more casino gambling folly in New Jersey

Tax revenue from casino gambling in Atlantic City has been an important source of income for the state of New Jersey since its inception in the 1970s.  The Atlantic City gambling market peaked, however, in 2006 and has been cut in half since then.  The financial crisis accounts for maybe a fifth of the contraction.  The rest is due to the introduction or expansion of casino gambling in nearby states, notably Pennsylvania.

New Jersey’s response to this development has been a bit bizarre.

Its first idea was to increase casino space in Atlantic City by funding an upscale casino project which had been trying unsuccessfully to get private financing for years.  How that would address overcapacity in the market was never explained.  But luckily this plan never got off the ground.

Then there was internet gambling, introduced in late 2013, which the state predicted would soon be a billion-dollar industry.  2016 revenue from this source, year to date through August, is about $32 million.

The state has also attempted to institute sports gambling in the casinos, unsuccessfully so far.  The main stumbling block, as I understand it, is that doing so is expressly forbidden by federal statute.  Before that legislation was passed, state were polled to see if they wanted to be exempted–and New Jersey said no.

The latest idea, being pitched in advertising as a cure for unemployment, is again to open more casinos–only this time in northern New Jersey, within striking distance of New York City.

As a general rule, I think that–with the exception of resort locations like the Las Vegas Strip– consumers in general, and casino gamblers in particular, normally tend to patronize the closest venue to where they live.  If so, these proposed new casinos may draw some New Yorkers away from NYC-area casinos and keep some New Jerseyans from crossing the Hudson River.  But they will certainly make a huge dent in the gambling traffic that now goes from northern NJ to Atlantic City.

 

The new casinos need voter approval before the projects can go ahead.  Hence the commercials now airing to promote their advantages.  It’s not clear, however, that their opening will be a plus for the state.  The question is not whether they’ll do damage to Atlantic City–they certainly will, I think.  It’s how many more AC casinos will be forced to close their doors, and whether as a result their south Jersey/Pennsylvania patrons will opt to gamble in PA instead.

 

Revel bankruptcy, a sign of Atlantic City’s continuing gambling woes

Maybe this shows I’m just not so inspired this morning  …because it’s the last day of Spring?

As I was collecting data for this post, I noticed that the Revel casino in Atlantic City filed for Chapter 11 bankruptcy protection yesterday.  The pipe dream of Morgan Stanley master-of-the-universe wannabees, the Revel was supposed to be the upscale entry in a market that caters to little old ladies with buckets of quarters.  Not only was the concept suspect, but the timing was awful, coinciding as it did with the peaking of the seaside town’s gambling win in 2006.  Oddly, in my view, the state government pumped more than a quarter billion dollars into Revel in 2011 to help get it open.  That’s a half-decade after the numbers began to show that the last thing the existing gaming operations needed was more capacity.

Revel is actually the second AC casino bankruptcy in recent months.  Last November, the Atlantic Club (which was, once upon a time, the Golden Nugget) entered Chapter 11; in January it closed its doors.

Aggregate casino revenue for Atlantic City has been dropping steadily since the legalization of casino gambling in nearby Pennsylvania (casinos have since opened in Maryland, Delaware and New York.  More are on the drawing board for NY and Massachusetts).  The current run rate is slightly above half of the peak.

As I wrote about at the time, last year Trenton tried to breathe some new life into Atlantic City, which even in its weakened condition will chip in $150 million – $200 million in tax revenue to the state, by allowing online gambling.

Early predictions by the politicians were that online gamblers would boost aggregate casino win (the amount lost by gamblers) by $1 billion.  Microeconomically minded might observe that some of this new-found money might come from gamblers betting online instead of in the physical casinos–so it might not be a pure gain.  In addition, any redistribution might deepen the plight of any casino that didn’t offer an online option.

But, since the state tax on online gambling revenue is almost double that for onsite betting (15% vs. 8%), Trenton would likely come out a winner no matter what collateral damage might occur.

results so far

Through May, online gambling has generated $53.5 million in casino win, or about $10 million a month.  On the same measure, physical casinos are down by 6.5% year-on-year, or about $74.0 million.   …Ouch.

significance?

While it’s still early days, online gambling in New Jersey so far seems to be a bust for everyone except the tax collector.  So Las Vegas may have little to worry about.

Also, in the Northeast US at least, there appears to be a relatively fixed amount of money that people are willing to spend on gambling in the local area.  New casino openings–of which there are plenty in the pipeline–don’t appear to add much to aggregate demand, but rather mostly shift money from one pocket to another–and add to overall industry costs.  This implies continuing trouble for overbuilt areas like Atlantic City, or, eventually, any of the other states that are adding capacity.