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Can sinners save Pennsylvania? Lawmakers gambling on it

To pay its bills Pennsylvania is counting on a historic gambling expansion. It has become a national leader in reliance on so-called sin taxes.

Pennsylvania’s gaming revenue is among the highest in the country. Above, slot machines at Parx Casino in Bucks County.
Pennsylvania’s gaming revenue is among the highest in the country. Above, slot machines at Parx Casino in Bucks County.Read moreParx Casino

The solution to your problems is never alcohol, they say — and probably not smoking or gambling, either.

Unless, that is, you're the Pennsylvania legislature.

The passage of the state's most major gambling expansion since casinos marked the third time in less than two years that lawmakers have turned to a familiar source – vice – to plug budget holes, thus avoiding spending cuts, assorted reforms, and potentially unpopular increases in sales and income taxes.

Pennsylvania's buffet of so-called sin taxes is more extensive than most states in the nation's, said Jared Walczak, a senior policy analyst at the National Tax Foundation. The state recently has jacked up levies on cigarettes, tobacco products, and e-cigarettes. With an exceptionally high tax on casinos, the state is second only to Nevada in gaming revenues. And Pennsylvania is one of three states that owns its liquor stores; it also adds taxes on the booze they sell and instituted some price hikes this summer.

"I don't know what other sin we go to," said State Sen, Scott Petri (R., Bucks). "Are there any sins we've missed?"

Various vice-related revenues constituted better than 6 percent of the state's income in the 2016-17 fiscal year, according to data from the Department of Revenue — the highest in the last 10 years, largely thanks to the new cigarette and tobacco taxes and a bigger contribution from the Liquor Control Board.

Now, the approval of internet gaming, mini-casinos, and video gaming terminals in truck stops is expected to raise further tax money.

But, like other sin taxes, the gambling package passed last month raises questions about how much money the state can really make from people's vices, and highlights the legislature's growing emphasis on such sources.

"The last couple of years, that's been the major area where the Assembly has been willing to raise revenue," said Marc Stier, executive director of the Pennsylvania Budget and Policy Center.

Taxing habits

Sin taxes are viewed as unreliable because they can act as disincentives, persuading some people to quit the habits that are generating the revenues. For example, experts say, as cigarette consumption declines, the tax revenue does, too.

"It's a double-edged sword," Stier said. "On the one hand, you're putting out the tax because you want to bring in money. On the other hand, you're picking that thing to tax because you want to discourage people from consuming it."

Until the new levies went into effect last year, the total revenue coming in to the state's general fund from excise taxes and contributions from alcohol, cigarettes, and gaming had steadily dropped since 2011-2012. Meanwhile, the gap between what was budgeted and what was collected in revenue grew from $19 million to $731 million between 2011 and 2016.

Cigarette-tax revenue in particular steadily decreased, going from more than $1 billion to $911 million over five years.

Last year's new taxes took care of that. The higher cigarette tax brought in $1.2 billion, and the tax on vaping and other tobacco products yielded $83.9 million. (That vaping tax, a whopping 40 percent on retailers, has caused more than 100 of the state's vape shops to close in the last year.)

After approving the latest gambling expansion, legislators said the package would allow them to return to work on other issues and get the budget out of the way. But experts say that strategy can't be sustained and that the revenue ultimately will have to be replaced by other sources.

"This is what happens when people have taken a no-tax-hike-of-any-kind-for-any-reason-ever pledge without actually considering what that looks like in practice," said Rep. Leanne Krueger-Braneky (D., Delaware). Sin taxes, she said, put the tax burden on people who are already struggling.

"The only purpose they're serving right now is to patch together a revenue plan from a legislature that doesn't want to do anything that's truly responsible."

Sin brings money to the state in other ways, too: The 6 percent sales tax is collected on the sale of tobacco and alcohol; and hundreds of millions in revenue from slot machines and the lottery goes directly into various state funds each year.

A price increase earlier this year at state liquor stores also snags more dough for the state.

"Effectively, while we didn't institute a new liquor tax, we did create more revenue because we'll have more profitability" thanks to the pricing changes," said Petri.

Sin taxes are easier to pass — "more politically palatable" — because they don't affect all citizens, unlike an income or sales tax, said Bob Dick, a senior policy analyst at the Commonwealth Foundation, a research group.

That also makes them regressive taxes, meaning they are disproportionately borne by lower-income residents — the people least able to afford them.

"That's another reason why lawmakers should stay away from them," Dick said. "Politically, there may be some benefits there, but … we prefer that decisions are made on what's best for Pennsylvania."

Roll of the dice

So might the lawmakers, if only they could agree.

Efforts to pass a tax on natural gas production, something Gov. Wolf has advocated since he took office, were rebuffed, as were various other tax proposals. And the idea of increasing the income or sales tax is taboo in Republican-controlled Harrisburg.

The only other taxes passed with the budget, which was approved at the end of October after a nearly four-month impasse, were a tax on fireworks and an expansion of the sales tax to apply to online purchases. Stier estimated that could bring in $50 or $60 million a year.

Some lawmakers are hopeful the natural gas tax will pass when lawmakers return to work this month.

"We could've very easily not done the gaming and substituted that with the Marcellus Shale tax," said Rep. Gene DiGirolamo (R., Bucks), who called the gambling package "a disaster" and estimated the shale tax could bring in more, and more reliable, revenue. (Parx Casino is in his district.) "Depending on the amount of gas extracted, that revenue would've gone up every year."

When it comes to the new gambling package, revenue is, well, a gamble. The estimated $200 million has been questioned by experts, and part of that would come from the one-time sale of licenses, meaning revenue is expected to drop after the first year.

There is no way to predict whether online gambling and mini-casinos will draw in substantially more players or just change the habits of people who already gamble. And in a recession, gambling is one of the first things people cut out, Walczak said, making revenue less reliable over the long-term.

"Predicting gaming revenues is like shooting darts at a board," said gambling expert Alan Silver, a professor at Ohio University, noting that in Ohio and other states, projections about gaming revenue have been off base. "It is very difficult to say with much certainty that revenues will hit the $200 million target projections."

The bill legalizes online gambling, including on tablets that will be set up in airports, authorizes up to 10 new mini-casinos outside a 25-mile radius from existing casinos, and allows up to five video gaming terminals at truck stops, which were loosely defined based on the quantity of diesel fuel sold.

Krueger-Braneky said many legislators were not enthusiastic about the plan. "But with the budget process having dragged on for so long, I think we believed this was the best we were going to see under this legislature." Krueger-Braneky voted for it because it included a separate provision needed in her district.

Petri criticized the pace at which it was pushed through. He said he thought estimates of $80 to $100 million after the first year would prove accurate, but had various concerns about the bill and the plan's ability to bring in revenue.

Petri, whose district is also in Bucks County, the home of Parx Casino, supports the shale tax. He believed scrambling to come up with revenue to fund a spending bill that had been passed before the budget was part of the problem.

"I guarantee you no one in the Senate, no one in the House read that bill before we voted on it," said Petri. "I think there are many, many other choices we could've made."