Socialized Gambling

Illinois pols want to muscle in on casinos.

Chicago Mayor Richard Daley is talking about launching a new lakefront casino, to be owned by the city. Meanwhile, Illinois Gov. Rod Blagojevich is talking about seizing all existing casino licenses and having the government run the gambling joints. Blagojevich is a reasonable man. If he's foiled in his effort to create his own chain of casinos overnight by seizing the assets of seven companies, he says he'll settle for a 70 percent tax on the casinos' gross.

The rallying cry of politicians statewide is "Tax 'Em, Hammer 'Em, Regulate 'Em, and Seize 'Em. The New Deal lives!" The targets include big publicly traded corporations: Harrah's, Argosy, Penn National -- the kind of solid employers most communities would kill to have in their midst. In some parts of the country companies this large are given moratoriums on taxes just for showing up. But things are different in Illinois. Mayor Daley recently told the Chicago Sun-Times, "The taxpayers of Illinois should own every gambling license right now. They should own it all and get all the profit. Hire someone to manage it. Instead of giving the profit to the private sector, the state should take it. Simple as that. Very simple."

Not so simple. For one thing, how would a government-owned casino deal with the age-old problem of table-game volatility? There are days, weeks, and even months when certain games lose money. If the state becomes reliant on gambling for revenue, does it announce that garbage collection will be suspended because a Hong Kong high roller won $3.6 million at the baccarat table? Does it tighten the slots every time it needs to build a new school? The competing casinos in northwest Indiana would love it, of course, because they could easily beat the odds, ride out the highs and lows, and drain off all the gamblers. Illinois would be left with the equivalent of the old sawdust joints on the Nevada-California state line, where only degenerates stopped to play.

And are Illinois politicians unfamiliar with the concept of the excise tax, the institution that distinguishes a capitalist country from a socialist one? Socialist countries want to own industries. Capitalists just tax them. If the government is going to take over casinos, then why not, say, amusement parks or, for that matter, Baskin-Robbins franchises?

I don't know exactly what's happened in the last decade to make the Illinois casino companies so unpopular, because in many respects they've been poster boys for exactly what riverboat casinos were set up to do. In Joliet the two casinos, Harrah's and Empress, have turned a crime-ridden, grimly depressed, deteriorating city known only for its state prison into a prosperous little suburban community with clean new streets and continually rising real estate values. In Aurora the Hollywood Casino has turned the Paramount Theater across the street into a major performing arts destination and redeemed the city center. Everywhere you find them, the casinos support hospitals, Little League baseball teams, high school band trips. And a casino operation is so labor-intensive that it also tends to be the biggest employer in town.

Still, Illinois hasn't been treating casinos like welcome benefactors. There were always strange rules and high taxes there compared to the rest of the country.

In Mississippi the philosophy was to tax low and let the market determine the number of casinos. That state ended up with a very prosperous business based on a Nevada model. Illinois, on the other hand, started out with a 35 percent tax, the highest in the nation, and set the exact number of licenses. It then created an approval process so byzantine that it took companies years and hundreds of millions of dollars to pass muster just for the license, before they had spent the first dollar on construction.

Illinois also wrote into law all kinds of hindrances to the casino operator in order to create "limited gambling." You can have only 1,200 gaming positions per casino, for example. (In other states, 2,000 positions would be considered a small operation.) Until last year, your riverboat had to leave the dock and actually cruise -- a major annoyance to customers who had to wait for the boat to return. Until very recently, the casino had to be an actual boat, not a barge, even if it never left the dock, making for cramped conditions.

All of these things are a pain to the operator, but they don't really limit gambling. The simplest way to limit gambling would have been to ban slot machines and allow table games only. But Illinois seems to love slot machines -- so much so that various civic leaders have proposed putting them in O'Hare Airport. That would be pretty much a commitment to wide open gambling, in a public access sense. No one has to drive to the riverboat, but everyone has to walk through the airport.

Throughout its 10-year experiment in gambling, Illinois assessed the highest casino taxes in the country -- its original 35 percent rate compares with 6 percent in Nevada, 9 percent in Atlantic City, and around 20 percent in most other riverboat states. But that wasn't good enough. Last year the Illinois legislature raised the casino tax from 35 percent to 50 percent, pretty much slamming the door on any new development projects. (This tax, by the way, is on the gross, not on profits, and is in addition to a $3 "boarding fee" charged every time someone walks through the turnstiles.)

Despite making for a $2 billion market, the gambling boats in Illinois don't compare favorably to those in other states. They're crowded (because of the gaming positions limit); most of them don't have any entertainment or hotels (if they do have hotels, they're tiny); and the high taxes mean you don't get as much for your money if you gamble there. The only thing they have is easy access from major urban areas where people will put up with a certain level of hassle to be able to gamble at all.

The most desirable market is, of course, Chicago, which is why the most profitable casinos are scattered in neighboring suburbs such as Aurora, Elgin, and Joliet. There's one other license, originally assigned to Rosemont, which has been tied up in regulatory proceedings for years now. Its holders have been deemed unfit by the gaming commission (based on alleged Mob ties), but they've been given a chance to sell it. A year ago MGM Mirage, the largest casino company in the world, offered to pay $615 million for the license, but that offer was quickly withdrawn when the state tax rate went to 50 percent.

Now the situation is even worse for the suburban casinos. With Daley talking about a Chicago casino, with the horse racing tracks trying to get slot machines in Cook County, with the legislature disinclined to increase gaming position limits or lower taxes, the economics of the business could collapse. Because Illinois is constantly changing the rules, major investment plans have already stopped.

The political resentment of casinos for making money in Illinois is strange. Rich corporations used to be exactly what a city or state wanted. No one gets outraged in Washington state if Microsoft has a record year. Michigan doesn't get crotchety if Ford makes billions. It's only in Illinois that you have this profit envy even though the system is set up so that the more money casinos make, the healthier the city, county, and state budgets.

What comes next for gambling in Illinois could be anything from years of litigation -- by casino companies who believed they were buying a valuable license that turned out to be worthless -- to some kind of cobbled-together compromise between the state, the city, the casinos, the horse racing tracks, and the cities in the rest of the state that feel they've been left out of the gambling boom and now want part of the action.

One interest group never represented in any meeting is the gambler himself. All he's expected to do is pony up.