Legal Gaming is Coming to Texas: The Maryland Playbook

Maryland Voters Overwhelming Passed Legalized Gambling

"Gambling ain’t no blight on society." – South Carolina State Senator Robert Ford.

Maryland voted for a different kind of “change” in November. Over 60% of Marylanders voted for legal gambling. Specifically, Maryland voters approved the Authorized Video Lottery Terminals to Fund Education initiative, a constitutional amendment that legalized slot machines, more commonly referred to by proponents as video lottery terminals or VLTs. This constitutional amendment will allow for 15,000 slot machines to be installed at 5 locations to be determined via a bidding process. So why should Texans care what happened in Maryland? It is not what happened necessarily, as much as how it happened.

The vote to legalize gambling in Maryland is unfolding now in Texas. The effort to legalize VLTs in Texas and the arguments used for and against are nearly the same. Just like Texas, Maryland debated whether to legalize gaming for over a decade. However, all efforts to pass legislation failed in Maryland’s Republican controlled state government. Once Maryland elected Democrat Governor Martin O’Malley, a former gambling lobbyist, the VLT bill was revived from a decade long coma.

Upon taking office, Governor O’Malley declared a financial state of emergency. Governor O’Malley declared that the Maryland public education system was running a multi-million dollar deficit and that the State desperately needed to find a new source of revenue. Specifically, Governor O’Malley called upon legal gaming to solve its funding ills. The Governor did not want to raise taxes and noted that Marylanders spend hundreds of millions of dollars in neighboring West Virginia and Atlantic City casinos. Governor O’Malley argued that Marylanders actually paid for better schools in West Virginia and New Jersey by crossing state lines to gamble. Third, Governor O’Malley noted that legal gaming could revive Maryland’s storied horse racing industry and keep the Preakness Stakes, the second race of the Triple Crown, in Baltimore.

When polled, Marylanders gave three main reasons why they voted for legal gaming or VLTs. First, Marylanders did not want an increase in their State income tax rates nor see an increase in the State sales tax. Marylanders perceived VLTs as a voluntary Sin Tax imposed only upon those who chose to participate. Second, Marylanders believed that the tax revenue generated from VLTs would in fact fund public education. Third, voters acknowledged that Marylanders were driving across State lines and gambling in neighboring states. Logic asked why should Marylanders pay for West Virginia’s or New Jersey’s roads and public education. Marylanders also pointed to job creation and development.

Most surprising, was how little of an impact the morality argument played in this election. Only a relatively small minority of Marylanders cited moral decline as a reason why they opposed the legislation. The voters were more likely to oppose VLTs because of an alleged increase in crime. Nelson Rose, a gambling-law professor at Whittier Law School in Orange County, California was quoted in an article by Associated Press reporter, Greg Bluestein, “Once you have legalized a form of gambling, the moral argument draws away and gambling is looked at as a cost-benefit analysis.” Translation: It’s called slowly turning up the heat on a frog in a pot of water. Just like Texas, Maryland maintained a State Lottery and legalized pari-mutuel betting at horse tracks. Oklahoma, Louisiana and Mexico litter the Texas State Line with casinos and their parking lots are full with cars and trucks with Texas license plates. Just like Maryland, morality may not play as much of a roll in this election as one would expect. However, this argument will play a much larger role in conservative Texas than Maryland.

Just like Maryland, Texas will legalize gaming… eventually. Maryland provided the playbook and laid out the road map. The same arguments will be used in Texas by both sides as they did in Maryland and the same reasoning will be applied. Texans may not have voted for change in 2008, but Texans will vote for another kind of “change” and soon.

Adam W. Vanek
214.998.1365
adam.vanek@tiptonjoneslaw.com

Adam is a former international banking officer for a FORTUNE Global 500 investment bank and focuses his legal practice representing entrepreneurs and small to middle market businesses in contracts, litigation and government matters.

Legal Gaming is Coming to Texas: Part II

“We know we’re losing that business every August by the lines of cars heading to Texas. We’re losing that tax revenue and watching Oklahoma businesses suffer at the same time. It makes more sense to keep those dollars here in our own state. It’s going to help our citizens, our businesses, and eventually help those businesses grow.” – Oklahoma State Senator Johnnie Crutchfield speaking about the Texas Sales Tax Holiday.

This blog is not a social commentary regarding the morality of legal gambling, but rather its inevitability.

As I noted last week, in 2009 the Texas Legislature will reconvene. High on the Capitol’s priority list is whether or not to legalize gaming. Last week I discussed the natural progression of how states legislate legal gaming: pari-mutuel betting such as dog tracks and horse tracks, state or multi-state lottery, video slot and bingo machines, and finally table games. This week, I want to give you a 2009 preview of the 3 most common arguments in favor of legalizing gaming in Texas: taxes, jobs and economic necessity for horse and dog track industry.

Tax Revenue: As Senator Crutchfield talks about the “line of cars heading to Texas” during the once a year Texas Sales Tax Holiday, some Texas representatives are crying foul as the lines of chartered buses migrate each day from Texas to Oklahoma casinos. Former gubernatorial candidate and famed plain talker, Kinky Friedman, commented on the intense competition between Oklahoma and Louisiana, "It's crazy to have Louisiana gamblers mad at Oklahoma for taking away their Texans." Some of the more realistic figures estimate that Texas will realize nearly $6 billion in direct gaming tax revenue annually. The proponents of legal gambling will argue that this new found money will fund Texas education, health care for children and maybe even put an end to new toll roads, as a lagniappe. But tax revenue is not the only reason, the Legislature will legalize gambling.

Job Creation: The second argument gambling proponents will make is that of job creation. It is true that legal gambling will create jobs, a lot of jobs. First, construction jobs and second, the jobs directly related to the gaming itself. And then there are those jobs that benefit from legal gambling indirectly, such as the hospitality industry, hotels, restaurants and travel. Metropolitan convention and tourism bureaus all across Texas are especially interested in legalizing gambling as a competitive advantage against competing cities such as Chicago, Atlanta and Orlando. If you then include the tax revenue generated from hotel room taxes or rental car taxes, the trickle down economics is compounded.

Economic Necessity: The third argument gaming proponents will cite is the need for legal gaming to save the Texas horse track industry. Despite hosting the Breeder’s Cup in 2004, the operator of Lone Star Park at Grand Prairie is now in dire financial straits. 2008 saw the smallest opening day attendance since the Lone Star Park was first opened in 1997. Magna Entertainment Corp., the operator of Lone Star Park announced that it is considering liquidating it’s assets to fend off creditors. While Magna does not own Lone Star Park, the City of Grand Prairie actually owns the track and leases it back to Magna, it does own significant acreage surrounding the horse track. According to the Dallas Business Journal, Magna Entertainment reported a $113.8 million net loss in 2007, bringing its total debt to $510 million. However, Magna has made it clear that it is hoping that Texas will legalize video slot machines and soon. As reported in the Austin American-Statesman, Reggie Bashur, spokesperson for the horse track industry, describes the need for legal gaming as a necessity for horse racing’s economic viability. "It's not gaming for the sake of gaming. It's gaming for the survival of the horse community as well as the track industry." The horse track industry has captured the attention of the Texas Legislature. In 2007, State Representative Jose Menendez, (D) San Antonio, filed a bill that would allow poker tables at specifically racetracks.

Eventually, the Texas Legislature will declare it’s time for Texas to get off the bench and get into the game. And of course, the House will want its cut.

Adam W. Vanek

(214) 890-0991

avanek@tiptonjoneslaw.com

Get Ready… Legal Gaming is Coming to Texas

“Anytime you open the door to any form of legal gambling, entrepreneurs are going to ram it open and run through.” - Nelson Rose, Law Professor, Whittier Law School.

Legal gaming is coming to Texas. The question in everyone’s mind is when? In 2009, the Texas Legislature reconvenes and will have several video gaming bills waiting for them in committee. Each bill will have its own version of how and where to legalize gaming. First, the Texas Legislature will authorize video gaming machines: video 8-Liners or slot machines, video poker, and video bingo. The proposed legislative bills will restrict these gaming machines to horse tracks and dog tracks, “off-shore casinos”, such as riverboats, and Native American reservations primarily located in West Texas. Eventually table games will be allowed and maybe even full-fledged casinos, but that won’t be for some time.

The best way to predict the future legislative course of legal gaming in Texas is to look at what is going on in other states. For example, in 2007, the Indiana legislature authorized legal gaming at horse tracks. Indiana has only 2 horse tracks, Hoosier Park approximately 40 miles north of Indianapolis and Indianapolis Downs Park approximately 30 miles southeast of Indianapolis. Each track must pay an initial license fee of $250 million, provide $100 million or more in additional construction or capital improvements, and the new slot machine facilities must connect to the racetrack facilities. Indiana is expected to generate close to $500 million in annual revenue within the first 5 years, exclusive of the licensing fee. Indiana will also require an annual $100 license fee for each video gaming machine in use. In a cash strapped state, such as Texas, the Legislature cannot afford to ignore those numbers.

Akin to the 1991 campaign establishing the Texas Lottery, gaming proponents will declare that the tax revenue generated from legal gaming will fund public education. And, just like the Texas Lottery, the proceeds will actually be deferred to the State’s general fund. It will be up to the Texas Legislature to actually determine how much is allotted to education. By 2006, the State of Texas received more than $3.7 billion in lottery ticket sales and only allocated $1 billion to public education.

Opponents to legal gaming will declare the need to protect the moral fabric of Texans. However, a closer examination of such opponents will reveal that casinos located in neighboring states, such as the Oklahoma Chickasaw Nation, are some of the largest campaign contributors to Texas politicians. Oklahoma and Louisiana casinos have good cause to play a major role in Texas politics. Texans make up approximately 80% of Choctaw Casino’s revenue. Similarly, shortly after Texas legalized pari-mutuel betting at horse tracks in 1987, Louisiana Downs, located in the border city of Shreveport, declared bankruptcy. Once gaming is made legal in Texas, there will be no need for Dallasites to drive 100 miles to visit the $60 million plus Winstar Casino in Durant, Oklahoma when they can visit Texas Lone Star Park in neighboring Grand Prairie. And that’s the idea.

One thing is for certain, legal gaming is coming to Texas and soon. Whether a new gambling law will pass in 2009 or 2011 is up for grabs. What is not in dispute is that Texans bet millions of dollars annually in Oklahoma, Louisiana and New Mexico. The Texas Legislature will eventually stop this mass exodus of untapped tax revenue in the name of education, our children and all that is good. For those who have doubts, just follow the money.

Adam W. Vanek

(214) 890-0991

avanek@tiptonjoneslaw.com