Massachusetts governor’s proposal to send the TradeSports-InTrade traders to jail is foolish.

Steve Roman November 12th, 2007

Expect to see more of this. State politicians have a big problem: they’ve made lots of promises and are financially unable to keep all of them. For the states, pension and health care promises made during expansionary times are unsustainable if tax revenue does not keep growing.

There is no discussion of shrinking government in order to make up for the short fall, and no politician wants to be the guy that raised taxes. The race is on for alternative sources of revenue.

Some states are considering selling off their infrastructure to investment firms to meet budget shortfalls (there is more talk than action on this). These one-off injections will, no doubt, quickly be allocated to pork projects and wasted. When that money is gone, the state will still be under-water financially and have nothing left to sell. Will the recurring revenue of gambling be able to make up the difference?

States are already turning to gaming revenues to help close budget gaps. Pennsylvania now has approval to open commercial casinos, and it seems Massachusetts is going to be next. Although it is a biased source, an American Gaming Association funded study concluded that, “”…[A] new casino of even limited attractiveness, placed in a market that is not already saturated, will yield positive economic benefits on net to its host economy.” So far, so good. Legal gaming in the US has been a positive sum game, at least as far at the politicians are concerned. Total tax revenue has grown as more gaming capacity has been added nationwide.

Legalizing gaming to increase tax revenue is a popular idea; Ohio is putting it to a vote (it had previously voted No on casino gaming in 1990, 1996 and 2006) and Maryland’s politicians are slowly working on the details as they suck in millions of dollars in campaign contributions from interested parties. The assumption is that more gaming will continue to lead to more tax revenue. This shortsighted view, in the long run, will come back to haunt the tax payers. Any new casino will haul in cash, but as the market saturates and consumers become jaded, rosy initial-growth assumptions won’t come to pass. An unfortunate reality of politics is, just like with the tobacco settlement, anticipated tax revenue from these casinos will be spoken for long before they are earned. If they casinos fall short, the tax payer will be making up the difference between what was promised and what was earned.

What happens when the market becomes saturated? Presumably there is some limit to the amount that US consumers can fritter away on something as unproductive as gaming. Overtime, the more casinos that are built, the more the revenue per casino will shrink. At some point, there will be a nasty battle between states to secure their share of the gaming revenue and keep it from their neighbors.

This leads us to Mr. Patrick’s foolish proposal to criminalize an activity just because he can’t tax it. It is a clear give away to the gaming interests that the residents of MA will pay a high price for. It is short sighted, heavy handed, and, if it passes, will turn approximately 8% of Massachusetts adults (based on nationwide rates) into criminals overnight.