Hard Luck on Slots

Pennsylvania's plan to use gambling revenue for property tax relief has turned into a political lemon.
by | July 2005

The residents of Pottstown, Pennsylvania, would like nothing better than to get a little bit of property tax relief. Bethlehem Steel and Firestone closed down plants there in the late 1970s, and Mrs. Smith's Pies, another longtime local enterprise, left town in 1998. All told, in the past two decades, more than 5,000 local manufacturing jobs have been lost. While the borough, 35 miles northwest of Philadelphia, has many historic buildings and new retail is slowly coming in, the depleted industrial base has saddled citizens with the bulk of the tax burden.

Yet a few weeks ago, when the state dangled a plan before local officials that could have provided eligible homeowners with an annual tax break of $217 apiece, Pottstown opted out. School boards across the state were given until May 30 to decide whether to take a share of the revenue from the introduction of slot machines and levy a small income tax on residents in exchange for the tax-relief program. Board members in Pottstown called the legislation "seriously defective."

Pottstown was hardly alone. Similarly anxious and uncertain school districts sued for more time to make a decision. But the deadline stood firm, so rejection seemed the safest bet. In the end, only 111 of 501 school districts opted into the program. Many of those did so reluctantly. The fiscal and political repercussions are being felt from Erie to Easton. For the rest of the country, the Keystone State's recent fiasco offers a cautionary tale about trying to do too much at once, and using a revenue source many consider unseemly to solve an entrenched tax policy problem.


Pennsylvania's Edward Rendell was one of several East Coast governors who rode to victory in 2002 on a pro-gambling platform, determined to ease budget problems, or tax burdens, with "easy" money: as in, revenue generated without drastically raising taxes or cutting spending. Rendell took office pumped up about his two-pronged plan for bringing in slot machines and using the proceeds to offer residents relief from skyrocketing property taxes. But if the governor expected this to be the signature program of his first term, it's now clear he will have to look elsewhere.

Starting up gambling in a state is never easy, as Governor Robert Ehrlich in neighboring Maryland also discovered this year when he watched his plan to put slots at racetracks fail. Perhaps Rendell and Pennsylvania lawmakers believed that linking slots to desperately needed property tax relief would ensure widespread support. Evidently not. It now appears that the complexity of this coupling was largely the cause of the plan's downfall.

The legislation that flummoxed so many came in two parts. Act 71, passed in July 2004, created a gaming control board and set up the framework for allowing 61,000 slot machines in 14 locations around the commonwealth. Seven of the licenses would go to horse tracks; the other half to stand-alone sites.

When Pennsylvania was painting the financial picture for supporting slots, officials proffered studies that showed that slots could generate about $3 billion in gross revenue a year. That would net the commonwealth somewhere as much as half a billion to a billion dollars. Ten percent would go specifically to the horse racing industry. "It's geared to make racing more attractive in Pennsylvania, create and keep more jobs, and bring more people here," says Nick Hays, spokesman for the Pennsylvania Gaming Control Board.

More than 50 percent of all slots revenue, however, is slated to go to programs. The biggest chunk--34 percent--would be devoted to property tax relief. The second piece of legislation, Act 72, covers how the money that comes ringing in from those machines will be doled out to school districts.

Act 72 has proved to be the really complicated one. First, it required homeowners in school districts to apply for property tax reduction. Then, if their school district opted in for a share of the gambling pot, it would impose a one-tenth of 1 percent income tax on all wage earners in the district, even those who do not qualify for tax relief, such as renters. Those benefiting from property tax relief would get a bite taken out of that amount through the increase in their income tax. (Philadelphia is an exception. There, all residents receive a wage-tax cut but no property tax relief.)

School districts that opted in also would lose some control over their budgets and taxing powers. Anytime their budgets contain a tax increase that exceeds an inflationary index, residents could nix it through a referendum. "There are a lot of problems school districts have with this," says Jon Rupert, business manager for the Highlands School District. "Why do you want your hands tied like that?"

Nevertheless, Highlands School District opted in because the district is heavily populated with senior citizens who would benefit from a property tax reduction. "The board wanted to give any type of relief it could, even though every one of them had reservations," says Rupert.

Last year, health insurance alone went up 40 percent in the Highlands School District, to more than $1 million. That, and the other state education mandates the district is required to meet, forced the school board to increase taxes by more than the rate of inflation. In the future, such an increase will have to go to referendum. Rupert is concerned about how such a vote would turn out. "They might say, 'To heck with your health insurance.' Then what happens?"

The choice was not an easy one for most districts. Those that turned down the opportunity to get in on the deal not only would get no gambling money but would not be given another chance to opt in. "It was, 'If you don't get in now, you'll never get in,'" says Rupert. "It was crazy." And given the time it will take to get slots up and running, those that opted in are not likely to see any of the money until at least 2007. To add to all the uncertainty, there is a lawsuit pending over the Act 71 legislation that created the gaming control board and gambling structure to bring in slot machines.

School board after school board wrestled with the matter throughout the month of May. Most of them went down to the wire--and ultimately turned a cold shoulder on the deal. They had myriad reasons for doing so. For communities with a high percentage of renters, property tax relief offered no value to a large segment of constituents. Some school board members weren't happy about the need to prepare school budgets months earlier than previously. Many also were skeptical about whether the gambling proceeds would add up to what was promised. And others didn't like the link between gambling and education for moral reasons.

"It was touted as a way to get property taxes down," says Rob Morgan, one of nine school board members in Pottstown. "Really, it's about gambling." People will have to lose an awful lot of money in the slot machines for people to get their couple of hundred bucks, he points out. Morgan calculates that every adult in Pennsylvania would have to lose $314 a year to produce the tax reduction promised. If only 10 percent of people gambled, they'd each have to lose $3,140 to produce the same amount of revenue.


Meanwhile, back in Harrisburg, a governor who had expected that all districts would opt in was stunned and embarrassed. Rendell "never thought it would be so difficult to give money away," says press secretary Kate Philips, adding that the plan represented the largest property tax reduction in Pennsylvania history.

Legislators, too, are second-guessing whether they should have made it mandatory for school districts to participate. And with such a lopsided result, everyone is wondering how the gambling money will be dispensed. If doled out as written in the law, only one-fifth of the commonwealth's school districts would get the hoped-for tax relief. Not exactly the intended result.

School board members and Pennsylvania residents who have followed the issue are scratching their heads and wondering why policy makers didn't choose to take the proceeds from gambling and send them directly to homeowners for tax relief, without putting the school boards in the middle of things. That's what Rendell originally had proposed, but negotiations with the legislature resulted in the enactment of Act 72.

With the benefit of hindsight in the days following the May massacre, politicos and others were saying it is simply against human nature to vote for putting limits on your own power. "Voting for Act 72 was probably a heavy lift," Philips acknowledges. "It was probably not the easiest way to get school districts to opt in." But it did represent a balance between the school boards' ability to do their jobs and properly build their budgets, and the taxpayers' right not to have "arbitrary and burdensome tax increases," she says.

School districts bristle at the idea that they made imperialistic decisions to protect their turf. Board members approached their decision-making based on whether the tax-relief plan was appropriate, says Scott Shewell, spokesman for the Pennsylvania School Boards Association. They considered how the plan would affect their local districts and had open meetings to seek input from district residents. Shewell says the association hopes the legislature and the governor "respect the decisions school boards made."

It likely will take until the fall to enact legislation addressing property tax relief for the people living in the 390 school districts that opted out. At least five legislative proposals are on the table. A couple of them give voters the opportunity to opt in to the plan via a referendum in November. Another requires all school districts to opt in. Another not only requires participation in Act 72 but seems to punish those that did not opt in voluntarily by imposing far more restrictive referendum provisions.

While lawmakers attempt to deal with the mess they have made, property owners in Pottstown and other municipalities will continue to pay their onerous tax bills.

Ellen Perlman
Ellen Perlman | Former columnist | mailbox@governing.com