Cities, states loosen up on gambling, alcohol to raise money © Jamie Grill/Photolibrary

The Basics

Strapped states find virtue in vice

Cities and states are investigating 'anything and everything' -- including looser restrictions on gambling, alcohol and strip clubs -- to drum up revenue.

[Related content: taxes, cut taxes, spending, tax laws, recession]
By The Wall Street Journal

Voters and politicians in Ohio used to slap down attempts to expand gambling in their state. But in May, many cheered as demolition crews razed an old auto-parts plant in Columbus to make way for a casino.

Facing high unemployment and the aftermath of a $3.2 billion state budget shortfall, Ohioans voted to allow casinos in November. Gov. Ted Strickland dropped his longtime opposition to video lottery machines, proposing to add them to racetracks to generate tax revenue.

"If I had not been confronted with these difficult circumstances, I would have obviously opposed expanding gambling in Ohio," Strickland says.

Nationwide, the public-funding crisis has led many state and local leaders to similarly reverse course. Hampered by withering funds for law enforcement, health care and other public services, a growing number of officials are condoning activities and businesses they'd be apt to restrict in better economic times.

For fiscal 2011, 38 states project combined budget shortfalls of $89 billion, according to the National Conference of State Legislatures, a bipartisan policy research group. Thirty-one states expect budget gaps totaling $73.5 billion in 2012. As a result, says Todd Haggerty, an analyst at the group, lawmakers are "trying anything and everything in order to bring their budgets into balance."

Oakland, Calif., began taxing sales of medical marijuana in 2009. Now at least a half-dozen states are weighing measures to allow some legal pot sales. Others have loosened decades-long restrictions on Sunday alcohol sales. And about a dozen, like Ohio, have discussed or passed plans to ease restrictions on gambling.

California legislators are debating whether to allow and tax Internet poker, even though such gambling is prohibited by federal law. "It is generally easier to pass something like this in a recession," says Lloyd Levine, a political consultant working for the pro-poker effort. As a state assemblyman in 2008, before the economic crisis, Levine introduced a similar initiative that failed.

'Blue laws' can't survive

Americans have a time-honored tradition of banking on vice in tough economic times, says David Laband, an Auburn University economics professor who studies the alcohol industry. "Blue laws" restricting Sunday alcohol sales, he says, are a common casualty of recessions.

"Every time there's an economic contraction, sure enough, you start seeing local repeal efforts," Laband says.

Since early 2008, five states have expanded Sunday alcohol sales, and counties and cities in Alabama and Texas have also scrapped long-standing restrictions on booze sales, says the Distilled Spirits Council of the United States, a liquor-industry group. In February, the mayors of Connecticut's three largest cities asked the Legislature to lift a statewide ban on Sunday alcohol sales in stores -- one of only three in the country. Such a move, they argued, could help mitigate the state's budget crisis by raising about $8 million a year in tax revenue. The next month, a bill that would have allowed stores to sell alcohol on Sundays died under fierce opposition from liquor-store lobbyists.

Peter Heise is a securities analyst with the stock-research firm RedChip who has followed publicly traded vice-industry companies such as alcohol marketers and strip-club chains. He says strapped local governments are smart to turn to such businesses for revenue, since "vices are a consistent source." Earlier this year, Heise boosted his rating on Rick's Cabaret International, a publicly owned chain of strip clubs.

In Ohio, the move to open up gambling has taken several turns. Four times when the state economy was healthier, in the 1990s and 2000s, voters rejected initiatives to build casinos.

Since then, Ohioans have fallen on unusually tough times. The state's unemployment rate in June stood at 10.5%. Faced with a $3.2 billion budget shortfall a year ago, Strickland proposed installing lottery machines at racetracks to avoid crippling cuts to public services such as education and Medicaid.

It was a stark turnaround for the governor. Strickland, a Methodist minister, opposed broader gaming rules in the state and had once described gambling as a "regressive tax" that harms the poor.

But Strickland faced a quandary last year, as state officials scrambled to fill the budget deficit. At the time, the governor had already reduced state spending by $2 billion. He had cut more than 2,500 government jobs, closed two psychiatric hospitals and two juvenile-detention facilities, and slashed the budgets of most state agencies by 10% to 20%. "It still wasn't enough," he recalls.

Further trims required "gut-wrenching" decisions, the governor says. To close the budget gap in the absence of new revenue, he would have had to slash most state agency budgets by 30% from 2008-09 levels, according to Pari Sabety, Strickland's budget director.

So Strickland convened a Saturday-morning meeting in June 2009 with Sabety and other staffers at his Columbus home. "We put a big whiteboard up and were going through the budget piece by piece," Strickland recalls.

A budget plan that lacked new revenue sources -- like a tax increase or new gambling income -- would have curbed assistance for Alzheimer's patients and mentally disabled children, Sabety says. It also would have cut back a Medicaid program that provides oxygen tanks for chronically ill patients.

"When they put up oxygen on the board, I said, 'Stop. We've gone as far as we're going to go,'" Strickland says. Six days later, he submitted a budget plan to Ohio legislators that included installing video lottery machines in the state's seven horse-racing tracks -- a move that he estimated would raise $851 million over two years.

Ohio's two United Methodist bishops -- Strickland's superiors in the clergy -- opposed the plan. It was politically risky, too, because Ohio voters had repeatedly rejected gambling.

Continued: One about-face leads to another

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