Best bet: Focus on slots' net impact

There is no doubt that Maryland's fiscal situation is a mess, and many who believe that slots will fix the problem have emphasized the state share of the gross revenues. But focusing on gross revenues will overstate the benefits of slots to the state treasury, perhaps by a large amount. It's the net economic impact that matters.

A casino is really just a store where people buy gambling, and the principles of economics apply to gambling just as they apply to other goods and services. To focus on just one reason that the distinction between gross and net impact is important, we can compare the economic impact of casinos on the state economy to a simple example of the effects on a local economy when a new megastore, like a Wal-Mart, opens in a small town.


Because the new store has lots of amenities, makes more goods available to local residents and sells them at low prices, it will tend to attract a lot of customers and sell a lot of merchandise. The new store will need employees, creating jobs for local residents. So the gross impact of the new megastore on the local economy in terms of revenue and employment is likely to be high.

The net impact is different. When a megastore opens, local residents will shift, or reallocate, spending toward it and away from existing local merchants. For example, residents will buy less from the local hardware stores and clothing shops. On the other hand, the megastore will attract new spending by shoppers from other towns and new spending from locals who were driving to other towns to shop but will now shop at home.


To determine the economic impact of the megastore, one cannot simply count its gross revenues. Because some of the money was already being spent at local merchants, it doesn't count toward net impact. It's the same for employment. As sales at local stores fall, they will hire fewer employees. The jobs added at the megastore will be offset by job losses at local merchants. To figure the net job creation of the megastore, add the jobs created, but subtract the jobs lost at local merchants.

Although selling gambling has social costs that are not associated with a megastore, the net economic impact of Maryland casinos is conceptually similar. Some people who were driving to Dover Downs to gamble will stay home, and some gamblers from other states will come to Maryland's casinos. This type of spending is new and contributes to net economic impact.

On the other hand, as in the megastore example, opening a casino in Maryland will cause local residents' expenditures to change. They will reallocate their spending toward slots and away from the state's existing merchants, purchasing fewer meals at restaurants and drinks at local bars. They will also buy fewer lottery tickets, gamble less on horse races and spend less on other things that are alternatives to slot machine gambling.

It is important that the state's leadership ask for information about slots' net impact, because that is what determines their net returns to the state budget. For example, when a person reallocates spending away from a restaurant meal or the lottery and toward slots, the state gains its share of the slots revenues, but the state loses the sales tax revenue from the meal or the money that it would have made on the lottery. Virtually all of the revenue estimates provided to Gov. Robert L. Ehrlich Jr. and to the General Assembly represent the state's gross revenues from slots, not the net impact on the budget.

A 2003 study by the Maryland Department of Business and Economic Development reports that only 22 percent to 30 percent of the spending will be new. A report by the Innovations Group, a consulting firm employed by the gambling industry, states that roughly 50 percent of the spending will be new. Both reports indicate that much or most of the spending on slots will be reallocated, not new.

A report by the Optimal Solutions Group, another gambling industry consultant, calculates the so-called True Net Impact of slots. This study looks at only those dollars reallocated away from the racetracks. Because it does not account for the many other areas where spending is reallocated, it does not properly measure the net economic impact of slots to the state.

Should Maryland choose to legalize slots, the state's leadership must bargain hard with the casinos for its share of slots revenue, and the state must also be careful to choose locations for the new casinos that will maximize new spending and the casinos' net economic impact. Placing casinos in locations convenient or attractive to out-of-state customers, or in locations attractive to Maryland residents who currently travel out of state to gamble, will tend to draw new spending and increase net economic impact. Placing slot machines in local bars and restaurants will tend to increase the amount of reallocated spending and reduce the net economic impact of slots.

Placing casinos at tracks will cause a great deal of spending to be reallocated from the state's businesses to the track-casino complex. That is why the licenses to run casinos are so valuable. Placing casinos away from the tracks will cause spending to be reallocated away from the state's businesses and racetracks. In fact, the track owners' fear of losing business to casinos is a perfect example of the impact of reallocated spending. Do these fears justify placing slots at tracks to subsidize Maryland horse racing? Perhaps on political grounds, but not on economic grounds. Most economists agree that subsidies to declining industries reduce economic health.


Most forecasts suggest slots will generate revenues for the state between 3 percent and 8 percent of its $24 billion budget. These are gross revenue estimates and do not account for reallocated spending, the negative impact of the social costs of gambling, the positive impact of new construction or the other things that make gross and net impact different.

The question of whether legalizing slots is good public policy is not an economic question. But determining the net impact of slots is one of many important economic issues, some subtle, that the state's leadership must consider in crafting a slots bill.

Robert Carpenter is an associate professor of economics at the University of Maryland, Baltimore County.