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Mid-Atlantic casino war

Our view: Decline of slots revenue in Delaware is evidence of Maryland's success, but clouds remain in our casino gambling future

July 6, 2013

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When Maryland was first contemplating legalizing slot machines, supporters pointed to Delaware and the success of its "racinos" — racetracks with slot machine gambling — and how they drew in thousands of Maryland residents each year. Turns out there was something to that observation, because it appears those patrons are now sorely missed.

The latest reports on 2012 gambling revenue from the First State show that the opening of Maryland Live Casino has had a staggering effect on Delaware's three racetrack casinos. Collectively, they saw a $217 million drop in revenue, or 5.5 percent.

Across the United States, only New Jersey suffered a worse one-year decline in gambling revenue, with an 8.2 percent reduction in 2012.

With the addition of table games in Maryland, however, the situation for Delaware has gotten even more dire. In the first half of 2013, Delaware slot machine revenue alone is down more than $47 million from the same period in 2012. It's gotten so bad that Gov. Jack Markell and state lawmakers are considering making a one-time $8 million payment to the operators to help avert layoffs.

The simple lesson in this is that casino gambling is not a bottomless source of riches. It is a market governed by the same principles of supply and demand as any other. State-sanctioned gambling is quickly reaching a saturation point in the Mid-Atlantic region, with the growth of casinos in nearby Pennsylvania as well as Maryland.

Now Delaware lawmakers are facing pressure to lower the state's tax rate on slot machines from the current 43.5 percent. The competition has also pushed Delaware to be among the first states in the nation to embrace online gambling, an expansion that's scheduled to go into effect by Sept. 30.

Maryland's decision to create a sixth casino in Prince George's County also caused lawmakers to allow for an eventual reduction in the tax rate on slot machines as well as to authorize table games — at a tax rate that is more favorable to operators. That's given casino owners a powerful incentive to invest more in table games than in slots.

And the impact of that on gambling revenue is likely to be profound. Last month, Caesars Entertainment received approval to open its Horseshoe Casino in Baltimore next year with 2,500 slot machines instead of the 3,750 it had originally proposed. Meanwhile, it will have 100 table games and 30 poker tables.

Considering that the state's Education Trust Fund currently receives nearly half of every dollar spent on slots (a rate that is among the highest in the country) but only 20 percent of the revenues generated by table games, that's not particularly good news for the financing of K-12 education. It may mean more jobs at the casinos and higher profits for Caesars and other casino operators, but purely from the tax collector's perspective, it's worrisome.

June's casino revenues provide our first apples-to-apples, year-over-year comparison of what life may be like in Maryland's table games era. Factoring out Rocky Gap (which only opened in May) and adjusting for the fact that Maryland Live opened on June 6, 2012, total Maryland gambling revenues were up almost $15 million in June over the prior year. The casinos got 78 percent of that new revenue, and the state only 22 percent. Allowing table games may have made our casinos more attractive in the regional gambling marketplace, but it has also partially shifted the state from the part of the business in which its profit margins are highest to one in which they are much lower. How that picture will change as we add more Central Maryland casinos — and eventually lower the tax rate on slots as a result — remains to be seen.

Maryland has much going for it that Delaware does not — chiefly, the proximity of gamblers in the populous and wealthy Baltimore-Washington region. And it appears to have been wise to look beyond racinos, as horse racing is hardly a major attraction for casino gamblers. But it is clear that gambling revenue will never be guaranteed from year to year. Like its neighbor to the East, Maryland will be hard-pressed to hold onto its casino market share and those gambling tax revenues in the years ahead.