Sharpen your pencils

November 23, 2003

TOWSON UNIVERSITY'S respected RESI economic research institute spent months analyzing other states' tax revenues from legal slot machines, and its study underscores an obvious bottom line worth repeating often in advance of the opening of the Maryland legislature in January. Unfortunately, the study, released this week, also provides some potentially misleading fodder.

First, the simple but useful truth: If the main reason for legalizing slots is to generate more money to help heal Maryland's long-term structural budget deficit, then the state must insist on the highest possible cut of the take. In other words, if the state makes this leap -- and we oppose it -- some very sharp pencils are going to be sorely needed in the General Assembly.

Yes, of course, you say.

But consider: If the state doesn't go the most profitable route of state-run slots parlors -- not studied by RESI -- and instead licenses private operators, the leeway for setting the state and local tax rate on the machines is stunningly vast.

The RESI study found that among six states across the country with "racinos" -- racetracks with slots -- state and local tax rates ranged widely from 54 percent in Rhode Island to 15.2 percent in Louisiana. That's a key reason these states' annual tax receipts per machine varied from $62,815 to $7,157.

With 11,500 machines -- once proposed for Maryland -- that translates to a variance in state revenue of more than $722 million a year to just $82 million a year, hardly enough to touch the state's fiscal problems.

Given that difference of hundreds of millions of dollars, those in Annapolis who might be asked to vote on a complex slots deal ought to pay very close attention, if nothing else, to one figure: the tax rate.

Here's even more reason to examine all numbers: RESI also took a look at the 10 states with stand-alone slots outlets (independent of racetracks), and that part of its data runs the risk of being used improperly by racino supporters in an effort to contradict several previous studies that show racinos are not Maryland's most profitable bet.

The potential for this misuse arises because, in figuring the take from independently located machines, RESI ended up using only three states, Colorado, Michigan and South Dakota -- with tax rates no higher than 22.6 percent and an annual per-machine take of no more than $29,825.

For Maryland, that at most would mean only $343 million a year, less than the racino average. When Gov. Robert L. Ehrlich Jr. -- who wants racinos -- was told of their seeming advantage in the RESI study, his eyes momentarily widened with sudden interest. Sorry, it just isn't so.

In Annapolis this winter, competing gambling studies, deals and state revenue projections are apt to be flying fast and furious. The RESI study is a useful addition. But it also tells legislators to make every effort to truly understand the numbers.

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