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Budget & Tax Fiscal Policy Research Brief

Policy Initiative October 2004

Beware the Quick Fix — Bet on Comprehensive Tax Reform, Not Gaming Expansion

As the Illinois General Assembly’s fall veto session approaches and the Illinois economy remains stagnant, the state remains bound in a fiscal straitjacket. Legislators’ record-overtime spring session resulted in across-the-board cuts to help resolve a Fiscal Year 2005 budget deficit in the billions of dollars, and one-time revenue fixes mean that much of the deficit will require resolution again when Fiscal Year 2006 budget talks begin. Lawmakers have yet to approve a capital budget for this fiscal year. Schools in many parts of the state still lack the basic resources to support a high-quality education for every child, and human services remain under-funded throughout Illinois, especially after the latest round of across-the-board budget cuts. There is renewed urgency to respond to budget shortfalls in public transportation and other areas of need. Given this context, it is no surprise we once more hear rumblings about the revenue possibilities represented by gaming expansion. Many proposals for gaming expansion have been offered since the 1990 legislation that established riverboat gambling in Illinois. Even this last legislative session saw the introduction of an ultimately unsuccessful measure to establish a Chicago-owned casino with 3,000 gaming positions, auction new riverboat licenses, expand slots on existing boats, reduce taxes on riverboat profits, and allow slot machines in racetracks.1 There are varying views about whether Chicago should be allowed its own casino and whether additional casinos should be placed in Waukegan and the south suburbs, even as the fate of an existing riverboat license remains unresolved. Voices for Illinois Children recommends that all proposals to raise state revenues be measured

against sound revenue policy principles of equity, adequacy and stability. Any successful proposal should enable state government to fulfill its mandate to provide education and other services for children and their families without, at the same time, fostering potential harm. As child poverty increases, kids and families need state-supported services that have been curtailed during the recent economic downturn. Many education and human services providers and advocates might support gaming expansion as the only measure on the table to

Because gambling revenues are so

regressive, states are advised not to increase their reliance on gaming

revenues in times of fiscal crisis.

Even if the rosiest projections prove

correct, the amount of additional taxes generated from

gaming expansion would not fill the state’s

budget gap.

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alleviate their extreme fiscal stress, but most would prefer a solution that spreads the burden more fairly, provides more secure revenues, and ensures that funding for both education and human services will be adequate in the future. Expansion of gaming to increase state revenues – while appearing to provide a quick and easy fix for today’s state and municipal budget woes – is bad tax policy. Voices strongly encourages Illinois policymakers to raise new revenues to bolster vital supports. But Voices also believes that comprehensive reform of our state’s revenue system is a much better way to achieve our goal than gaming expansion. This paper examines key questions in the debate and matches the concept of expanded gaming against principles of sound revenue policy. Does the state really need additional revenue? Yes. To balance the FY2005 budget, Illinois lawmakers cut many programs vital to children and families and used a collection of one-time, non-renewable revenue sources, such as the sale of

state property and sweeps of special state funds. Without new recurring revenue, the state will likely face billion-dollar deficits and the prospect of even deeper and more painful program cuts again next year. Illinois is recovering from the economic downturn more slowly than states in other parts of the country,2 and state tax revenues are still below where they were before the 2001 recession.3 For the foreseeable future, revenues will not rise quickly enough to meet current expenditures, in part because most consumer services are exempted from the state sales tax despite the fact that services are the fastest-growing part of our economy.4 Illinois’ per capita revenues rank 30th out of

the 50 states, and Illinois’ state and local-use revenue (as a percentage of personal income) ranks even lower, at 46th.5 Because the state government does not have enough revenue, it is failing to meet its responsibility to provide adequate funding for good schools for all students; it might not be able to adequately support public transportation needs; and it is forced to make tough choices between such priorities as helping uninsured families get health care and finding good homes for children in foster care. Illinois clearly needs more revenue, now, to continue to provide basic services its citizens need and deserve. Does Chicago really need additional revenue? Yes. Like the state, Chicago’s employee headcount is at its lowest in recent memory – yet the city’s 2005 preliminary budget reflects a gap of $220 million to be filled with a combination of layoffs and fee hikes.6 The city’s budget director, John Harris, has noted that Chicago’s employee benefit costs grew between 3 percent and 7 percent annually from 1989 to 2003, while revenue from property taxes increased only a little more than 1 percent per year over the same period.7 And, although 10 percent of the state income tax and a portion of the state sales tax are returned to municipalities, the state’s low and flat income tax rate (3 percent) and narrow sales tax base limit Chicago’s and other communities’ revenues.

State revenues from gaming, just like taxes, represent money from someone’s pockets.

Good tax policy reflects careful deliberation about

how to most fairly distribute the tax burden for funding

public services.

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Would revenue from new casinos be a fair way to fund public services? No. It is important to remember that the state revenues from gaming, just like taxes, represent money from someone’s pockets. Good tax policy reflects careful deliberation about how to most fairly distribute the tax burden for funding public services. Revenues from Illinois casinos

largely come from people who live nearby.8 The presence of a gaming facility within 50 miles roughly doubles the prevalence of problem and pathological gamblers in the area.9 While 30 percent of Americans don’t even gamble, 10 percent of the population accounts for up to 80 percent of all

wagers; up to half of gambling revenues come from pathological gamblers.10 A 1995 study of casino gamblers in Wisconsin found that half had household incomes below $30,000.11 Last year, Illinois casino gamblers lost $1.657 billion.12 All forms of gambling provided $1.2 billion in state revenue, more revenue than public utility taxes, which are much more equitable taxes.13 Legalized gambling is a “back-door tax,” and because gambling revenues are so regressive experts advise states not to increase their reliance on gaming revenues in times of fiscal crisis.14 Allocating the responsibility for additional tax revenues to those who live near a casino and suffer from an addiction is a very unfair way for the state to raise the money needed to serve us all. Illinois should instead try harder to spread its total tax burden more evenly among people at every income level, using a mix of revenue sources. Would new casinos provide sufficient revenue to make higher taxes unnecessary? No. City officials project that a new casino in Chicago would attract visitors and provide as much as $550 million in new annual revenue for the state and up to $300 million a year for Chicago. They also estimate an additional $150 million in increased sales taxes, income taxes, and hotel taxes.15 But to increase state aid to schools to the level widely acknowledged as adequate will require at least $1.8 billion annually;16 to address Illinois’ “structural deficit” so that state services can at least be maintained at their current, stripped-down levels will require even more.17 Chicago and other Illinois communities vying for a riverboat license are hoping for an economic development boost as well as substantial gambling tax revenues. But those hopes and revenue projections should be tempered by the experience of New Orleans, a tourist-destination city where a new casino went into bankruptcy seven months after opening,18 and Atlantic City, where casinos failed to create a thriving business community. Some economically depressed Illinois river communities have found that riverboats provided economic benefits,19 but Chicago already attracts visitors to world-class museums, architecture, and parks. None of the proposed casino sites in Chicago fits the state gaming statute’s profile of an economically depressed community with few opportunities for development. Casinos divert dollars away from existing local businesses and attractions.20 Expanded gaming revenue projections also seem optimistic in light of the fact that last year a total of $661 million in state tax revenues was generated by all nine currently operating casinos combined.21

Any successful proposal should enable state

government to fulfill its mandate to provide education and other

services for children and their families without, at the same time, fostering

potential harm.

Legalized gambling is a “back-door tax.”

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Would new casinos provide stable revenue? Probably not. When Illinois’ 10 riverboats were first authorized, Illinois was only the second state to allow them. But today Illinoisans also have easy access to 16 more commercial casinos along the state borders in Indiana, Iowa, and Missouri, as well as casinos and greyhound racetracks in Wisconsin.22 A new casino would also compete for gamblers’ bets with the nine existing Illinois riverboats; the Illinois lottery (FY2004 tax revenues of $570 million); horse racetrack, off-track, and inter-track betting (FY2004 tax revenues of $13 million); bingo, charitable games, pull-tabs and jar games (FY 2004 combined receipts of $12 million); as well as non- licensed, non-taxed, illegal gambling (including internet gambling, which is growing rapidly).23 Researchers have found strong substitution effects between lottery games and other forms of gambling, including casinos.24 In fact, riverboat attendance in Illinois declined from 18.8 million visits in 2002 to 16.6 million visits in 2003, and the Illinois Economic and Fiscal Commission has warned that tax revenues could decline in FY2005.25 In today’s potentially saturated market, creating future tax revenues by adding even more casinos to the mix is a real gamble. Would the benefits from gaming expansion outweigh the costs? No. The social ills associated with problem and pathological gambling are widely recognized and include suicide, divorce, homelessness, domestic violence, and child abuse and neglect.26 Gambling debts are associated with bankruptcy and employee theft and add costs to the criminal justice system and the social welfare system.27 Taking the social ramifications of problem and pathological gambling into account, expanded gaming could end up costing Illinois millions of dollars.28 To monitor the existing nine riverboats, the Illinois Gaming Board has 127 employees and a budget of over $14 million.29 The Illinois Gaming Board administrator estimated that the

proposed gaming expansion would require an additional 280 agents, and even more if Chicago is given a casino.30 Part of the cost is a self-exclusion initiative for compulsive gamblers in which people voluntarily sign up to be barred from gaming facilities; over 1,800 have joined to date.31 The state’s gambling treatment initiative has a budget of close to $1 million. But this state program for pathological gamblers points to the hidden costs of gaming, which must be balanced against the revenues a new casino would bring. The social and personal costs to children whose parents suffer from

pathological gambling also cannot be ignored. Raising revenue from direct taxation is a much more efficient way to fund public services, and carries none of the social costs. Is a new casino the best available source of additional revenue for Chicago and Illinois? No. A far better solution to the current budget problems is to scrap the state’s outdated, inadequate tax system and replace it with a 21st Century model that will generate sufficient revenue to pay the bills today and meet the challenges of a changing economy. Comprehensive

A far better solution is to scrap the state’s

outdated, inadequate tax system and replace it with a 21st Century

model.

The social ills associated with problem and

pathological gambling are widely recognized: suicide, divorce,

homelessness, domestic violence, child abuse

and neglect.

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tax reform will provide long-term, sufficient revenue, and fix the inadequate education funding formula that makes Illinois’ system the most inequitable in the nation. The right solution to the state’s fiscal mess includes:

§ Putting the mix of state tax revenues into better balance by lowering local property taxes and raising state income taxes while also broadening the sales tax to include services.

§ Supporting education with additional state funding to reduce the large gaps between rich and poor districts in funding and achievement.32 The current system places the greatest burden on the families least able to pay and provides fewer resources for children with the greatest needs.

§ Generating sufficient recurring revenue to meet the state’s obligations to its children and families.

§ Making the total tax burden fairer through added tax credits for low- and moderate- income people.

Voices for Illinois Children, along with over 90 other organizations, supports A+ Illinois,33 a statewide campaign for comprehensive tax reform to ensure adequate and equitable funding for education, reduce property taxes, fix the state’s structural deficit, provide stable revenues that would grow with the economy, and reduce the tax load of low- and moderate- income families. This better answer to the revenue crisis – in stark contrast to gaming expansion – would not generate additional social costs.

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Endnotes 1 Legislation introduced last session, Amendment 3 to HB 1067, would add riverboats in the south suburbs, Waukegan, and Rockford, a land-based casino in Chicago, 3,850 slot machines at racetracks, and an additional 800 new gaming positions for each riverboat. Each new riverboat license would be sold for a minimum bid of $350 million, and Chicago would pay $350 million to the state for its license. 2 Nicholas W. Jenny, State Revenue Report #57, Rockefeller Institute of Government, September 2004. 3 Governor’s Office, Illinois State Budget Books, FY 2002-2005 (Springfield). 4 Illinois’ sales tax is among the most narrow in the nation, taxing only 17 of 164 possible services. Hovey, CQ’s State Fact Finder 2004: Rankings Across America. 5 Census Bureau Annual Survey of State Government Tax Collections; Federation of Tax Administrators, 2003 State Tax Revenue, Bureau of Economic Analysis. 6 Spielman, Fran. “Why Blagojevich balked at Daley’s casino plan.” Chicago Sun-Times, May 13, 2004. The Chicago budget can be viewed at www.ci.chi.il.us/Budget/budgetprelim2005.html. 7 Harris, John F. (Director of the City of Chicago Office of Budget and Management), “City finances fitter than editorial would illustrate”, Crain’s Chicago Business, July 12, 2004, p.11. 8 National Gambling Impact Study Commission Final Report, p. 7-10. Washington, D. C., 1999. A survey of 800 Illinois riverboat gamblers found that more than 85% lived within 50 miles of the casino. A study of the effect of new casinos on 100 communities found that per capita casino spending rose 237%. National Opinion Research Center at the University of Chicago, “Gambling Impact and Behavior Study,” Report to the National Gambling Impact Study Commission, p. 70, April 1, 1999. 9 The Better Government Association, “Riverboat Gambling Demographic Survey” (1996). 10 Grinols, Earl L. Gambling In America: Costs and Benefits. Cambridge University Press. 2004. 11 Thompson, Gazel, and Rickman, “The Economic Impact of Native American Gaming in Wisconsin”, Wisconsin Policy Research Institute Report, April 1995, p. 23. 12 Illinois Economic and Fiscal Commission, “Wagering in Illinois, 2004 Update”, September 2004. 13 Governor’s Office, Illinois State Budget Book, FY 2005, p. 1-21. 14 Thompson and Gazel, “The Monetary Impacts of Riverboat Casino Gambling in Illinois,” (1996), available at www.bettergov.org. See also, Kincaid, John. “Trends in Federalism: Is Fiscal Federalism Fizzling?” Council of State Governments, The Book of the States 2003. 15 Hinz, Greg. “Daley reveals his hand on Chicago casino.” Crain’s Chicago Business, May 10, 2004. Washburn, Gary and Ray Long, John Chase, and Michael Higgins, contributing. “Daley places his bets on casino for Chicago.” Chicago Tribune, May 11, 2004. 16 Education Finance Advisory Board, “Recommendations for Systemic Reform of Funding for Elementary and Secondary Education in Illinois,” October 2002. Illinois State Board of Education, “2003 Condition of Public Education.” 17 The Center for Tax and Budget Accountability, “Funding a Quality Education Requires Fiscal Reform,” June 2004. http://www.ctbaonline.org/funding.pdf. 18 Dimanche, F. “The Rise and Fall of the New Orleans Land-Based Casino: A Case-Study”, The 1996 Leisure Research Symposium; www.indiana.edu/lrs/lrs96/fdimanche96.html. See also, Associated Press. “New Orleans casino’s future grim,” Las Vegas Review-Journal, April 5, 2000. 19 Mayors from Elgin and Alton have testified about the benefits riverboats bring to their communities. National Gambling Impact Study Commission Final Report, p. 7-5, Washington, D. C. (1999). “All hail, grand lady’s stunning impact”, Daily Herald, October 4, 2004. 20 In an analysis of 100 communities with casinos, the National Opinion Research Council noted that while “the benefits are borne out in reports, for example, of increased employment and income, increased tax revenues, enhanced tourism and recreational opportunities, and rising property values, there was “no change in overall per capita income” after the introduction of casinos, since the increases “are offset by reductions in welfare and transfer payments as well as a drop-off in income from restaurants and bars.” National Gambling Impact Study Commission Final Report, p. 7-8, 7-11. Washington, D. C., 1999; National Opinion Research Center at the University of Chicago, “Gambling Impact and Behavior Study”, Report to the National Gambling Impact Study Commission, April 1, 1999. 21 The state authorized ten riverboat licenses in 1990; nine are currently operating, in Elgin, Aurora, Rock Island, Joliet (2), East Peoria, Alton, East St. Louis, and Metropolis. The tenth license, dormant since 1997, was recently

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awarded at auction to Isle of Capri for $518 million to build a riverboat casino in Rosemont, over the Gaming Commission staff’s recommendation. The ensuing investigation and litigation has delayed the $350 million the state hoped to realize from that sale in FY2005. The casino is not expected to be operational until 15 months after the sale is finalized. 22 The American Gaming Association Survey of Casino Entertainment, “2004 State of the States.” 23 Illinois Economic and Fiscal Commission, “Wagering in Illinois, 2004 Update”, September 2004. The Economist, “Gambling goes global,” October 4, 2004. 24 Gulley, O. David, and Frank A. Scott, Jr., “Lottery Effects on Pari-mutuel Taxes.” National Tax Journal 42 No. 1 (March, 1989); Elliott, Donald S., and John C. Navin, “Has Riverboat Gambling Reduced State Lottery Revenue?” Public Finance Review 30 No. 3 (May 2002). 25 Illinois Economic and Fiscal Commission, “Wagering in Illinois, 2004 Update”, September 2004. Comparing admission in March 2003 with March 2004, admission is down 16.45%, and adjusted gross receipts are down 7.9%, according to the Illinois State Gaming Commission. The most severe declines were experienced in Aurora and Joliet, where operating hours and staff were cut back in response to the 2004 increases in the state’s admission fees and tax rate (up to 70%). 26 National Gambling Impact Study Commission Final Report, p. 7-18 to 7-28, Washington, D. C. (1999). 27 Kindt, J. W. “Diminishing or negating the multiplier effect: the transfer of consumer dollars to legalized gambling: Should a negative socio-economic ‘crime multiplier’ be included in a gambling cost/benefit analysis?” Michigan State DCL Law Review, 281-313. See also, Co mptroller Daniel Hynes, “Gaming in Illinois”, Fiscal Focus, Aug./Sept. 2000; Sabar, Ariel. “Detroit casinos offer promise, problems,” Baltimore Sun, Jan. 13, 2004. 28 Grinols, Earl L. Gambling In America: Costs and Benefits. Cambridge University Press, 2004, p. 177-178, 195. In his cost/benefit study of casino gambling, Earl Grinols, an economics professor at the University of Illinois, found that gambling brings up to $289 in social costs for every $46 of social benefit, and in a county-wide model found that the balance of costs to benefits would approach the ratio of more than 3:1. 29 Illinois Gaming Board, 2003 Annual Report. 30 AP. “Illinois legislature considering video poker, Chicago casino,” Reno Gazette-Journal, May 16, 2003. 31 Malone, Tara. “Gambling addictions worsen closer to casinos, experts say.” Daily Herald, Oct. 4, 2004. 32 Carey, Kevin, “The Funding Gap 2004: Many States Still Shortchange Low-Income and Minority Students,” Education Trust, at www2.edtrust.org. 33 For more information, see www.aplusillinois.org. An example of this approach is HB 750, Senate Amendments 1 & 2, Sen. James T. Meeks, et al. For more information, contact Ann Courter, Budget & Tax Policy Initiative director, at 312-516-5556 or acourter@voices4kids.org. This fiscal policy research brief was prepared as a part of Voices for Illinois Children’s Budget & Tax Policy Initiative by Initiative Director Ann Courter. Voices for Illinois Children is a statewide, non-profit, non-partisan group of child advocates who work with families, communities and policymakers to ensure that all children grow up healthy, nurtured, safe and well-educated. Through policy analysis, public education and outreach, Voices generates support from civic, business and community leaders for cost-effective and practical proposals to improve the lives of Illinois children. Jerome Stermer is the president of Voices for Illinois Children and James J. Mitchell, III is chairman of the Board of Directors. The Budget & Tax Policy Initiative identifies and analyzes the state’s revenue and spending policies to help Illinois policymakers and advocates set priorities and make wise fiscal decisions for the short term and for the long haul. J. Thomas Johnson is the chairman of the Inititative’s Advisory Committee. The Initiative is supported by grants from the Ford Foundation, the Annie E. Casey Foundation and the Chicago Community Trust.

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