Three Ways to Look at the Maryland Slots Debate

August 13, 2008

In November, Maryland residents will vote on a controversy that has been brewing for years: whether to put government-run slot machines at state racetracks and other locations to raise revenue.

Groups on both sides of this debate have been very vocal (we chimed in with a still-relevant op-ed in 2005), not just in Maryland but in many other states as well. They tend to focus on two main arguments. Slots supporters emphasize the economic argument, which goes something like this: “If we don’t bring slots to this state, the economy will collapse, residents will spend all their money playing the slots in neighboring states, and we’ll never have enough money to balance the budget/spend more on public education/pay for a tax cut/etc.”

An example of this reasoning can be found in the Frederick (MD) News-Post:

George Murphy, an executive assistant to the president for Local 27, which represents about 600 racetrack employees at three Maryland racetracks, said he has watched the [horseracing] industry in Maryland decline in the past 15 years “to the point where they’re fighting for their survival.”

“We need slots,” Murphy said. “We need to save this industry.”

O’Malley explains much of his support for legalizing slot machines by pointing out that neighboring states like Pennsylvania, Delaware and West Virginia have slot machines, which are putting Maryland horseracing tracks at a competitive disadvantage. Maryland residents are spending $400 million a year in West Virginia and Delaware each year, contributing about $150 million a year in tax contributions to those states, according to a Maryland study.

Slots opponents, on the other hand, most often turn to paternalistic moral or public health arguments, which go something like this: “Slot machines will lead to moral depravity, widespread addiction and financial ruin, and the collapse of western civilization.” People who argue thus often call for the prohibition of all gambling, not just state-run gambling. An example of this type of argument appeared today in the (Maryland) Gazette:

Even if gambling were to generate enough short-term revenue to plug a temporary fiscal gap, there are compelling moral reasons why state-sponsored slot machine and casino gambling should be resisted as repugnant to sound public policy.

. . . To the assertion that if Maryland does not approve slots, our compulsive gamblers will drop their money in surrounding states, we should consider the comparative advantage we will provide to citizens and firms that value an environment and economy free of the pernicious influence of an industry that preys on greed, desperation and fantasy.

It is entirely possible to analyze the slots debate without relying on either the argument for government to uphold public morality or the pleas of supposedly cash-starved legislators. The third option is a little more complex and less emotional, and offers no quick fixes to any problems, which explains why it’s not heard as often.

This argument relies on sound tax policy and goes something like this: State-run slot machines and lotteries exemplify poor tax policy. The revenue they raise comes disproportionately from the poor, which makes them regressive taxes. They impose an unusually high tax rate on one specific consumer good, which violates the principle of economic neutrality. Taxes should be levied broadly on a wide range of goods and services at a uniform rate; since taxes pay for general public services, they should be raised from the population as a whole rather than from a subset who happen to enjoy a certain activity.

In addition, lotteries and other state-run gambling are not taxed transparently, or honestly. Transparency requires that taxpayers understand exactly what is being taxed and at what rate, but since legislators dishonestly call lottery revenue “miscellaneous revenue” rather than admitting it’s tax revenue, they are able to mislead the public about the size of the tax burden. This is usually true of state-run slot machines as well.

For more on the problems of state-run lotteries, read Gambling with Tax Policy: States’ Growing Reliance on Lottery Tax Revenue or take a look at our Lottery and Gambling Taxes research area.


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