Lucy Nicholson/Reuters

Though states often pledge to fund public schools with taxes levied on lotteries and casinos, that money tends to get funneled elsewhere.  

In 2008, after years of political squabbling over whether Maryland should host casino gambling, the question came up before voters in a referendum. The state government and the gambling industry lobbied hard for the votes, pledging that taxes levied on the gambling establishments would go to public education. TV commercials promised that casinos would bring hundreds of millions of dollars “directly into our schools,” and warned that if Maryland missed this opportunity, those stacks of cash would instead benefit students in the bordering casino-friendly states of West Virginia and Delaware.

The referendum passed. In 2012, after the “most expensive political campaign in Maryland's history,” a ballot question expanding gambling to table games also passed, narrowly. Maryland now has six casinos, including the Horseshoe Casino in downtown Baltimore, which opened in 2014. In the last seven years, these facilities have welcomed tens of millions of visitors and generated around $4.5 billion in profits. That has translated into $1.7 billion in funds for education, including $200 million from Horseshoe.

Yet Baltimore’s schools are in dire straits: Last month, city schools CEO Sonja Santelises announced that, due to a $130 million budget deficit, she is considering laying off more than 1,000 workers, including teachers.

That same week, the Baltimore Sun reported that the casino money the state had promised for public schools is instead being siphoned to pay for other government expenses, such as salaries and roadwork. As a result, Maryland schools have received the same amount of money they would have without the casino tax. And Baltimore schools have received less state money than they did before the casino opened.

Selling Gambling to the Public

The casino pitch that Maryland voters went for in 2008 is one that was honed over decades, as one by one states agreed to host the gambling industry. It’s been a big turnaround for an industry that was all but banned nationwide in the early 20th century. Though Nevada legalized casinos in 1931, most states began to allow them in the 1990s. The promise of reaping economic benefits has driven the trend: Statistics from the American Gaming Association show that casinos bring thousands of jobs to host communities, and they also have a “multiplier effect,” in which new businesses then open in the surrounding area. This is particularly helpful, says Erik Balsbaugh, the association’s VP of public affairs, for struggling post-industrial cities like Bethlehem, Pennsylvania and Springfield, Massachusetts.

To win support, casino boosters often emphasized that a percentage of these benefits from lotteries and casinos would be funneled directly into public education. “They countered fears of gambling with this emotional reference,” says Patrick Pierce, a professor at Saint Mary’s College in Indiana who has studied the topic. “Americans, at least on a symbolic level, place a great deal of emphasis on public education.”

The tactic did the trick: Today, you can play the lottery and/or bet at a casino in most states.

Where Does the Money Go?

Experts on gambling and state funding say that Maryland is only one of dozens of states taking gambling revenue meant for education and using it for other purposes.

“In almost every case states either earmark the funds for education but then decrease the general fund appropriations for education by a similar amount, or, in more cases, they simply put the money in the general fund,” says Denise Runge, a dean at the University of Alaska Anchorage and editor of Resorting to Casinos: The Mississippi Gambling Industry.

In the first year of operation, taxes from lotteries generally do go toward education, according to a study Pierce co-authored that looked at the period 1966 to 1990. “You saw an initial bump in education spending by about $50 per capita,” he says. But after a number of years, the practice of using the money for other expenses became commonplace. After eight or nine years, says Pierce, “states with lotteries were spending less on education than states that didn’t have the lottery tax.”

State lawmakers welcome the lotteries and casinos for this very reason: The tax revenue gives them the flexibility to fund other programs or even cut other taxes. “If you’re a state legislator and you’re telling citizens that you supported gambling because it improves children’s education, and then you used the money someplace else, you did a bait and switch,” says Pierce.

And politicians become dependent on the money—something the gambling industry understands well. Pierce notes, for instance, that while Nevada is famous for its casinos, it doesn’t have a state lottery—casino operators don’t want the competition. The industry’s pull with Nevada lawmakers “is a major reason why we haven’t seen an effective push to put a lottery in place,” he says.

Standing in line to buy lottery tickets at the border of California and Nevada. (Gene Blevins/Reuters)

Earl Grinols, an economics professor at Baylor University, says this relationship between government and gambling amounts to crony capitalism, in which the industry and state politicians stand to gain from each other—and do. “The public system should be designed so that it leads people to do the right thing,” he says. “When you set up a system in which the gambling industry and state government have interests in common, you do the opposite. You create a system that encourages back-room deals.”

The Exception: Lottery Scholarships

But not all gambling-sourced school funds are fated to disappear: The exception are scholarships like Georgia’s Hope Scholarship program, which provides merit-based funding to students pursuing an undergraduate degree. The program didn’t exist before Georgia’s lottery, which began in 1992, and so wasn’t financed through a general fund that could be monkeyed with.

“Every dollar from the lottery that comes in for the Hope Scholarship program goes to that program,” says Ross Rubenstein, a Georgia State professor who studies lotteries and education funding. What’s more, Georgia’s model spurred states such as Tennessee, South Carolina, and Florida to create similar lottery-funded scholarship programs.  

Still, because these scholarships are merit- rather than need-based, they often benefit middle- and upper-income students rather than their poorer counterparts. That’s particularly problematic, because virtually every study on lotteries shows that lower-income households spend a larger amount of their earnings on lotteries or casino gambling than higher income households. “You’re redistributing wealth from poor people to wealthier people,” says Pierce. (Rubenstein notes that Georgia also straightforwardly distributes lottery money for pre-kindergarten programs. “Benefits for pre-K are a little more even across income groups,” he says.)

Politicians also like taxes from casinos and lotteries because they’re voluntary: However regressive these taxes are, no one has to pay them. As a result, they’re less likely to complain to state legislators about them. But this also makes these revenue streams unstable.

Runge of the University of Alaska notes that over time, casinos tend to make less money, as general interest drops off. Baltimore’s Horseshoe Casino, for instance, has seen a 14.5 percent decrease in its revenue in the past year. Rubenstein says there’s a similar trend with lotteries. “Everyone wants to play them when they are first available,” he says, “but then many people start to realize they’re not going to win, or they get bored with the games.” So even if public schools were benefiting from these taxes, the revenue stream is not reliable.

The key, then, is not to reform this flawed system, but to scrap it for a better one. Pierce wants politicians—state governors in particular—to have the courage to tell constituents that taxes from stable sources, such as income or sales, are needed for education. And then they need to actually raise taxes.

“If everyone really wants to support our schools, we need to make a public commitment to them,” says Pierce. “The way to do that is not through gambling.”

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