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Impact of vote on slots

Spending cuts will occur regardless of outcome of Nov. referendum

By Gadi Dechter

August 31, 2008

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As the November referendum on slots nears, Maryland voters can expect a barrage of warnings from proponents about what a "no" vote could mean: cuts to public education and health care, higher taxes and the demise of the state's horse racing legacy.

In recent years, though, voters in other states have rejected gambling initiatives sold as cure-alls for fiscal ailments, and the consequences have not been catastrophic, according to officials in Ohio, Nebraska, Rhode Island and elsewhere.

Moreover, analysts and budget experts in Maryland caution that approving 15,000 slot machines here will not preclude the need for major spending cuts in coming months because of faltering economic conditions in the state and nation. Just last week, the state comptroller's office said revenue fell $74 million short of expectations in the 2007-2008 fiscal year, which ended in June.

So how would a failure of the slots referendum affect you? The answer depends on who you ask and who you are.

"If you are solidly middle class and you don't have a kid in school and you're not sending a kid to college and you're not in a high-crime area, maybe it's not going to make that much difference to you," said Warren G. Deschenaux, the General Assembly's chief fiscal analyst. "But you may notice that you are paying higher taxes locally because state government is being less generous."

A constitutional amendment to allow slots parlors in five locations around the state is an integral part of a fiscal overhaul designed by Gov. Martin O'Malley and Democratic leaders to repair a structural budget deficit that has dogged Maryland for years.

Since O'Malley took office in 2007, lawmakers have cut the state budget by about $1 billion and passed about $1.3 billion in tax increases. If the slots plan is approved by voters, the introduction of $600 million in anticipated yearly slots revenue could plug much of the remaining budget hole and enable the state to expand popular programs such as health care.

Slots opponents - who say the plan would prey on the poor and trigger social ills - hope voters will reject casinos and force state government to balance its books without establishing a new industry to tax.

Among likely voters polled by The Baltimore Sun in January, a strong majority said they would vote for slots, a finding consistent with internal polls conducted by slots proponents in May. Still, similar ballot initiatives have failed in other states in recent years.

In 2006, Ohio voters rejected a legislature-sponsored referendum to install 31,500 slots at seven horse racing tracks and two other locations. That proposal earmarked about 30 percent of the hundreds of millions in projected annual revenues for state college system scholarships.

"I don't think anything happened directly from the rejection of that particular proposal," said Jean Botomogno, an economist with Ohio's Legislative Service Commission, who emphasized that that was his personal opinion.

Nebraska voters have repeatedly rejected gambling referendums, most recently in 2006. As in Maryland, gambling proponents have argued that casinos in nearby states siphon off tax dollars that could bolster the state treasury and create jobs.

"You'd be hard-pressed to show any impact" such as tax increases or budget cuts, said Ernie P. Goss, an economics professor at Omaha's Creighton University.

Unlike measures in those states, the Maryland slots proposal is backed by the state's top elected officials. And some spending initiatives championed by O'Malley, including a dedicated revenue source for higher education, are conditioned on voters' authorizing the slots measure.

"We are already spending the money that we are hoping to raise, if you will," Deschenaux said. "Slots were part of a program to restore structural balance to the budget."

The possibility, however remote, of voters rejecting slots has elected officials, lobbyists and analysts starting to chart the painful course out of Maryland's budget woes without a gambling-generated windfall.

The biggest cuts would likely be to school-related funding, because more than half of the tax revenues generated by slots is targeted for education.

If the referendum fails, state lawmakers are likely to revive debate on a measure they rejected last year: shifting responsibility for teacher retirement costs - now more than $600 million a year and projected to escalate - to local governments.

Because local governments are already suffering from the slow real estate market, which has reduced tax revenue from property sales, a cut in state support for local schools could trigger higher taxes at the county level, said David Bliden, executive director of the Maryland Association of Counties.

Those counties with the ability to raise property taxes would likely do so, Bliden said. And the four counties that have already maxed out their property tax rates - Anne Arundel, Prince George's, Wicomico and Talbot - would have little choice but to cut services in essential areas like public safety, he said.

"The real risk in all of this, so far as local governments go, is that you dial 911 and get a busy signal," Bliden said.

Less likely to happen - with or without slots - are statewide tax increases of the type O'Malley and Democratic leaders ushered through in 2007 and 2008. The governor's popularity ratings plummeted after those increases, and neither he nor the legislature is likely to risk further eroding voter support before the 2010 election.

"My sense is that the folks in the legislature are not excited about going back to the revenue well," said Deschenaux.

Meanwhile, slots opponents such as Comptroller Peter Franchot are urging voters to keep in mind that a "yes" vote on slots is not a short-term solution to the state's fiscal woes and that major spending cuts are coming regardless of the referendum's outcome.

"Even if slots were to pass in November, we will still have a significant budget shortfall," Franchot said, a statement he and slots supporters agree on.

Budget analysts say short-term cuts can be minimized if voters approve slots. With a predictable new revenue stream in the offing, the state can borrow more liberally from its $700 million "rainy day fund" without endangering its AAA bond rating, they say.

"With slots, we could possibly have to find somewhere between a couple hundred million and $500 million" next year, Deschenaux said. "In the absence of slots, we are going to need to find between $500 million and a billion dollars."

But Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno, said the terms of Maryland's slots plan increase the likelihood that it would generate expensive "social costs" and minimize economic benefits. He said that danger is particularly potent in urban areas such as downtown Baltimore, one of the five prospective slots sites.

Under Maryland's plan, slots parlor operators must send about two-thirds of their revenue to the state, and the unusually high tax rate will make it difficult for them to create "destination" casinos that lure well-heeled tourists, said Eadington and Goss.

According to a new study by Eadington, "Lawmakers who impose gambling privilege taxes higher than 50 percent are trading the possibility of job creation and other economic amenities that casino-style gaming might deliver for government revenues."

In 2003, former Attorney General J. Joseph Curran Jr. warned that slot machines in Maryland would result in increased crime, bankruptcies, divorces and other social problems that would outweigh the economic benefits.

But Eadington and other economists - while recognizing the potential for social costs - say they are difficult to calculate.

Politically, a voter rejection of the slots referendum could put to bed an issue that has stymied Annapolis for years.

"During my lifetime it will not be an issue again," said House of Delegates Majority Leader Kumar P. Barve, a Montgomery County Democrat, "I don't see how a vote by the public can be ignored by elected officeholders."

the slots referendum
When: November 2008

What: Legalize as many as 15,000 slot machines.

Where: Sites in Baltimore City and Allegany, Anne Arundel, Cecil and Worcester counties.

How much: Slots could generate more than $600 million annually when fully phased in by 2012 or 2013.

Who gets the money: Chief beneficiaries are public education, horse racing industry, gambling industry