Published: Thursday, 10 Sep 2009 | 4:28 PM ET

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Casinos and lotteries in most states are reporting a downturn in revenue for the first time, resulting in a drop in the money collected by state and local governments, according to new state data.

The decline comes as states are rapidly expanding gambling in hopes of stemming severe budget shortfalls, and it indicates that gambling is not insulated from broader economic forces like recessions, as has been argued in the past.

The drop has led some gambling experts to wonder whether the industry is reaching market saturation, whereby a limited number of gamblers with a fixed amount of money to bet is being split across a growing number of gambling options.

Photo by: Conor Ogle Roulette Wheel

States that have been invested in gambling the longest have been hit hardest. Illinois reported a $166 million drop in tax revenue in fiscal year 2009, from 2008; Nevada had a $122 million drop, and New Jersey $62 million.

In hopes of enticing more gamblers, New Jersey lawmakers have repealed a smoking ban, and in Illinois they are considering allowing free drinks on riverboat casinos. “The data shows that states take a real chance in depending on gambling because this revenue is not likely to keep pace with growing budgetary needs,” said Lucy Dadayan, a senior analyst at the Nelson A. Rockefeller Institute of Government at the State University at Albany, which will release a report on the subject next week. “In the absence of new types of gambling, it can become a zero-sum game as states compete for the same pot.”

Others, however, argue that the current decline is temporary, and that the industry has plenty of room to expand. Some experts expect revenues to bounce back, but doubt they will be as robust as they were before the recession.

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The 12 states that have casinos made $4.5 billion in fiscal year 2009, which ended June 30, a 7.4 percent drop from last year, according to the state data. Among the roughly 42 states with lotteries, 38 reported data indicating that they made $14.5 billion this year, a 2.6 percent drop compared with the earnings from the same states last year.

Gambling critics have long maintained that it provides short-term revenue at the expense of long-term social costs, like increased crime and addiction. But the new data also shows that the revenue collected by states and local governments is decreasing while competition for it is on the rise. Still, state leaders are looking for ways to get a piece of the earnings.

Here in Ohio, Gov. Ted Strickland, a Democrat and former Methodist minister, reversed his opposition to gambling and, in conjunction with the legislature, issued a directive allowing video slots at the state’s seven racetracks.

In Colorado, voters last year backed an increase in betting limits at casinos, and Missouri voters approved the end of limits on how much a gambler can lose. “We need those slots like nobody’s business,” said Mildred Cox, 77, who for 28 years has run the concession stand at River Downs here, one of the seven horse racing tracks slated to receive some of the state’s 17,500 proposed new slot machines. “Look at this place, it’s desolate.”

Across from her, a crowd of older men, betting tickets in hand, stood staring at several televisions mounted on the wall showing races in other states and Canada.

As a bell rang, the horses sprinted by, competing for a winning prize of $4,600. But the men barely broke their concentration from the televisions. “You can’t attract the best horses and the biggest bettors with purses like that,” said Ms. Cox, pointing outside at a largely empty grandstand.

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Thirty years ago, gamblers had to go to Las Vegas or Atlantic City to bet legally. Now, a dozen states have commercial casinos, 12 have “racinos,” or slot machines and other games that are installed at racetracks, 29 states have Indian casinos, and at least 42 states and the District of Columbia, have lotteries. “When budgets get tight, expanding gambling always looks to lawmakers like the perfect quick-fix solution,” said John Kindt, a professor of business and legal policy at the University of Illinois who studies the impact of state-sponsored gambling. “But in the end, it so often proves to be neither quick nor a fix.”

Crime jumps 10 percent in areas with casinos, personal bankruptcies soar 18 percent to 42 percent and the number of new gambling addicts doubles, Mr. Kindt said. Predicted state revenue often falls short and plans frequently get tripped up by legal fights or popular opposition, he said.

In Delaware, for example, Gov. Jack Markell said in March that he wanted to legalize sports betting in casinos, which he said would bring in $53 million in the first year to help plug an $800 million budget shortfall. But the plan was blocked by a federal court in Philadelphia on Aug. 24 on the grounds that it would undermine confidence in professional sports.

In Ohio, Governor Strickland reversed his stance on video slots at racetracks based on a “conservative” estimate that the new machines would net more than $760 million to the state.

But the slots are not likely to arrive here any time soon because a lawsuit is pending before the Ohio Supreme Court that argues that the plan should be placed before the voters. The slots may also get overtaken by a proposed constitutional amendment that will be on the November ballot and would allow four full-fledged casinos, one each in Cincinnati, Cleveland, Columbus and Toledo.

Still, Frank J. Fahrenkopf Jr., president of the American Gaming Association, said states had plenty of reasons to want to expand gambling. “Even though our revenues are down during the recession, bringing a casino into a community will still provide new jobs, new tax revenues, new opportunities for local vendors and other benefits that didn’t exist before,” Mr. Fahrenkopf said. “It isn’t surprising that as consumers are tightening their wallets, and with less discretionary spending for entertainment, they are spending less when they visit casinos, too.”

About 60 percent of people who participate in casino gambling have cut back on spending on the activity, according to a 2008 national survey conducted by the association.

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Despite the downturn, revenue from racinos grew this fiscal year, producing $2.9 billion in taxes and fees in 12 states compared with $2.7 billion the year before, a 6.7 percent increase.

But Ms. Dadayan of the Rockefeller Institute said the racing windfalls might be short-lived because slot profits usually soften with time as their novelty wears off and more states add machines.

If Pennsylvania and Indiana, where slots are new, are excluded, the total slot revenue from the other 10 states with racinos actually fell by $76 million in fiscal year 2009, a 4 percent decline.

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