Will Slot Machines be a Jackpot for Maryland?

1. Will Slot Machines be a Jackpot for Maryland? Robert E. Carpenter Department of Economics, UMBC Maryland Institute for Policy Analysis and Research (MIPAR)

2. Disclaimer: The views in this presentation are those of the author.

3. The hopes for slots • Its revenues will limit any needed increase in taxes or service cuts and be a key part of the solution to the “structural budget deficit” • Its revenues will fund the growing commitments of the state to K-12 and higher education • Its revenues will stave off the decline in Maryland’s historic horse racing industry

4. The underlying economics • Maryland’s budget crunch is both large and persistent • The budget gap is the result of • Increasing commitments towards K-12 education (Bridge to Excellence) • Enacted with no dedicated revenue stream to support it • Slowing macroeconomic growth

5. Maryland’s structural problem has narrowed for FY09

6. But it’s back for FY10-12 • What’s the plan to solve this problem? • Some parts already in effect: increases in sales tax rates, expansion of sales tax to services, higher income tax rates at top end, tobacco tax increase • Combined projected effect is $1,230mm in FY12 • Slots estimated contribution is $445mm in FY12 • Fair to say that slots are important part of the plan • What are the details? Are the projections reasonable? Is it likely to work? • Also some big spending programs planned that depend on slots passing

7. Some important details • License fee: Currently “at least” $3mm per 500 VLTs. Could be more (or less) than $90mm • Up to 33% of revenues to licensees, 7% to purses & 2.5% to tracks (max $100 & $40mm) • Roughly 50% to “Education Trust Fund”

8. Important question #1 • Is the combination of license fee and operator take a good deal for the state? • To assess requires a simple capital budgeting exercise • Haven’t ever seen one (besides mine). What happens beyond FY12? What are the assumptions • My own figures suggested that Governor Ehrlich’s original deal was in the ballpark. Governor O’Malley’s appears also to be, but that’s because of much larger mandated construction costs in supporting legislation. • Lower required costs leave could leave more value for the state. Let the operator figure it out.

9. Important question #2 • Are the revenue projections and “win per day” estimates reasonable? • Estimates comparable with others in region. Special Session Fiscal and Policy Note does not perform a “sensitivity analysis.” Standard technique in this sort of exercise. • Gaming revenues waning right now. Gaming ETF down over 7% this year • If Maryland enters the regional market for slots will have as many as 86,800 machines (or more) • Competitive pressure can reduce revenue • It will pressure states to preserve revenue streams • Lots of debate every year, no doubt

10. Important question #3 • How much of slots revenue is “new”? • If people are already spending the money here, we’re just moving it around. • Need to bring Marylander’s back, or out-of-staters in, for the money to make a difference. • Called “the substitution effect” • How big is it? DLS: “estimates vary” What is the range of those estimates? • Key issue…what’s the net impact of slots? • Key point: The billion dollar plus estimates are overstated. They count all revenue as “new”

11. The substitution effect could be big • Means little new revenue for the state, and that slots won’t help with the budget problem • Most believe that the slots market is “local.” Most technical analysis by consultants use a “gravity model” to reflect this fact • Market for most Maryland slots appears to be largely Maryland. Implies a very large substitution effect

13. How much new spending? • DLS: Potentially $400 million being spent by Marylander’s playing out of state • The recognize, properly, that not all will return • How about out-of-staters coming here? • Look at the map. It will be a challenge to attract players from WV, PA, NJ, and DE. We might do better with VA and DC players • Haven’t seen estimates

14. Is this $400 million important? • No, not at this level of analysis. It’s a debater’s tactic • States trade with states. Why do you care about this $400 million and not the other billions of dollars the flow out of Maryland for all the other things we buy? • It could be smaller than the annual coffee and bagel bill for Maryland’s commuter workforce

15. Important question #4 • Common to link gambling to education. Does the creation of the Trust Fund benefit it? • Maybe • Dedicating some of the revenues from slots shifts the budget towards education (and it doesn’t matter if the spending is new or not) • Money is fungible • Some evidence suggests that increased revenue from gambling earmarks results in lower general funds allocations; some suggests some of the earmark “leaks” and doesn’t make it to its intended use • DLS Fiscal and Policy Note: “In light of the substantial structural deficit currently forecasted for fiscal 2009 through 2013, it is assumed that all of the available ETF proceeds are used to support operating programs and therefore offset general fund expenditures.”

16. Important question #5 • Does racing deserve a subsidy? • It does not meet the classic requirements (national defense, positive spillovers, equity) • Employing many people or a historic tradition is not an economic justification for a subsidy • Subsidies generally reduce economic welfare (Economics 101) • This decision is political choice. It cannot be supported by economic theory • A subsidy of $100mm is • Roughly $13,000 per racing-related job ($7,300 per racing horse)

17. Important question #6 • How big are the social costs of increased gambling? • Social costs are lost productivity, increased crime, broken families. More broadly the troubles of problem & pathological gambling • They are very large and effect many people • DLS estimated roughly 70,000 problem gamblers. Estimates of costs range from $1,000 to $13,000 per problem gambler, per year. ($70mm to $910mm) • Some of these costs already being incurred • Important to know the incremental costs

18. Last important question • What characteristics do you want from your tax system? • Slots often characterized as a “voluntary tax.” Contributing to the support of social programs where all benefit (like education) must and should be a burden shouldered by all • I want my tax system to be fair, equitable, and transparent. • Are slots a mixed bag? • They are “fair” in that the payoffs are blind, but not in a probability sense (the house always wins) • They are equitable in that all are invited to play, but state sponsored gambling is often regressive • They are decidedly not transparent • From whom will we raise our revenues? State policy makers have an opportunity to be national leaders here

19. The bottom line • Slots are often called a “gimmick” • Gimmick has more than one definition • An ingenious or novel device, scheme, or stratagem, esp. one designed to attract attention or increase appeal. • A concealed, usually devious aspect or feature of something, as a plan or deal • The first is certainly true. We’ll find out what voters think about the second in the fall