Politicians Bet the Farm

Last spring, Kansas politicians decided to take government promotion of gambling to a new level, voting to make the state the first to actually own Las Vegas-style casinos. Not content, as other states, to merely tax the revenues of commercial gambling establishments, Kansas will own the casinos' buildings and rake in much of their proceeds. But the corporate giants and investors who own casinos in other states won't be left out. Kansas will partner with them to run day-to-day operations. The state's Republican legislature and Democratic governor, Kathleen Sebelius, endorsed the law as an answer to demands from the state Supreme Court to come up with more money for education. Rather than impose higher taxes or cut budgets, they bet on an easier road to riches. Watching Kansans flock to casinos in nearby Missouri and Iowa, political leaders decided to try to keep that money at home.

Kansas isn't alone. Officials in other states (over a dozen in 2007) are also scrambling to expand gambling, eyeing negotiated fees from American Indian tribes and tax revenues from commercial casinos. And, no longer satisfied with restricting casinos to rural areas, politicians are fighting to build them right downtown in the largest U.S. cities. As discussion of taxes has become taboo, politicians of both parties have been promoting gambling as a way to make a quick buck. Afraid to tell voters they need more money for government programs like education and public services, officials surreptitiously collect it by taxing gambling revenues.

It's not just a question of hidden taxing. When gambling comes to a community, crime, bankruptcies, suicides, and mental illness increase. City and county governments have to bear added costs for these problems, and local businesses often fold, as money that would otherwise be spent in the region flows into a corporate headquarters elsewhere. Despite opposition from many local citizens and business leaders, politicians have decided gambling is politically the easiest answer when they need immediate funds. The Rev. Tom Grey, field coordinator for the National Coalition Against Legalized Gambling, says Republicans' anti-tax rhetoric has caused "progressives to lose faith that there's a common good and a willingness to pay for goods and services."


Legalized gambling has spread rapidly throughout the United States. Two decades ago there was a social stigma attached to gambling, and only two states, Nevada and New Jersey, allowed commercial casinos. American Indian gaming barely existed. But gaming has come out of the back alleys and onto the main streets of small towns and struggling cities around the country. It is promoted as high-class entertainment, yet affordable to the masses. And business is booming, with more than 460 commercial casinos operating in 11 states. Casinos took $32.4 billion in gross gaming revenues in 2006, almost double the $17 billion of 10 years earlier. American Indian-run gaming has also taken off, following an official blessing by Congress in 1988. Currently, 423 facilities, run by 228 tribes, operate in 28 states, according to Alan Meister in the 2007-2008 Indian Gaming Industry Report. Tribes raked in $25.5 billion in 2006. On top of the casino money, Americans spent more than $56 billion on state-run lotteries.

While gambling supporters argue that casinos are always an economic boon for a region, research indicates otherwise. With the exception of Las Vegas and Atlantic City, studies show that for many casinos, most of their players live within a 50-mile radius. The money those gamblers lose would otherwise be spent within the region, at such places as restaurants, movie theaters, and retail shops. And when local businesses lose these customers, they fire employees, pay fewer taxes, and often close. A few years after a casino comes to town, increased crime and other problems result in local governments' needing more police, courts, mental health programs, and other services. In many localities and states, casinos do not bring in the money politicians had hoped. Commercial casinos pay wagering taxes to states, but they also displace existing sales tax revenue. American Indian casinos only pay the state and localities the fees they have negotiated, and often not that.

Despite this, legislators ignore the broader consequences and look at the immediate tax dollars casinos might provide. Critics see this as equivalent to states urging people to smoke in order to get more tax money up front, despite the long-term health-care consequences. "No political leader would say, 'Let's increase revenue by promoting cigarettes' -- it's absurd," says Les Bernal, who spent nine years as a top aide to a Massachusetts state senator, Susan Tucker, fighting casino legalization. "Yet, they do it with gambling."

The gambling industry does not like to be compared with the tobacco industry, and the American Gaming Association (AGA), its lobbying arm, touts its openness and concern for problem gamblers. The association was set up in 1995, after the industry was scared by a brief effort to pay for the Clinton health-care initiative by taxing gambling. Frank Fahrenkopf, former head of the Republican National Committee, was named AGA president. "I didn't want to come in to this job with the same sort of approach that the tobacco industry had had -- the denial," he says. He showed the board of directors the famous picture of tobacco executives swearing under oath at congressional hearings that smoking wasn't harmful. The board took that message to heart, and the AGA has spent over $20 million to fund research into gambling addiction. "We as an industry must commit to doing everything we can to help people who can't gamble responsibly," Fahrenkopf stresses.

Industry-funded research puts the onus on gamblers, emphasizing gambling addiction as a personal, psychological problem. It ignores casinos' enormous and sophisticated marketing efforts, which help create the problem gamblers. The reality is the gambling industry lives off of people who gamble excessively. Exactly how much casinos depend on problem gamblers is difficult to determine without opening up their accounting books. But a 1997 study by Henry R. Lesieur, founder of the Journal of Gambling Studies, found that problem and pathological gamblers spend roughly 30 percent of the cash taken in by casinos.

The industry expends enormous effort to keep people coming back. Casinos issue guests cards, which carefully track their visitors' betting activities. These provide a detailed profile of players, telling casinos how much people bet, what they like to play, where they eat. They also provide clues to what might entice them to return. Then casinos lure gamblers back with free gifts, including rooms, meals, limos, and free game time. "It's all about building player profiles, gathering information, and putting that in orderly form, so that at a later date, when marketing to those individuals, you can pinpoint events, incentives, giveaways for your clients, to give yourself the best chance of moving that client to your place," says a former marketing executive for a major Atlantic City casino.

The casinos are designed "extremely carefully," he says. "Where you put the tables, where you give access, the colors of the rooms, the ventilation, could mean all the difference." Casinos almost never have clocks and rarely have windows in game rooms, so gamblers lose touch with time. Round-the-clock restaurants keep people from wandering too far away. On the gambling floors, players are continually offered free drinks. Some casinos cater to young, more affluent gamblers, offering free rooms and dinners. Others focus on lonely, disabled seniors with time on their hands, providing free bus service from senior citizen housing.

Occasionally a casino official will approach someone losing heavily, who is showing signs of stress, and ask whether they want to leave. But unlike bars and restaurants, which will stop serving drunks, casinos rarely stop a gambler. And while some casinos do stringent credit checks before allowing gamblers to borrow money, or limit the checks they will cash, others are not so careful. In some cities such as Detroit, "you can borrow as much as you want," says a former casino official. Many casinos have voluntary exclusion forms that gamblers can sign, asking that they be thrown out and subject to arrest if they return. Admittedly, it is not always easy for staff at large casinos to spot these gamblers if they try to return, especially if they change their appearance or don't use the player cards. But a number of casinos have been sued by gamblers who charged they were not only allowed back in, even when spotted, but were actually induced back with free gifts. Casinos deny this. So far, the courts have sided with the casinos in these cases, or the suits were settled quietly.


The current gambling boom in the U.S. started with the growth of state lotteries. Fahrenkopf says that "the seminal moment" came in 1964, when taxophobic New Hampshire voters agreed to a state-run lottery. That changed the public's view on gambling, he says, because people believed, if a "state government is running a gambling enterprise, how can it be wrong?" The state-blessed lotteries attracted poor people who hoped to win big, and also legislators, who hoped their states would win big. Former Democratic Rep. Bob Edgar, now head of Common Cause, explains, "There are a whole class of people who think they will make millions from the lottery. Politicians also convinced people that the money lotteries would bring in would help seniors and schools. Once we went down this road, politicians began to see gambling money as an easy revenue source."

Although lotteries existed in the U.S. as far back as colonial days, by around 1900 they were all prohibited, thanks to numerous scandals. After New Hampshire gave them a rebirth, states throughout the Northeast, plagued by budget problems in the 1970s, also adopted them. States on the West Coast followed in the 1980s. While a few Southern states set them up, others resisted in the face of opposition from religious conservatives, who were against lotteries on moral and religious grounds, and liberals, who opposed lotteries as a regressive tax, because numerous studies showed that the heaviest players were the poor. Southern resistance gave way in the late 1980s, thanks in large part to James Carville, the political guru who helped Bill Clinton get elected, says Randy Bobbitt, author of the book, Lottery Wars, about the politics behind Southern lotteries. In 1987, Carville was trying to elect an unknown businessman, Wallace Wilkinson, as Kentucky's governor. "He wanted an issue no one was talking about," Bobbitt says. He found it by promoting a lottery as a new way to fund education. This was the key to Wilkinson's election.

Today, 43 states and the District of Columbia run lotteries, which are still widely promoted as the only way to bring in additional money for education. But the reality is that, while initially lottery money often adds to regular education budgets, as time passes it often is used just to maintain levels of education spending. In Florida, for example, as education budgets were diverted for other uses, and as lottery sales flattened and student enrollment increased, spending per student ended up below pre-lottery days. "If the lottery has bad sales one year, schools lose out," Bobbitt says.

State lotteries opened the door to American Indian gaming. In the early 1980s, several tribes started high-stakes bingo parlors, but their states objected. After fights in local courts, a landmark 1987 Supreme Court decision ruled that if a state allows a form of gambling, then American Indian tribes within that state are allowed to engage, unregulated, in that form of gambling. The following year, Congress passed the Indian Gaming Regulatory Act, establishing the legal structure for American Indian gaming. A key provision requires tribes to sign a compact with a state if they want slot machines or casinos. These compacts usually detail how much gaming revenue the tribe will share with the state.

While the Indians were busy setting up casinos on their reservations, the cowboys were also determined not to be left out. In the late 1980s and early 1990s, gaming interests promoted a revival of Old West gambling saloons in historic Colorado and South Dakota mining towns and gambling riverboats along the Mississippi and Missouri rivers. Although there was popular opposition, legislators and governors in six river states, which were suffering hard economic times in the late 1980s, promoted gambling as a source of revenue. Iowa led the way, followed by Illinois, Indiana, Missouri, Mississippi, and Louisiana. Because there was strong public opposition when the riverboats first started plying the waters, there were strict limits on when, and how, people could gamble. Boats had to be moving and could only operate for limited hours, and in some areas, losses were limited, too. But as more and more states allowed gambling boats, competition took away customers. So states started lifting restrictions. It did not take long for the moving gambling casinos to become stationary. Then it was only a short leap to building riverfront casinos.


So what is really wrong with all this if tribes and towns benefit and people are entertained? "If it was just harmless entertainment, it wouldn't be a public-policy question," says Earl Grinols, a Baylor University economics professor who has researched gaming extensively. Casinos exact a tremendous toll, Grinols says, and the odds are not in society's favor. "My estimate is there is a 3.1 to 1 cost to benefit [ratio] to society as a whole," he says. Grinols and David Mustard, a professor at the University of Georgia, studied data on all U.S. counties, spanning 19 years. They found that in the three to four years after a casino came to town, crime (including robberies, burglary, embezzlement, fraud, and assaults) increased by 8 percent. This forced budget increases for law enforcement, courts, and other services. Gambling also exacerbates other social problems, including suicides, bankruptcy, divorce, domestic violence, and mental illness. This, in turn, necessitates expenditures by local governments. Grinols estimates that society spends $10,300 per pathological gambler. Even when governments get tax revenues from casinos, he says, overall they lose money.

Despite these costs, government officials look to the quick returns they can get from casinos. At times, though, they don't even get this money. In Michigan, for example, the state negotiated to get 8 percent of the slot machine revenues from casinos run by nine tribes. But one by one, eight of the tribes stopped paying, claiming the state had violated the agreement. Also in Michigan, tribes promised to use some of their profits to aid local communities, to offset the crime, traffic, and other problems caused by casinos. But a Detroit Free Press investigation revealed that tribal money in Michigan earmarked for such uses went instead to pay for such things as tribal members' taxes, a historical documentary, and homemaker groups.

Even if they do take in casino money, states lose out on sales tax revenue. Since most people have a limited amount of disposable income, money spent at casinos would otherwise buy taxable items or be used at restaurants and stores. A fiscal analyst for Indiana's legislature looked at 19 years' worth of multi-state data and concluded that eight of 12 states lost sales tax revenues when large-scale commercial casinos opened. States could offset this loss by having sufficiently high wagering taxes on casinos, but only four of the eight did. Fahrenkopf disputes the idea that casinos reel in money that would be spent elsewhere in the area: "All the economic studies say that's a bunch of bull because what you've gotten is new revenue coming in, new jobs in the area, new restaurants being built, new motels and hotels." But very few cities have had an economic revitalization because of a casino, and even Fahrenkopf admits that three casinos have not been able to rebuild inner-city Detroit.

More and more local business leaders are seeing beyond the hype that casinos spark an economic boom, and are opposing them out of concern they will actually harm the local economy. Even in Kansas, where the government will now run the casinos, the Wichita Metro Chamber of Commerce board voted last June against a casino in the county. Its vote followed a study by Wichita State University showing a casino would cost the county $1.4 billion over 20 years, when benefits, including jobs and revenues, were compared with the fiscal and social costs.

The Wichita business community is not alone. Mike Jandernoa, a business leader in Grand Rapids, Michigan, became interested in a nearby American Indian tribe's plan to build a casino when the local chamber of commerce expressed concern. Jandernoa reviewed a consulting company analysis of the casino and became worried about the casino's impact on his employees, "about the distraction, the tardiness, bankruptcy and divorce." The study also showed a casino would take consumer spending away from local restaurants, bars, and retailers, and that Grand Rapids and the surrounding area would lose more than $600 million over 10 years. The state as a whole was projected to lose $300 million, largely due to money taken out of state by investors and management companies. "It has been promoted as this idea of being a tourist attraction that we can use in difficult economic times," says Jandernoa, who leads a business coalition that so far has slowed, but not stopped, the casino's development. "Well, we've grown to 23 casinos, and our economy has lost jobs and population."


Voters in many states have opposed casinos time and again, only to see them legalized by legislators. Only two states, Michigan and South Dakota, approved casinos by a statewide public vote between 1988 and 2002. In the more than two dozen states that okayed casinos during that time, it was the legislature that brought them in, even over public opposition. For example, Iowa voters rejected the idea in 1985 and 1988, and polls showed they were ready to do so again in 1989, when the legislature endorsed it.

Perhaps this legislative support has something to do with the millions of dollars the industry pours into state campaigns. In the 2006 election cycle, the industry gave $70 million to state candidates, according to the National Institute on Money in State Politics. It also spends lavishly on advertising when there are ballot referendums. In 2006, six gambling-related measures were on the ballot in five states. Committees backing or opposing these measures raised $54 million, 89 percent of it coming from gambling interests. Despite the expensive campaign, three states rejected an expansion of American Indian casinos, video games, or slot machines. Only in Arkansas was gambling expanded, but just for charities to run bingo games. And South Dakota kept its video lottery. These votes show significant public opposition to casino expansion. Last April, after the Maine legislature endorsed a measure to allow a second casino to open in the state, the Democratic governor, John Baldacci, vetoed the legislation. Two years earlier, Baldacci had vetoed a similar measure, saying that the social and economic costs of gambling were too great. In November 2007, Maine citizens endorsed Baldacci's position, voting down a referendum to expand gambling.

Gambling is a hot issue at the national level as well. In the run-up to the Nevada Democratic primary in January, Hillary Clinton used gambling industry executives affiliated with her campaign to criticize Barack Obama for his opposition, as a state senator, to using gambling for budget-deficit reduction. (He had expressed concerns about its "moral and social costs" and about the money the industry pours into politicians' coffers.) Obama did not take on the industry in Nevada, and his campaign responded to the Clinton attack by saying the state was a model for regulating gambling.

At least 10 states are currently debating casino regulation and expansion. In some areas, such as Philadelphia, there are active citizen groups fighting casinos. Business leaders like Grand Rapids' Jandernoa are looking for economic development based on companies that can provide "an economic engine that would be sustainable" to revitalize their depressed cities.

While opponents have at times succeeded over the heavily financed campaigns of the casino interests, it is not easy. Despite earlier polls showing that California voters were poised to defeat measures on Feb. 5 expanding Indian gaming, in fact they ended up endorsing them, after an expensive effort by the pro-gaming side. But if the public and business show strong opposition, politicians may yet get the backbone to resist the spread of gambling, especially since, with so many casinos already operating, new ones may be in political leaders' own backyards. That's something even Frank Fahrenkopf doesn't want. During a 2006 debate in Cleveland he admitted, "If someone were to come along and tell me they were going to put a casino in McLean, Virginia, where I live, I would probably work very, very hard against it. What's the old saying? NIMBY. Not in my backyard."