Gambling In Texas

This is Part II of a four-part series in the Texas Republic News on various issues
related to gambling legislation.

Part II - Horse Racing and Slot Machines

By James Aalan Bernsen
Texas Republic News

Twenty-two years ago, the Texas Legislature signaled the return of gambling to Texas in
a limited form by legalizing pari-mutuel horse racing in Texas. It was an innocuous entry
into the world of gambling: horse racing is ultimately a game partly of skill, not just
chance like slot machines or roulette tables. But now Texas thoroughbreds are carrying
more than just jockeys on their backs – they carry the hopes and dreams of the gambling
lobby to bring the holy grail of gambling to Texas.

An unlikely partnership of supporters, including horse breeders and the generally

conservative Texas Farm Bureau, has stepped up to the plate to support an initiative that
would bring video lottery terminals, or VLTs, to Texas tracks. VLTs are virtually
indistinguishable from casino slot machines, and more importantly, are treated as such in
federal law – with rather large implications for Texas.

Indeed, the introduction of VLTs to Texas horse tracks would create a domino scenario
that most of the legislation’s supporters appear to not have considered. Instead of
reviving the declining stakes of the Texas horse raising industry, VLTs and their
consequences would likely start an explosion of gambling beyond the ability of the race
tracks – or the State of Texas – to control.

The Argument
First there are the general arguments for gambling. Proponents say it will bring in large
tax revenue to the state, as well as economic development (These issues will be discussed
in Part IV of our series). But there are also arguments specific to racetrack gambling.

Texas Horse Breeders say they’re hurting, and argue that the only way to rejuvenate their
industry is through the passage of legislation establishing “horse incentives” to grow the
industry. This can only be done, they claim, by increasing the purses at thoroughbred
racing venues like Sam Houston Park in Houston and Retama Park in San Antonio.

And the only way to get those payouts, they assert, is through the introduction of slot
machines at racetracks.

To get their message across, the Texas Thoroughbred Association has even hired noted
Texas songwriter Lyle Lovett as their spokesman. In a video on their website, Lovett
makes the Association’s case, and pushes for passage of the “Texas Horse Prevention
Preservation Act.”

“It’s a bill that would benefit virtually every aspect of the horse industry in Texas and
would allow video lottery terminals or VLTs to be installed at existing licensed
racetracks,” Lovett said. “It would provide a way to supplement purses and breeding
programs for racehorses, equine research, breed retirement and adoption programs.”

Regardless of the merits of what is essentially a bailout for the Texas horse-raising
industry, the “Texas Horse Prevention Preservation Act” is somewhat misleadingly
named. The subsidy amounts – which are unknown, but would likely be in the tens of
millions – would likely be dwarfed by the actual slot machine revenue, which supporters
say will likely be in the tens of billions of dollars. It is the equivalent of a mouse hitching
a ride on an elephant and painting his own name on the side.

Farm Bureau Support

One of the big wins for the racetrack casino lobby prior to the opening of the 81st
Legislature was the winning of an endorsement of the project by the Texas Farm Bureau.
Steve Pringle, the bureau’s legislative director, said the issue came up from members in
the horse raising industry, who argued that slot machines at racetracks would revive their
business.

“The horse industry in Texas has been suffering in the last five years,” Pringle said. “We
support these incentives and support VLTs as a funding mechanism to support that
industry.”

Pringle said that the bureau doesn’t take a position on gambling, and said that if there was
an alternative funding mechanism for the incentives, the group would support that. As of
today, however, VLTs are it.

Battling Polls
Texans for Economic Development (TED) – a group which promotes racetrack casinos,
or racinos as they are sometimes called – commissioned a poll by Baselice and
Associates, which shows strong support in Texas for the proposed race track casinos. The
poll (linked via Newspaper Tree, an online El Paso newspaper) found 63 percent of
Texans support the idea and 36 percent oppose.

However, the poll was paid for by TED. A similar poll from only two years ago,
conducted by an a separate gambling group favoring “resort” casinos, found only 45
percent of Texans supported racinos. That poll was also conducted by Baselice and
Associates.

The dueling polls is a legacy of past discord. Historically, disunity has been the gambling
lobby’s worst nightmare, and the biggest boon for opponents of the idea. This session,
such groups have put up a front of unity, although it remains unclear how strong that
remains. Right now, gambling proponents are supporting HB 1724, which technically
includes both resort casinos and racinos, although it did not escape notice among the
capitol crowd that a recent press conference touting the bill did not have any
representatives from the horse racing industry present. Word in the halls also suggests
that many members of the Farm Bureau may be getting cold feet, although Pringle says
the group continues to support the idea.

A Monopoly or the Big Tent?

Currently, horse racing tracks have a near monopoly on gambling in Texas, and a big-tent
approach would end that. It would also make legislation a harder sell. In the past,
legislators have been somewhat moved by the idea of gambling that has a “small
footprint.” For this reason, racetracks have generally advocated for the exclusive right to
gamble, limiting casinos to existing tracks. This is actually an impossibility, given the
impacts of the federal Indian Gaming Regulatory Act (which will be discussed in Part III
of our series).

Will The Revenue Projections Turn Out?

Historically, gambling revenues have underperformed expectations. The Texas Lottery
was sold as a cure-all for the state’s school finance system, but failed dramatically
(though this was partly a result of skyrocketing school costs which the lottery could not
have met anyway).

But is the current economic environment the right time to launch a major gambling
operation? In a March 5, 2009 Houston Chronicle story a Nevada economist and
gambling expert said no. William Eadington, an economics professor at the University of
Nevada and director of the university’s Institute for the Study of Gambling and
Commercial Gaming, pointed out that two states are currently facing the prospect of
having to pass tax breaks to bail out the very casinos that were pitched to legislators as a
way to bail the states out.

Even Texas tracks have been touched. On the same day the Chronicle story appeared,
Magna Entertainment Corp, the parent company of Grand Prairie’s Lone Star Park, filed
for Chapter 11 bankruptcy. Lone Star Park’s press release is quick to point out that its
operation is not part of the filing. Magna Entertainment is the largest horsetrack operator
in America; after its colossal collapse after 7 years of failing to make a profit, the
company was officially de-listed from the Nasdaq Exchange on Monday.

The loss of revenue is not restricted to racetrack operations, but is a trend generally true
of all casino operations. Casinos in New Jersey posted a 20 percent drop in income last
month – the largest decline in the 30-year history of gambling in that state. Famed casino
developer Donald Trump – who made a name for himself turning everything he touched
into gold – couldn’t even make it work.

About the only positive casino developers can take from recent developments, in fact, is
the argument that gambling may not be as addictive as some say. Given the choice
between paying the bills or playing the slots, it seems, people just aren’t gambling as
much. Yet the premise behind the argument – that the two items compete at all – is hardly
something gambling proponents want to admit to.

Opening the Door for an Explosion of Gambling?

Last week was National Pathologicial Gambling Week. Indeed, the social costs of
gambling are widely known, and are tacitly admitted to by the fact that virtually every
gambling bill proposed includes funds for treating compulsive gamblers (These issues
will be discussed in Part IV of our series).

Given this fact, gambling is recognized by all as a cost/benefit ratio. Benefits are
maximized – and costs reduced – by limiting the footprint of gambling. Destination
casinos are likely just as addictive as any others, but they are generally less accessible
and require sufficient expense, premeditation and planning to visit, unlike hometown
casinos.

For the horse racing industry, furthermore, there is additional reason to keep the footprint
low. As alluded to above, the business model of a racino includes slot machines which
make sufficient revenue to offset the loss – or insufficient gain – of the actual horse
racing operation. The more casinos there are – racinos or others – the more diffused the
potential revenue base. More casinos chasing a limited number of gamblers means fewer
returns. A model of business based on a handful of casinos will simply not work if the
casinos proliferate wildly. This does not even consider the draconian – and uneven – tax
rates levied on gambling operations.

This then, is the ultimate mirage of racetrack casinos: proponents believe they can
prevent the expansion of gambling. But a closer look at the law – and experiences from
around the country – prove this is a very dubious proposition. Casino gambling can’t be
tamed, because it isn’t a thoroughbred, it’s a mustang.

That’s because another group of people who once lived and died by the horse hold all the
cards now. Indian Tribes bring a whole new dimension to the dynamics of gambling.
They have the power to expand – indeed they virtually guarantee it by their presence –
the footprint of gambling wherever they exist – or could potentially exist.

Indeed, when the dimensions of Indian gambling are considered, all bets are off, and all
the dreams of horse racing enthusiasts – and state budget writers – could likely be dashed.
For that reason, we turn next to the most controversial and vital piece of the gambling
puzzle: Indian Gaming.