Slots math

February 18, 2004

AS A STATE senate committee takes up Governor Robert L. Ehrlich Jr.'s latest plan to legalize slot machines in Maryland, one number may prove overpoweringly seductive: $900 million.

That's Mr. Ehrlich's estimate of the state's yearly take from 15,500 machines. It's enough to cover half the state's long-term structural budget deficit, in a few years expected to hit $1.8 billion a year. But it's still not big enough to rule out the need for a state tax increase to make ends meet.

And what if slots only bring in, say, $600 million? You don't have to be much of a skeptic to get to a considerably less alluring number. All you have to do is subject it to some reality checks:

The top line:

First off, the state's gross take from slots may well be much more like $750 million or less - not $900 million. Consider:

With a 46-percent state tax on slots, $900 million in state revenues implies total gambling revenues of more than $1.9 billion.

The state Department of Legislative Services figures total revenues of about $1.6 billion, yielding only about $750 million for the state.

And a top gambling industry analyst, Eugene R. Christiansen, has said the total take could be as low as $1.3 billion, thus yielding as little as $600 million for the state.

A range of such estimates is understandable. But note: Mr. Ehrlich's $900 million is at the high end of that range.

Subtract competition losses:

If Maryland legalizes gambling, West Virginia and Delaware would likely respond competitively by adding more gambling at more locations and increasing payouts to players. Pennsylvania would have more reason to adopt gambling and then would join in the same competitive race.

And then Maryland would be forced to respond, likely raising its slots payout ratio, now forecast at about 92 percent. And that would mean less revenue for the state.

Maryland slots would also compete with its lottery. The governor says the lottery won't take a hit. That hasn't been the case elsewhere: Legislative services says the annual lottery loss will rise to about $70 million. Here, the governor's at the low end.

Subtract costs:

A fair assumption with legal slots is the number of problem and addicted gamblers in Maryland - now at least 37,000 - will rise, and that will raise costs for such state agencies as police, courts and prisons. Cost estimates vary widely - literally by hundreds of millions of dollars - and defy certainty.

Also varying widely are estimates of lost state sales taxes from the diversion of Marylanders' spending money from, say, eating at restaurants or buying clothes to playing slots. The key variable is how much slots spending comes from Marylanders who would have spent that cash in-state. The possible range of these state sales tax losses is roughly from $10 million to $30 million.

The bottom line:

Would that the potential state gains and losses from slots could be fixed more precisely. But the point of all this slots math is the same: Happy estimates may be politically compelling in the short run but they can all too quickly come back to haunt.

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