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Gambling on Pennsylvania’s future

By Iain Oldman, Point Park News Service: 

Ahead of another looming budget showdown between Pennsylvania Gov. Tom Wolf and the state’s Republican-majority General Assembly, a familiar issue to bail the state out of its budgetary woes has been submitted for the legislature to take up – expanded legalized gambling.

But even as Wolf and some lawmakers in Harrisburg look to increased revenue from legalized gambling to fill the state’s budgetary lapses, some opponents and experts look at the proposal as unsustainable, short-sighted and ultimately costly for the state.

Currently, a new bill concerning expanding gambling and gaming legalization is in the state Senate after it passed the House of Representatives by a vote of 142 to 56. House bill (HB) 271, submitted by Rep. Jason Ortitay, would permit gambling terminals to be installed at airports across the state.

The General Assembly has considered a slew of gambling expansions in recent years, weighing topics ranging from online gambling to daily fantasy sports.

Pennsylvania legalized casino operations at horse racing tracks and standalone locations in 2004, and in 2006 the Pennsylvania Gaming Control Board granted licenses to operate to 11 business. Currently, there are 12 casinos and “racinos” in Pennsylvania with operating slot machines and table games.

From 2005 to 2013, the state saw record collected tax revenue from slots and table games, year after year. Then in the 2013-14 fiscal year, the state saw a decline in these numbers for the very first time.

Collected revenue from slot machines and table games have since both climbed to record highs again.

Per HB 271, authorized casino holders will be able to apply for an airport table gaming permit for a one-time charge of $1 million. The state would collect a 14 percent tax on gross revenues from the tablet-style electronic gambling machines and an additional 20 percent would be earmarked for the airports.

The fiscal note attached to the most recent version of HB 271 states that the bill would raise an estimated $14 million in 2017-18 from application fees and gaming revenues. Additionally, the state could see an annual revenue of $8 million of collected gaming revenues from the airport gambling terminals, according to the House Appropriations Committee – a drop in the bucket compared to the difference of $800 million between the governor’s and the General Assembly’s proposed budgets.

WHAT IS AHEAD

The bill could be viewed as a compromise in a political climate that sorely needs one.

On Feb. 7, Gov. Wolf introduced his 2017-18 budget. Wolf allotted a total state budget of $32.3 billion with $1 billion in new taxes, most of which were aimed at business interests (such as a new tax on Marcellus Shale natural gas production).

Pennsylvania House Republicans countered with a $31.5 billion annual budget that included no new taxes whatsoever. The House passed their budget bill into the Senate on April 4.

Pennsylvania’s fiscal year begins on July 1, 2017 and requires a state budget signed into law prior to that date.

In 2015-16, the governor and state lawmakers came to a nine-month budget impasse that left multiple government agencies scrambling to borrow money to continue operations. That standoff eventually ended when Wolf let a Republican-engineered budget become a law without his signature in March 2016.

The concept of using expanded gaming legalization to collect revenue for the state is nothing new. In the past two years, the General Assembly has seen multiple bills entered in both the House and Senate to expand multiple facets of gambling.

Currently, two bills are moving their way through the General Assembly. Senate Bill (SB) 477 and HB 392 are almost carbon copies of one another, both of them focusing on legalizing online gaming and daily fantasy sports in Pennsylvania.

Among other things, SB 477 would legalize and regulate online gambling and daily fantasy sports. The bill in its current language would establish a one-time licensing fee of $8 million for an online gaming license. In addition, a 14 percent tax on total revenue would be established, as well as a two percent tax on revenue set aside for local communities.

As of yet, there is no fiscal note attached to either of the bills, but state Republicans put a provision in their budget bill for $375 million in revenue to be collected from gambling expansions.

While the legalization and regulation of online gambling and daily fantasy sports presents a unique opportunity to generate new revenue for Pennsylvania’s General Fund, one sponsor of HB 392 maintains that the bill is intended to provide consumer protections (from fraud or deception, for example) that are not yet in place.

“It was always introduced it as consumer protection,” said Rep. George Dunbar, the primary sponsor of HB 392. “The revenue portion that it provides is just a small portion. [HB 392] can be part of a larger discussion.”

As of 2016, 29 states have introduced bills to legalize and regulate daily fantasy sports gaming, with three passing laws – Indiana, Tennessee, and Virginia. Five states have banned all fantasy sports.

For the state’s traditional gambling centers, or “brick and mortar” casinos, the state is seeing month after month of historic revenue. This exponential growth in the gaming industry’s collected tax revenue has attracted some lawmakers to call for an expansion of Pennsylvania’s gambling laws, but some experts have cast doubt on the long-term sustainability and social impact of relying on revenues collected from vice.

 

GAMBLING EXPANSION AS A LONG-TERM INVESTMENT

One study conducted by the Rockefeller Institute of Government, a policy research institute part of the State University of New York, casts a dark shadow over the proposed benefits of collecting state revenue from gambling expansions.

Lucy Dadayan, a senior policy analyst at the Rockefeller Institute of Government, warns against relying on those revenues for the state budget as a long term solution.

“First and foremost, Pennsylvania should learn a lesson from its own history: that is, the growth in gambling revenues is not sustainable,” said Dadayan.

In her 2015 report “State Revenues From Gambling: Short-Term Relief, Long-Term Disappointment,” Dadayan concludes that over time, competition among neighboring states gradually lessens the revenue collected from brick-and-mortar gambling businesses.

“The long run growth in state revenues from gambling activities slows or even reverses and declines,” Dadayan writes in the report.

The casinos, Dadayan finds, are heavily bolstered by gambling tourism. Pennsylvania syphoned casino tourism from New Jersey when the Keystone State expanded gambling legalization in 2004. Likewise, Pennsylvania saw declines in their tax revenues generated by gambling when Ohio, West Virginia, Maryland and Virginia legalized some forms of gambling in their states.

“Pennsylvania was early in the game in casino industry. However, as other states started legalizing and expanding operations, Pennsylvania saw a decline. Especially if you look at data casinos close to the borders you see a decline in revenue,” Dadayan explained. “It’s not at all a good sign.”

Indeed, of the state’s 12 casinos only two are in counties that don’t border other states – Hollywood Casino in Dauphin County and Mohegan Sun Pocono in Luzerne County.

When adjusted for inflation, seven of the state’s 12 casinos have reported actual overall revenue growth in 2016, and only two saw growth of 5 percent or more. Overall, the state only saw a one percent growth in 2016 in revenue adjusted for inflation.

In both 2015 and 2016, Pennsylvania saw a five percent growth in tax revenue collected from casino table games. The state collected just under $120 million in taxes from table game revenues in the 2015-16 fiscal year.

Dadayan warns that these returns offer little long term value, however. The state already taxes casinos for slots and table games at a higher rate than New Jersey and Nevada, for example, and the market of gamblers may have already peaked at its saturation point.

“Tax revenues from tables games would most likely decline in the long-run unless the state constantly adds more tables games and encourages its citizens to go and gamble,” Dadayan said.

Dunbar contends that the forms of gambling facing legal expansion under his bill – iGaming and daily fantasy sports – are isolated from interstate competition.

“It seems like whatever one state does the other state does,” Dunbar said. “Internet gaming will be strictly regulated through geographic technology. If another state does it then it does not affect what we’re doing.”

Dunbar additionally believes that his legalization and regulation of the iGaming and daily fantasy sport industries in Pennsylvania will bolster the state’s online poker players by providing them safe and sponsored “rooms” to gamble in.

The Westmoreland County representative even asserts that the commonwealth could enter into agreements with other states to have more and more players from across the country enter into legal, regulated tournaments that are “hosted” right here in Pennsylvania.

But Dadayan and some officials argue that gambling revenue, whether it be collected online or at physical locations, is not the appropriate stream of revenue for societal gains.
THE UNDERLYING SOCIETAL COSTS OF GAMBLING EXPANSION

Dadayan disagrees with the assertion that gambling expansions like iGaming or tablet machines are isolated from the same pratfalls that traditional casinos face, especially when you factor in the additional societal costs.

“You are encouraging all members to play when you put these in facilities other than casinos. You will face more societal costs. There will be more regulation needed than in casinos,” Dadayan said.

“Expansion of gambling leads to potential social costs, which in turn leads to economic costs,” Dadayan says in her report.

Additionally, a report from the National Gambling Impact Study Commission discovered that “The minimum estimated average cost to the combined public and private sector economies of a state is about $13,200 per problem gambler, per year.”

Dadayan asserts that society picks up the tab for complications associated with problematic gambling.

“Usually what you see is problem gambling, which leads to bankruptcy rates which leads to… an increasing crime rate,” Dadayan said. The Rockefeller Institute lays out several more societal dilemmas that are potentially born from problematic gambling, such as arrests, job loss and divorce, among others.

But Josh Ercole, the chief operating officer of Council on Compulsive Gambling of Pennsylvania, is reluctant to affix societal costs to expanded gambling legalization.

“I can’t say gambling is bad, for something that so many people can enjoy without developing a problem,” Ercole said.

Ercole argues that the true costs of problematic gambling become hazardous when programs aren’t put in place to provide help to those addicted to gambling. The Council on Compulsive Gambling of Pennsylvania is a nonprofit organization that trains therapists to provide proper clinical training to problematic gamblers.

Under HB 271, many services and resources for problematic gamblers will be put under a unifying umbrella. Ercole said that his organization has seen a decrease in calls to their hotline number, but also points to Pennsylvania’s casino self-exclusion program as an example of regulatory success.

“The numbers are absolutely astounding for how many people participate,” Ercole said. “it’s really incredible.”

Currently, HB 271 is sitting in the Community, Economic & Recreational Development committee in the Pennsylvania Senate. The other gaming expansion bills, HB 392 and SB 477, have a longer path to take before they are signed into law, as both pieces of legislation are languishing in committee.

The bill will have to pass through the Senate without any major overhauls (or else it faces the possibility of being sent back to the House) before it lands on the governor’s desk. If HB 271 does end up in front of Wolf, there’s no guarantee he will sign it, and he has expressed reservations about gambling expansions in the past.

Regardless of how long these bills take to get to Wolf’s desk, the governor and the General Assembly will have to eke out a resolution on gaming expansion before the two parties come to an agreement on the state’s budget.

The Republican-drafted budget bill allots for $375 million of the state’s budget to be filled by revenue collected from gaming expansion. Wolf’s budget only designates $100 million for the same expansion.

Dadayan asserts that the gambling market is saturated, and the growth of expenditures that will be paid for by gaming revenue in Pennsylvania will outpace the growth of the gambling market itself. The policy researcher suggests that lawmakers should earmark gaming revenues for “rainy day funds,” and not key areas of the state’s budget. Such a reliance on gambling expansion, Dadayan says, has historically proven to be short sighted.

“No one ever thought that New Jersey and Nevada would suffer a lot of revenue loss because of new gambling operations,” Dadayan said.

“You can see that states that have had casino operations for a long time have all suffered because of operations in neighboring states. People are not willing to drive long hours to go another casino when they can one to go in their own state. Maryland and Ohio will definitely have an impact on Pennsylvania.”

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