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One of the more exciting features of the latest recession has been the collapse of tax revenue flowing into the coffers of the individual US states. Sales are down so there’s less tax take there. Property values have crashed through the floor so, where tax is a percentage of valuation, the tax take has fallen – with so many properties foreclosed and families unemployed, payment of the tax has been difficult to enforce. People have been earning less and businesses have made less profit so, again, less income tax. Put everything together and many states are effectively bankrupt, their bonds reduced to junk status by the credit rating agencies. Yet there is no political will to really grasp the nettle of tax increases. If the electorate want the same level of services from the state, they have to pay for them. If they genuinely will not pay, they must be prepared to accept real cuts in the quality of the services. Perhaps this recession will finally break through the stubborn refusal to pay a larger percentage of income as tax. While we wait for this revolution, individual states are playing around the margins to save a few dollars here, and raise a few dollars there. Their theory is that federal government will not allow them to fail. Like AIG, many of the states are “too big”. So bail-out money will save them from having to make the hard decisions.

This has not prevented some states from getting creative. In New Hampshire, Governor John Lynch has a new policy. To help bridge the gap between solvency and insolvency, he’s proposing to legalize online gambling. The detail of the plan is to be announced soon, but it’s already controversial. Ignoring the problems created by the federal law clamp-down on the transfer of funds for gambling purposes, the Governor has been caught in a classic flip-flop. Not so long ago, the lawmakers who represent the real-world casino interests proposed a bill to licence some 17,000 slots and table games. The recession was not yet in its full glory and the hole in the budget was not today’s gaping chasm. The Governor decided to veto the bill.

He gave two reasons. The first a simple calculation that there were already a significant number of machines in the state and licensing more was unlikely to produce a real increase in revenue. It would only share out the same money among more machines. But it’s the second reason that has landed him in trouble. He said the bill would lead to an increase in gambling. Whether he was concerned at the rising level of addiction, the risk of more young people being tempted into gambling or he had some moral objections is not clear. The bill died. The new proposal to legalize online gambling is likely to make gambling more accessible. If people have to travel to specific locations, their behavior can be more closely monitored and controlled. The age of players can be verified. Operators can stop someone when they have obviously lost too much. Allowing gambling from PCs, lap and palm top machines, and Blackberrys is opening the flood gates. Playing online slots, people can burn through a lot of money very quickly without anyone to stop them. The Governor can’t have it both ways. If proliferating gambling is a bad thing, legalizing online gambling is a bad thing. While he decides how to answer, we can all have fun playing slots wherever we find them.

In many ways, the US has the best and the worst system of federal and state governments in the world. Arguably it has the qualities of being the best because, even though it’s a two-horse race, there’s enough of a difference between the political intentions of the successful candidates to make life interesting. But it’s one of the worst because of the level of corruption in the lawmaking following elections. Money speaks loud behind the scenes with different lobbying groups pressuring the elected representatives to deliver on the promises they made to get the campaign funds. For these purposes, it makes no difference which party you look at. All the individuals at every level in the political system depend on “donations” to get elected. When it comes to the world of gambling, the politics get particularly complicated. For individual states, the revenue derived from the different forms of licensed gambling helps avoid complete financial meltdown. Yes, there’s a recession, but this has only slowed the flow of money into gambling. Unlike other sources of tax revenue, the gamblers of America are helping balance budgets. But there are different interested parties. In one corner stand the real world casino operators who want the least possible regulation on their activities. Their group is not united because the casinos on Indian land have advantages and, some say, represent unfair competition. We should not forget the other sites who can get licences to run slots. In another corner stand the racing interests. They are long-standing political players and also want the maximum freedom to run their own betting operations with the least interference from states. This blurs into another group that runs betting operations on other sporting events. While a more distant group runs online casinos.

As an example of the conflict of interests, let’s go to Massachusetts where there’s a new bill in the state House to establish two new real world casinos. As always, the declared intention is to generate more revenue for the state. To maintain a monopoly for the land-based casino operations, the bill proposes to criminalize all online gambling. It will be an offense for any resident of Massachusetts to place or accept a wager placed by a telecommunication device, no matter where they may be located. You will realize, of course, this includes all telephone betting and would hit the racing and sports betting operations. Not surprisingly, this has stirred up an intense lobbying exercise.

Real world operations are preferred because they are easier to police and monitor when it comes to collecting the tax or levy. Once operations disappear down telephone lines or into the internet, they can be based anywhere. This seriously complicates the collection of any tax. States like to keep their worlds simple. They want the maximum revenue from licensed gambling with the lowest possible cost for collection. Just crossing state lines makes collection more difficult. If casino games are offered from outside US territory, tax cannot be collected. That’s one of the reasons why the federal government clamped down on the use of credit cards and other easy payment methods. It forced more operations onshore where they could be taxed. Whether you agree with this approach to balancing the budgets is irrelevant. Casino games are seen as the easy way to raise money without upsetting the electorate. Imagine a world without gambling and hear the roar of anger if states announced an increase in sales tax.

Just as we all used to follow the form of horses – think the Great Depression and the success of Seabiscuit to see we all love a champion – the latest form book covers the race among US states to balance their budgets. Of course, everyone has been focussing on California with Arnold Schwarzenegger leading the charge to the winning post on getting the budget signed into law. He has enough strength for arm twisting and ‘gator wrassling to bulldoze the bill through. But Pennsylvania is just as interesting with the Governor’s office matching California’s use of IOUs by refusing to pay funds to the four state universities. Probably someone somewhere is running a book on which US state will be the first to declare itself bankrupt. These would be the front runners among an alarming number of states lacking initial prudence and the political will to raise taxes, to cut spending, or both.

Anyway, the real point of interest in Pennsylvania is the growing threat of litigation from the group of license holders who run slot machines. When the licenses were first issued, the state sold maximum exclusivity for a high fee (that’s $50 million a license). The enabling law is very clear. No other gambling outlet will be allowed to compete directly with the market for slot machines. At the time, this looked a good deal for both sides. Gambling was a popular activity and the state benefited from a generous input to its finances. Fast forward and the recession has forced people to cut back on their discretionary spending. This means less money to spend on trips to gamble. Ironically, the casino operators to benefit from this have been online. Had it not been for the changes in the law making it difficult to move money into and out of the online casino accounts, they would have cleaned up. So this leaves the current license holders under pressure with building work on some of the proposed casino and resort sites put on hold. While the government finds an expanding black hole eating up its cash reserves as tax revenue falls. The state’s answer is proposals to increase the number of slot machines allowed in the existing resorts and to license new resorts. To the existing license holders, this looks like plans to allow direct competition from new operators. They are up in arms with their attorneys slavering on the end of a short leash, just waiting for the chance to sue.

There’s no doubt slots still represents a pot of gold for both the license holders and the state. The machines are still a big draw even though the recession is biting hard. But this plan looks like an expansion too far. The average spend has dropped. If the state increases the number of machines, this will only spread the same amount of money around more machines. It’s not going to increase the size of the spend. This leaves the state with a growing hole in its accounts and the existing license holders with a good case in contract and constitutional law. With the online casinos introducing new slots games every month and keeping up player interest, this is no time to be fighting over a reducing market in the real world.