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When Virginia lawmakers passed bill SB 1126 in May, it represented a compromise of sorts between proponents and opponents of gambling in the Commonwealth.
The bill removed the state-level prohibition on most forms of gambling, giving individual cities the option to conduct a referendum on the subject. It also mandated a comprehensive study on the possible impacts of gambling expansion.
That study, conducted by the state’s Joint Legislative Audit & Review Committee (JLARC), has just been turned in. The commission draft offers 18 recommendations with considerable overlap, including:
Aside from the staffing adjustment, most of these recommendations would apply to any state looking to expand gambling. However, the report also contains some more specific details about the good, the bad, and the ugly that Virginia has in store.
The study highlights three key areas in which Virginia would clearly benefit from a well-conceived expansion of gambling.
Any state looking at gaming legislation is going to be looking, first and foremost, at what it will create in terms of tax dollars.
JLARC recommends a tax rate of 27%, a bit lower than average among states with a limited number of licenses. States with open licensure (such as Nevada) range from 7%-12%, while those with limited licensing have rates from 19%-50%.
At the recommended rate, the report predicts that legal gambling would drive at least $81 million in revenue to the state annually. That’s the worst-case scenario. The most optimistic projections climb over $500 million.
In reality, taxes from land-based gambling would likely fall somewhere in the middle. The report puts its best guess somewhere in the vicinity of $260 million per year.
It also estimates that sports betting could generate another $55 million in annual revenue at a moderate 12% tax rate. Online casino gaming could add a further $84 million.
The introduction of casinos to the labor market is also expected to create almost 10,000 new jobs. Virginia’s smaller towns, particularly those along the borders, could be the biggest beneficiaries.
The 40,000-strong city of Danville, for instance, currently struggles with a 4.2% unemployment rate — among the worst in the state and well above the national average. A proposed casino could employ up to 3.2% of the city’s workforce.
There’s clearly a lot of unmet demand for gambling in Virginia. According to the report, 80% of adult residents have engaged in some form of gambling in the past year. Options, however, are limited outside of the lottery.
The state has just a single racetrack, Colonial Downs, which reopened this year after a five-year hiatus. It also added 3,000 historical horse racing (HHR) terminals — electronic devices which use the results of past races to determine the games’ outcomes. HHRs are projected to bring in revenue north of $20 million annually for the state.
The unmet demand for gambling options has also spawned the success of so-called “gray machines” over the last two years. These unregulated slot machines, often found in convenience stores and restaurants, incorporate a trivial element of skill in order to skirt the law. The state lottery estimates that these gray machines cost it $140 million in annual ticket sales.
A greater range of legal options could incentivize enforcement to help rein in this gray market.
It’s important for lawmakers to see all sides of the issue, though, and the study highlights a few potential pitfalls of expanded gambling.
SB 1126 creates a framework for legal casino gambling in Virginia, but it leaves a lot of wrinkles to be ironed out.
More detailed follow-up legislation is needed, and cities must to hold referenda to determine whether their citizens want a casino. The licensing process needs to be established, and companies need to submit applications. Then they need to be vetted.
JLARC estimates that establishing where the casinos will be built and who will build them could take as long as two years. The actual planning, construction, and hiring could take another two on top. Virginians could therefore be waiting as long as four years before the first casinos actually open their doors.
A requirement that online casinos tether to a land-based partner means that iGaming might also have to wait. We may, however, see retail and online sportsbooks come to market before brick-and-mortar casinos, should the state choose to allow them.
Although casinos will create a lot of jobs in numerical terms, not all of those will be desirable jobs. The JLARC report says that over half will be what it classifies as “low-skill” positions. It estimates that the average annual wage would be $33,000, which is below the state median.
A bad job might be better than no job, but such positions in customer service, housekeeping, and so forth are not difficult to fill. The market for these jobs is considerably more elastic than that for more specialized, skilled positions. It’s primarily the latter with which governments are concerned when they talk about job creation, and casinos may not do much in that regard.
Sports betting and online casinos might likewise help maximize tax revenue, but the report projects a minimal impact on employment and the larger economy.
The expected tax revenue from the casinos isn’t pure profit for the state, either. Some of the dollars Virginians spend at the casinos will be siphoned from existing options.
Historical horse racing will likely be the hardest hit. The report estimates that revenue from those terminals will decline by as much as 45%, or around $10 million per year. Again, this reinforces the notion of unmet demand for casino-style gaming at the moment.
Other officially-sanctioned forms of gambling would be impacted to a lesser extent. The lottery and various charitable gaming initiatives, such as church bingo, would see declines on the order of a few percent according to the report.
The gray machines might see a similar decline, though they are by their nature hard to quantify. The report recommends that they be expressly legalized, regulated, and taxed. If that were done, those machines would constitute a large part of the projected gaming revenue.
Another reason that the projected tax revenues can’t be interpreted as profit is that the state will need better harm-reduction systems. These are minimal at the moment.
Legalizing gambling will require establishing better services for problem gamblers and their families. Funding will come largely from the tax dollars generated by the activity itself.
That said, such programs are needed anyway. The JLARC report stresses this, recommending that the state spend more money on addressing problem gambling whether or not it expands legalized gambling.
Black- and gray-market gambling businesses flourish in the absence of regulated gambling, and problem gamblers are far more likely than non-problem gamblers to turn to those options.
The report doesn’t expressly call state-by-state regulation a problem. However, several of its findings suggest that it might be confusing the issue.
It warns, for instance, that the opening of casinos in Tennessee and North Carolina could negatively impact revenue. Many of the proposed Virginia casinos are located along those borders, aiming to attract intrastate traffic. If citizens of those states have legal local options, though, they might be disinclined to travel.
By the same token, the report cautions that many new casino jobs might go to out-of-state employees. People living in towns on the foreign side of the border could easily commute in to occupy those positions. They, too, may not do so if they have equivalent local options.
Cross-border gambling and commuting aren’t inherently problematic, but they do undermine the accuracy of studies like these. Tax revenue depends on state boundaries, but social issues don’t. An asymmetry can therefore arise when one state legalizes gambling and its neighbor does not, especially when the gambling venues reside along the border.
As Virginia moves forward with legal gambling, it would do well to take this broader perspective into account. Legalization is still likely to be the best path forward, but it need not be rooted in demand from adjacent states that haven’t yet taken that step.