John W. Kindt, an emeritus professor of business and legal policy at the University of Illinois, is a leading national gambling critic who has testified before Congress and the Illinois state Legislature about the societal, business and economic impacts of decriminalizing gambling. Kindt is the senior editor of the book “The Gambling Threat to Economies and Financial Systems: Internet Gambling.” He spoke with News Bureau business and law editor Phil Ciciora about the expansion of video gambling in Illinois, which has mushroomed to over 24,000 machines operating in more than 5,600 establishments throughout the state.
According to the Illinois Gaming Board, video gambling has generated more than $811 million in state and local tax revenue since the first machines were legalized for widespread use four years ago. In a state starved for new tax revenue, what’s so bad about video gambling? And what’s not to like about additional tax revenue?
The state of Illinois has more electronic gambling devices than Nevada. Think about that for a second. But the worst part is that Illinois has one of the lowest, if not the lowest, tax rates on video gambling machines. Under the 2009 Video Gaming Act, the machines’ owners and operators take 70 percent of the revenues, while the state treasury receives only 25 percent and local governments only 5 percent.
So state coffers may have been fattened by $811 million during that four-year period, but the owners and operators walked away with $2 billion to $2.4 billion, which the state treasury could have and should have received.
To extrapolate to another level, those numbers only represent a fraction of the total number of dollars wagered on video gambling machines in Illinois. According to video gaming revenue reports from the Illinois Gaming Board, since September 2012, gamblers have wagered almost $34 billion on video gambling machines. That is truly a staggering sum. For context, Illinois’ general funds revenue in fiscal year 2015 totaled $36.6 billion.
Basic economic principles dictate that gambling cannibalizes the consumer economy, reduces overall tax revenues and, most importantly, destroys the economic multiplier effect. The nearly $34 billion that was wagered over those four years could have been much more profitably spent in the consumer economy – on houses, automobiles, appliances, food and clothing. From the average consumer’s point of view, gambling is akin to burning money in a fireplace.
The state of Illinois needs to become more business friendly, expand its consumer base and grow its economy. Which is why, via new taxes on gambling, it should immediately reclaim the billions of dollars owed to the state by gambling interests. The state’s future policy should be to tax gambling, not people.
I think we should follow the Canadian model, in which the government keeps virtually all of the income and only pays management fees to the casino companies. Otherwise, the state Legislature is just giving away billions of dollars to casino companies.
What role have the original casino licenses played in this situation?
The original 1990 legislation authorizing 10 casinos in Illinois granted casino licenses worth $5 billion at the time ($11 billion in current dollars) to political insiders for only $25,000 per license, including one insider who subsequently went to prison for corruption.
Years later, despite multiple warnings about these giveaways of casino licenses to insiders, two gambling expansion bills vetoed by then-Gov. Patrick Quinn raised these license fees to only $100,000 each – when their Wall Street values were and are hundreds of millions of dollars. In subsequent gaming expansion bills in 2013 and 2014, the Illinois Legislature again pegged the value of those casino gambling licenses at only $100,000 per license.
In 2003, financial expert Jeffrey Hooke of the Maryland Tax Foundation briefed the Illinois Legislature on the value of Illinois casino licenses. He cited numerous examples, including a 2002 offer of $615 million by MGM-Mirage Corp. for the Rosemont license; an offer of $750 million by the Illinois Argosy group for a suburban Cincinnati riverboat license; and a $660 million offer for a Detroit casino license.
The bottom line: Whether we like gambling or not, the state of Illinois is seriously undervaluing its casino licenses. It’s tantamount to a $7 billion to $14 billion giveaway to casino companies and gambling interests. In addition, the low tax rates on Illinois casinos since 1990 have resulted in more giveaways of $25 billion to $100 billion, all of which should have gone to the Illinois treasury.
Would a casino change the fortunes of the cash-strapped city of Chicago?
Absolutely not. The effect of bringing a casino to downtown Chicago would be second only to the Great Chicago Fire of 1871 in terms of damaging the city. Illinois lawmakers envision a Chicago casino as a revenue jackpot, but it ignores the other reality: It could just as easily be a huge bust for the city and taxpayers.
Academic studies in the early 1990s concluded that a proposed $2 billion Chicago casino by three gambling companies would be a lose-lose for taxpayers. These rebuffed gambling interests took their sour grapes to Detroit, where they promised to save Detroit’s finances. Instead, in 2013, Detroit became the first major U.S. city to declare bankruptcy.
Phil Ciciora / Business and Law Editor / Illinois News Bureau