at pearlsteins@washpost.com.