The stream of money going into state coffers cannot continue to grow -- and could begin to dry up.

01:00 AM EDT on Tuesday, April 5, 2005

BY FOX BUTTERFIELD
The New York Times

DOVER, Del. -- Gambling revenues, once a mere income trickle, have become a critical stream in a number of states including Rhode Island, in some cases surpassing traditional sources such as the corporate income tax and helping to lower personal income or property taxes.

The sums are so alluring that some officials are concerned that their states are becoming as addicted as problem gamblers. "We're drunk on gambling revenue," said Wayne Smith, the Republican who is House majority leader in the Delaware legislature. "Gambling revenues are like free money."

In Rhode Island, South Dakota, Louisiana and Oregon, not to mention Nevada, taxes from casinos, slot machines at racetracks and lotteries make up more than 10 percent of overall revenue, according to a new report. In five other states -- Delaware, West Virginia, Indiana, Iowa and Mississippi -- gambling revenues are fast approaching 10 percent.

So vital has the money become that in Rhode Island, gambling revenue has now surpassed the corporate income tax to become the state's third-largest source of income, after the personal income tax and sales tax. It has enabled the state to avoid raising its income tax for 10 years.

Because of gambling, South Dakota officials a decade ago were able to push through a 20-percent reduction in property taxes by increasing the state's share of gambling revenues from video lottery terminals to 50 percent, up from 37 percent.

A property tax reduction was also the main argument in Pennsylvania for legalizing gambling when the legislature last year authorized slot machines at racetracks and casinos after years of intense opposition.

In Delaware, where video slot machines were legalized in 1994 as a way to revive the state's ailing horse-racing and horse-farming industries, racetracks are thriving, horse farms have been preserved and the legislature, unexpectedly, has been able to cut the top personal income tax rate over several years during the late 1990s to 5.9 percent, down from 8.4 percent, a reduction of nearly one-third.

The scenes that fuel Delaware's success take place every night. On a recent cold, rainy week night, many of the 2,500 video slot machines at Dover Downs in Dover were clinking steadily, as customers from as far away as Baltimore, Washington and Richmond, Va., pressed the play button every three seconds, as fast as the electronic terminals can spin.

That was good news for the state, since Dover Downs, a combination harness racetrack, Las Vegas-style hotel, slot machine emporium and NASCAR track, pumped $102 million from its slot machines alone into the state's budget last year. Delaware overall got $222 million from gambling, or 8.1 percent of its $2.72 billion in state revenues.

But Delaware, like most states that have come to rely on gambling revenue, now faces a danger -- competition from nearby states for the same dollars.

Some 70 percent of gambling revenue in Delaware's three "racinos" (racetracks with video slot machines), comes from visitors from Pennsylvania and Maryland, according to the Delaware Department of Finance. But Pennsylvania legalized slot machines last year, and the Maryland legislature is debating a bill to legalize gambling there.

If Pennsylvania and Maryland install all the slot machines they are considering, Delaware could lose $120 million annually, almost 5 percent of total state revenues, said Tom Cook, a spokesman for the Department of Finance.

In Dover, the looming battle with Pennsylvania and Maryland has touched off a debate pitting the governor, Ruth Ann Minner, against many legislators.

"We have legislators every day who propose opening new venues, like a big casino on the waterfront in Wilmington or a floating barge in the Delaware River," said Minner, a Democrat. "But there are only so many dollars that are going to be spent on gambling, and I don't want to build that into the base of my budget and then find Pennsylvania and Maryland leaving a $120-million hole in it."

So Minner has decided, in her words, "to draw a line in the sand." She has allowed longer hours at the state's three racinos and encouraged them to modernize to attract out-of-state bettors. But she is saying no to stand-alone casinos or other proposed forms of gambling such as blackjack tables and sports betting.

Similar dilemmas are cropping up around the country now that 48 states, with the exception of Utah and Hawaii, have legalized some form of gambling.

South Dakota first legalized gambling for a limited purpose -- allowing casinos in the decaying frontier town of Deadwood to try to preserve it.

But South Dakota now gets $112.8 million a year from gambling, most of it from video slot machines in bars all over the state operated by the state lottery. Gambling accounts for 13.2 percent of South Dakota's revenue, according to state figures.

David Knudson, a Republican state senator from Sioux Falls, concedes that gambling has brought some benefits. In 1995 he was chief of staff to the governor, Bill Janklow, when gambling allowed South Dakota to reduce the property tax by 20 percent.

"But that only increased our dependence on gambling," Knudson said. He noted that gambling opponents often cite the danger of addiction for individual gamblers, but "the biggest addict turns out to be the state government that becomes dependent on it."

In 2000, worried about an increase in divorces, crime and suicide among problem gamblers, Knudson supported a ballot issue to repeal the law legalizing the state lottery video slot machines. But many members of the legislature argued that the state would have to come up with alternative sources of money, Knudson said, and the measure was defeated.

Iowa, which pioneered modern riverboat gambling in 1989 when it legalized gambling as long as the boats were cruising on a river, is continually striving to keep ahead of neighboring states. When Illinois and Missouri soon passed similar laws, the Iowa legislature voted to add slot machines at racetracks. It also negotiated with local Indian tribes for tribal casinos.

Last year, facing a $140-million budget shortfall that threatened education programs, Iowa added table games at racetracks, dropped a moratorium on new gambling licenses and allowed gambling on the riverboats when they were tied ashore.

Iowa derives 6.65 percent of its state revenue from gambling, according to a new study by William N. Thompson, a professor of public administration at the University of Nevada, Las Vegas, and a colleague, Christopher Stream.

The analysis, which Thompson says is the first to measure the percentage of state revenue from gambling, was done for the Wisconsin Policy Research Institute, a business-sponsored organization, and was based on 2003 data.

Nevada, not surprisingly, gets by far the largest proportion of its revenue from gambling, 42.6 percent, Thompson found. South Dakota is second, with 13.2 percent.

Rhode Island is another state that legalized video slot machines for a limited purpose -- to help its aging horse and dog racing tracks. When the slots were introduced in 1992, the income was small, but the amount has almost doubled every year since, said Joseph A. Montalbano, the president of the Rhode Island state Senate, and has reached $281 million a year, including the state's conventional lottery.

Not only has gambling revenue surpassed the corporate income tax in Rhode Island and enabled the state to avoid raising its income tax, gambling also helps teach children, pay for medical care for the poor and repair roads.

But Rhode Island, too, faces competition. There is concern that Massachusetts, the source of many customers at Rhode Island's gambling facilities, will legalize slot machines at its own racetracks, and within an hour's drive of Providence, the large American Indian-owned casinos in Connecticut are expanding.

"We're in a Catch-22 situation, with our third-largest revenue source being surrounded by these other gambling facilities," said Montalbano, a Democrat.

In Dover, Denis McGlynn, president and chief executive officer of Dover Downs Gaming and Entertainment, also sees the need to expand, perhaps by allowing his slots to stay open 24 hours a day instead of closing at 4 a.m.

"Sometimes you play the cards you're dealt," said McGlynn, whose company has prospered with the legalization of gambling in Delaware and is now a publicly owned corporation. "Delaware is small. It's not Silicon Valley. People are not pouring in to build new industries from the ground up. But people are willing to come here and gamble and contribute to the state's revenues."