David Cay Johnston

Politicians in both parties are betting that allowing more gambling will make them winners at the polls by raising revenue without appearing to raise taxes.

Governors Andrew Cuomo of New York and Steve Beshear of Kentucky, both Democrats, each want seven casinos.

In Kansas, where the state owns casinos, Governor Sam Brownback, a Republican, wants more gambling money to pay down state debts.

In Minnesota, Governor Mark Dayton of the Democratic-Farmer-Labor party wants more gambling to finance a new stadium for the privately owned Vikings football team.

Florida legislators are mulling three casinos, one in Miami. Illinois lawmakers may allow a casino in Chicago.

In Texas, Governor Rick Perry says he opposes more gambling. Yet eight years ago he called the legislature into special session to allow gambling at the gas pumps to help finance schools. He lost that bet.

Egging on these and other politicians is anti-tax crusader Grover Norquist, who has made “tax” the vilest four-letter word in American politics. Norquist wrote Texas politicians a letter in January saying that more gambling is better than more taxes.

As a longtime student of gambling companies and their regulation, I find these developments troubling. People who want to play should have an honest place to wager. But states should only allow, not encourage, gambling. Basic government services should not depend on gambling revenue, as Perry’s school finance proposal did.

No matter how much gambling the law allows, taxes on the money players lose will never be enough to finance the government services on which jobs and private wealth creation depend.

$24 BILLION IN 2010 REVENUES

Gambling generated $24 billion for the states in 2010, about 2 percent of their total revenues, data collected by the Rockefeller Institute of Government shows. Thanks to its lottery, New York got the most gambling revenue, $2.7 billion, more than Nevada and New Jersey combined.

Tax revenues from gambling are down in both West and East Mammonopolis, in part because of a weak economy. In the west, Nevada gamblers lost $3.8 billion last year, down 12 percent in real terms from 2000, according to the University of Nevada. In the east, Atlantic City players lost $3.3 billion last year, down 39 percent from their inflation-adjusted loss of $5.4 billion in 2001, according to the state of New Jersey. The only growth is in betting near home, which the industry calls “convenience play.” Slot machines took more money from players in Pennsylvania than Atlantic City last year.

Nelson Rose, the Whittier College law professor who developed the theory that America is riding its third historic wave of gambling, says, “we are decades away from market saturation” for convenience gambling.

The first two gambling waves ended in scandals, the first between 1820 and 1840 because of dishonest games, the second in 1890 because the nationwide Louisiana Lottery corrupted politicians.

While the third wave has yet to crest, a potential new scandal lurks in proposals to initiate legal online betting.

The U.S. Justice Department issued a formal opinion in December that the Wire Act, a law long-thought to bar Internet gambling, applies only to sports betting.

This means that states running the Powerball and Megamillions lotteries can operate multistate online poker and other Internet betting.

But how will states know if online players are adults? My 1992 book “Temples of Chance” named 13- and 14-year-old children who Atlantic City casinos plied with liquor, limousines and luxury suites. How will the states keep underage gamblers using their own money –- or Mom and Dad’s credit cards — from online poker?

WHO BENEFITS?

Another issue is who benefits from more gambling and who may be maneuvered into supporting it. Consider the way Cuomo has framed a casino expansion proposal.

New York has nine racetracks with slot machines, called racinos. By proposing only seven casino licenses, Cuomo initiated a variation on musical chairs, where two or more operators will end up without a license when the music stops. Want to bet whether this approach encourages political donations and quiet favors?

The giant Asian gambling company Genting Group won the contract for the Aqueduct racino in Queens last year. Now, Cuomo has tapped Genting to build the nation’s largest convention center there, which it says it will do without subsidies.

I doubt many people would fly to New York to visit mundane Ozone Park, an hour’s subway ride from Manhattan’s Broadway shows, Fifth Avenue shopping and Times Square.

At the same time, Cuomo is proposing to close the Javits convention center in the heart of the city, alarming Manhattan hotel and restaurant owners, as it should.

Now let’s connect the dots.

Genting would make more money if instead of a convention hall in Ozone Park it erects a large open space for a full-blown casino with baccarat, blackjack, craps, pai gow and poker. But a casino requires legislative and voter approval, which may not be easy to get.

Cuomo, by threatening to close the Javits center, has given Manhattan hotel and restaurant operators an interest in persuading state legislators and voters to make sure Ozone Park becomes a huge casino complex and Javits stays open. That way their income from Manhattan conventioneers would not be at risk.

I find it most curious that any politician trying to avoid tax increases would consider a casino operator whose profits will go to Malaysia instead of staying in-state.

People in New York, and elsewhere, should ask: What value do offshore casino operators add? Why not license American gaming companies? Or local investors? What motivated Cuomo to shun Indian casino operators, like the Oneida Nation with its well-run Turning Stone casino near Syracuse?

And all Americans should ask what the odds are that more gambling will promote an industrious, thrifty society. And does it make sense for your tax savings to depend on how many of your neighbors make a losing toss of the dice?

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

The Lisboa, the oldest casino in this thriving gambling city, features a polished black marble floor flecked with what looks like glittering gold. While all gamblers eventually find only fool’s gold, like the glittering pyrite in the marble floor, government is mining real gold from the casinos here.

Macau, a special administrative region of China, is raking in 8 billion patacas (US$1 billion) a month this year in casino taxes.

That is up by almost half from last year and likely to grow much more in the next few years as Chinese with wads of renminbi search for excitement, glamour, commercial sex and a brief escape from the rigors of life back home, not to mention the hope of striking it rich at the tables.

The casinos generate so much tax revenue that the Macau special administrative region cannot spend it all, anomalous proof that government is not an unlimited user of money.

Last year the Macau government took in more than twice what it spent. The budget for 2011 anticipates the government spending more than three-quarters of its revenue as the 22,600 civil servants — every 25th resident of this city of more than half a million — get their first across-the-board pay increase since 2008.

These huge tax surpluses free Beijing from having to spend any money in Macau, the only place under Chinese rule where casinos are legal.

The casino taxes can be seen also as an indirect way for Beijing to capture some of the vast untaxed income in China, where only 3 percent of workers pay income tax and it is universally believed that many fortunes made in business escape the nascent Chinese tax enforcement system.

CASH FLOWS IN
Of course it has not gone unnoticed by Beijing, or for that matter Washington, that so much money flows into Macau across the bustling border crossings at the mainland, on the jetfoils and ferries from Hong Kong and in the jumbo jets landing at the airport. Spies are said to lurk everywhere in Macau, as ubiquitous as the working girls who gather legally at the casino bars.

The Chinese spies are looking for both high-rolling government officials, a sure sign of corruption given Chinese civil service salaries, and for people who might let state secrets slip. The Americans scan for people who might hold valuable military and other secrets and who, having put themselves in vulnerable positions, can be coaxed into selling what they know.

Everywhere around the edges are criminal gangs that lend money to gamblers, encouraged by laws that make casino markers, as credit slips are known, collectable in Macau and Hong Kong, but not the Chinese mainland.

The big markers are held by associates of junket organizers who, workers and customers at the casinos say, are willing now and then to have a customer just disappear because it helps to encourage repayment by the rest of the borrowers.

For those unwilling to leave China with renminbi stuffed into men’s packs (or murses, as they are known in America) there are jewelry shops that take Chinese plastic and hand over not diamonds or watches, but cash with which to gamble, a subtle form of money laundering.

For those who wish more discretion, the Las Vegas Sands — operator of the Venetian, Sands and Four Seasons casinos — operates seven private jets, some of which fly back and forth to the company’s Marina Bay casino in Singapore. Going to Singapore means gambling where Macau, and thus Chinese, officials lack access to casino videotapes.

PROFITABLE DESPITE HIGH TAXES
The six casino companies pay in taxes almost 40 percent of what their players lose, compared to 5 to 15 percent in Singapore, 7.75 percent in Las Vegas and 9 percent in Atlantic City. The American casinos also pay corporate income tax.

Despite Macau’s high taxes, its casinos are immensely profitable.

Partly that is because gamblers pay high prices in the form of the vigorish charged at the baccarat tables. Baccarat accounts for close to 90 percent of the money that Macau players lose.

In Atlantic City the vig, as it’s called, is under 2 percent. In Macau it is almost 3 percent. So Macau players pay about 50 percent more vig because of the higher casino tax.

Almost half the world’s people live within a five-hour flight to Macau, ensuring a steady torrent of players and tax revenues even when the long economic boom in China slows, as it must someday.

Steve Wynn’s Wynn Resorts runs casinos in Macau and Las Vegas. Last year Macau generated 69 percent of company profits and 77 percent of cash flow, a measure of how China prospers while America struggles.

Cash flow from the Las Vegas Sands’ Macau casinos last year was four times what its Las Vegas business generated. Its Macau cash flow, as measured by the company, grew 47.5 percent from $842 million in 2009 to $1,242 million last year. And its new Sands Marina in Singapore, although open only eight months, brought another $642 million of cash flow.

The Macau Venetian has more than 550,000 square feet (50,000 square meters) of gambling floor, making it 3.5 times larger than the Trump Taj Mahal in Atlantic City and infinitely more profitable.
Across the street from the Venetian, new hotel towers are rising for Conrad, Sheraton, Holiday Inn and perhaps other hotels as the number of Chinese with money to play with grows along with the tax revenues generated by the money they lose.

There are many lessons here for America. One is that higher taxes do not necessarily mean less business.  (Editing by Howard Goller)