Profit or Plunder: States Weigh Casino Question

TX: Most profitable business in America also rings up high off-ledger costs

EYED as a fix-all solution for ailing state economies, casinos in the 1990s may not be living up to lofty expectations.

Academics and economists - who differ on the social impacts casinos have on a community - agree that casinos often are not the effective development strategy to bail out state budgets that they are advertised to be.

"Gambling in the '90s is the same kind of economic-development vehicle that many towns thought convention centers were in the '80s," Timothy Ryan, dean of the College of Business Administration at the University of New Orleans told a conference on casino development sponsored by the Federal Reserve Bank of Boston.

"It doesn't mean that all convention centers have been successful," he adds. "Some are, and some aren't."

While casinos - which make more profit per square foot than any other business in the world - do bring in revenue and create jobs, experts say there are other factors in casino arithmetic that need consideration: Are casinos creating new jobs or taking away from existing employment? How much casino profit accounts for a state's total revenue? What are the social costs if casinos proliferate?

"Casinos do contribute to state revenue," says Steven Gold, director of the Center for the Study of the States at the State University of New York. "But the revenue they produce ... will not be great enough to make a huge difference in the overall fiscal situation of a state on a sustained basis."

For example, in 1991 New Jersey took in $246 million from its casino gross-revenue tax and another $50 million from licenses, Mr. Gold notes. But this represented only 2.5 percent of the state's total tax revenue - $11.6 billion - that year.

Some state successes

On the other hand, states such as Mississippi and Louisiana have had block-buster results in the short-term from casino development. In Louisiana, casinos are expected to generate $464 million of state tax revenue in the July 1995 fiscal year - about 8 percent of the state's revenue, he says. But the recent closure of two riverboat casinos in New Orleans may cloud future revenue projections.

Still, if casinos are relying primarily on gamblers from in-state rather than from surrounding states, they are likely to be cannibalizing revenues from other state businesses, such as restaurants and other forms of entertainment, economists note.

Most regional casinos are really offering "convenience gambling," which is catering to the local population, says Earl Grinols, an economics professor at the University of Illinois in Champaign-Urbana. "And since the money that the casino is earning was already in the economy in the local area, it's not expanding the economy at all."

Economists argue that states should also account for the social costs associated with casino development, such as the rise of compulsive gamblers, traffic congestion, and crime.

"Were gambling introduced everywhere in the country," Mr. Grinols says, "the social costs would be roughly equivalent to the costs of an additional recession every decade." If gambling proliferates, 1.5 to 5 percent of the adult population will become addicted to gambling, he estimates. That could cost between $110 to $340 per adult per year, in, for example, lost worker productivity, he adds.

And the gambling industry relies on the addicted gambler for revenue, he says: About 22.3 percent of casino revenue is generated from addicted gamblers, according to a study by the Connecticut-based accounting firm, Deloitte & Touche LLP. If one assumes that the compulsive gambler loses $10,000 a year, instead of $4,800 a year as the study does, Grinols says that about 46 percent of casino revenue is generated by compulsive gamblers.

Doing the math in Florida

For a look at the casino-economic equation, Gold cites a 1994 study by Florida's Office of Planning and Budgeting.

Florida's projected state gaming revenue would be from $324 million to $469 million per year; parimutuel gambling (betting on horses races) and lottery revenue would drop some $14 million to $86 million per year; recurring sales-tax revenue would decrease at least $85 million a year; crime and social costs attributable to casinos would total at least $2.16 billion a year. The annual projected state revenues related to casinos would cover only 8 percent to 13 percent of annual minimum projected casino costs.

But the key question, according to the experts, is the economic impact if casinos proliferate across the country.

Eight years ago, only two states - Nevada and New Jersey - permitted casino gambling. Today, 25 states have legalized casinos, and every other state is considering rolling the dice. In five years, the number of casinos in the United States will double, Mr. Ryan estimates.

States, he says, are asking themselves: "If we don't have gambling, will that put us at a competitive disadvantage?"

Economists warn that a more pertinent question may be: If casino gambling grows, will it be as profitable for all states as it's been for a few?