Pennsylvania found a middle ground; the legislators passed a budget without a revenue plan. The governor did not sign the budget; instead he let it become law by default. Governor Tom Wolf was relying on history with his passive approval, but history did not repeat itself. Last year,
Wolf allowed a budget to become law without a revenue component; the lawmakers remained at work until they had a plan. It took two weeks, but in the end everyone was satisfied. This year, the lawmakers went home without taking any action. Now, they are back in session with no choice except to find new sources of revenue to balance the budget. To do that, lawmakers need to find need $2 billion. That number might be low; the budget forecasts a 4.5 percent growth in the current revenues. Last year, the budget revenue estimate was $1.6 billion more than actual revenues. The $1.6 billion from last year has to be paid, and another $700 million in spending has to be funded. In the Republican controlled legislature, where there is no appetite for increased taxes, the answer has to be found elsewhere.
In Pennsylvania revenue from the expansion of gaming was and is a key issue. The Keystone State is already number two on the national casino revenue chart. Still, many lawmakers and lobbyists believe there is opportunity for more gambling in the state. Lawmakers are exploring a number of options, including satellite casinos, slots in any establishment with a liquor license, online gambling, online lottery, gambling at airports, fantasy sports and sports betting. None of those, individually or combined, is a magic bullet; no option produces an instant revenue stream. Regulations have to be promulgated, licenses issued and infrastructure developed. The only instant money would be deposits and processing fees; but even that might not be a total success. Last year, lawmakers thought it would be easy to raise money by charging $1 million for permits to serve alcohol 24 hours a day; the casinos politely declined.
The two options with the largest revenue potential are the satellite casinos and slots in bars. In the satellite option, each of the existing casinos would be allowed an additional casino with up to 700 slot machines and 100 table games. In the previous fiscal year the 12 operating casinos with 26,709 slot machines generated $1.4 billion in taxes. In the "slots in bars" option, some estimates predict as many as 40,000 slots might eventually be installed. I think that number might be high. In Illinois a comparable plan has resulted in 26,000 VLTs. Both states have approximately the same population, and it seems unlikely that Pennsylvania could support 14,000 more units than Illinois. Nor is it probable Pennsylvania would collect any money the first year, or even the second. It took three years in Illinois before the state started to receive tax revenues from the VLTs. In the third year, there were fewer than 7000 VLTs in Illinois; those generated $100 million in taxes that year. Clearly, neither satellites nor slots in bars would produce $2 billion in the next year.
The other options might be much easier and faster to ramp up; online gaming does not require the lengthy construction time, nor would hundreds of small operations need to be licensed as would be the case with bars. Still, it would take a while to write regulations and license the online operators. In New Jersey the licensing and preliminary activities associated with online gaming took several years. It was only in 2016 and 2017 that the online revenue and taxes became large enough to be important. Online gaming in New Jersey is now generating about $20 million a month in revenue and the total tax paid to the state since November 2013 is only $104.48 million. Using the New Jersey model, the potential revenue from online gaming is a fraction of what is needed to balance the budget.
The quickest way to get
cash flowing into the state's treasury might be slot machines in airports; there are eight in the state that would be eligible under current proposals. But like the other options, a realistic estimate of possible tax revenues is far short of the required $2 billion. In the last 11 years, Pennsylvania has collected $12.1 billion in tax revenue from slot machines, slightly more than $1 billion a year. One might reasonably expect as many as 8000 slot machines could be placed in the airports. At the current taxation and play levels in the state that might produce $400 million. And one final caveat: each additional slot machine will have a negative impact on the existing slots and thus create a corresponding decrease in current tax revenue.
Two things are clear: Pennsylvania does not
generate
enough revenue for its spending and legalizing some form of gambling to fill the budget gap is not a simple solution. There are both positives and negatives with each option being considered. To pick the best and most effective option requires time and thought. But time is something lawmakers never seem to have in adequate amounts. As most lawmakers seem to do, the elected representatives of the good citizens of Pennsylvania waited until the last minute, leaving themselves no time to study, think and weigh all the revenue possibilities. A year ago, the lawmakers knew this day was coming, but put off thinking seriously about the revenue deficit until they were just days from the deadline for the budget.
Good solutions take more than a week to craft and more than 6 hours to read, digest and understand. State Representative Madeleine Dean wrote an editorial for the Philadelphia Inquirer on the subject: Six Hours Not Enough Time to Study Gambling Bill. Representative Dean said deals were made behind closed doors and then six hours before the vote, she and the majority of the lawmakers were handed a 675-page bill. She voted against the bill, not because she was not in favor of using expanded gambling to fund state services, but because she did not know what was in the bill. That last minute bill is a tactic we have seen often lately, but not a terribly effective one. In the first place, 675 pages is a lot to read and understand. And, because that bill and others like it are cobbled together pieces of compromise, it is not even well understood by its drafters. In the case of the gaming expansion in Pennsylvania, the issues are too complex to allow for a solution that is constructed to garner votes, not solve the problem. No one in the process fully understands the long term consequences of the various parts and pieces of that bill. It is very difficult to draft a bill to solve a specific problem if it has to be crafted to garner enough votes to pass.
Political deal making and compromises are part of our system. They have stood the test of time and for the most part we have managed to muddle through. The system forces opposing parties to consider each other's needs and agendas and it is at the core of our representative democracy. But there are times when the unintended consequences are much worse than the situation the legislation was meant to cure. In those times, it might be worthwhile to postpone action and take the opportunity to better understand all of the issues and implications.
I believe this is such a time for Pennsylvania. It does need more money and gaming is a logical place to look for part of it. However, no amount of expanded gaming will provide a cure for a government that spends more every year than it generates. And no expansion is possible without some attendant loss to current revenues. Any expansion will cut into the revenue and therefore the tax revenues of the existing casinos. No one is served by ignoring that fact or exaggerating therevenue potential of a scheme. Nor does underestimating the amount of time necessary for the revenue to begin flowing into the state's coffers produce the money necessary to balance the budget.
But that is just my opinion, isn't it?
Ken Adams
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