Greising: What Our Gambling and Pot Fix Says About Illinois

Studies show states that turn to gambling and pot tend to have few other options. Heavily in debt, losing population, facing difficulties funding pensions or even paying its bills, Illinois fits the description.

BGA President David Greising writes a regular column for Crain's Chicago Business.

Decades of profligate spending, unkept pension promises and a state constitution that is resistant to reform have brought us to this: Illinois is in the running for sin-tax capital of the nation.

With the adoption of recreational marijuana and a frenzied expansion of gambling—sports betting, new casinos and "racinos," a doubling of gambling positions—Gov. J.B. Pritzker and state lawmakers took two big steps toward solving the state's fiscal distress by taxing the habits and vices of residents and visitors.

This is an observation, not a congratulation. Studies show states that turn to gambling and pot tend to have few other options. Heavily in debt, losing population, facing difficulties funding pensions or even paying its bills, Illinois fits the description.

Lawmakers didn't stop at gambling and marijuana, either. They doubled the gasoline tax, hiked cigarette taxes and even introduced a new "Tesla tax"—charging people for their socially beneficial decision to trade in carbon-belching autos for low-emission electric cars.

If the success of a legislative session is measured purely by volume, then the barrage of Springfield's spring session was a remarkable achievement. J.B. Pritzker had lots of advantages—a supermajority in both houses, the ability to lure Republican support for a major infrastructure bill, even a disarming style to match with his strong electoral mandate.

It will be years before we can tally the full cost and benefits of Springfield Session 1 of Pritzker's progressive agenda. This much seems evident already: It appears Pritzker's expectations for gambling and marijuana revenues are based heavily on, well, high hopes.

Pritzker at first expected up to $170 million in annual state tax revenue from marijuana. Compromises during the legislative session brought that down to $57 million for fiscal 2020. From sports betting, he anticipated $200 million in initial state licensing fees and an annualized take of as much as $136 million in taxes on sports wagering itself.

If Pritzker comes anywhere close to either of those projections, he'll make history. But Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, has seen such optimistic forecasts before—and knows how they turn out.

"All the states that have come up with forecasts of their own have been overly optimistic," she says.

States are rushing into sports betting in the wake of a 2018 U.S. Supreme Court decision allowing them to do so. The Tax Policy Center studied 13 states that have detailed their plans. Illinois' projections are more aggressive than the 13 other states' by a wide margin.

Five states each planned for no more than $10 million in revenue, with Iowa's $600,000 forecast the lowest. On the high end, the most optimistic revenue estimates came from Pennsylvania, which predicted $75 million. Pennsylvania forecast a total of $70 million in licensing fees and only $5 million in tax revenue from the gambling itself.

When Pritzker introduced his plan, by contrast, he foresaw a whopping $200 million from the one-time sale of licenses and a minimum of $77 million in revenue on an annualized basis from sports betting. At the close of the legislative session, he was forecasting $350 million a year in tax revenue from gambling once expansion plans for casinos, video and sports gambling are rolled out in full.

As for the value of licenses, Illinois expects up to $10 million apiece for seven licenses, to be booked in fiscal 2020. That puts it in line only with Pennsylvania’s plans, making the two states outliers by a significant margin. No other state charges more than $750,000 for their sports gambling licenses. Iowa expects to take in only $100,000 apiece, according to the Tax Policy Center study.

Illinois' estimates for marijuana revenue don't offer certainty either.

Actual tax revenues from marijuana have not lived up to the hype the states generated when liberalized marijuana laws were passed.

Such taxes are notoriously fickle, besides. Pot and gambling are the ultimate discretionary expenditures. Revenues rise when the economy booms but shrink rapidly when it slows down. When that happens, the timing is awful: Tax receipts dry up just when revenue is needed most.

A Pritzker spokeswoman says the governor knows gambling receipts will fluctuate. "The sometimes unpredictability of gaming revenue was taken into consideration in the preparation of the revenue predictions," she says in an email.

Pritzker accomplished a remarkable feat in passing so much legislation during his first legislative session. The bills he passed—including his progressive income tax—offer the promise of improving Illinois' fiscal plight. But the experience in other states shows that the hopes for two signature initiatives—pot and sports gambling—risk of going up in smoke.