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Racetrack casinos used to contribute as much as $240 million a year to Delaware's tax coffers. But as the Northeast becomes saturated with gambling venues, the state's casino revenue has tumbled, prompting a new industry request—for a tax break.

"It's a different world for the Delaware casinos," said Democratic Gov. Jack Markell, who supports reducing the tax burden on casinos by $20 million a year to help them compete.

More casinos have opened in the Northeast over the past decade than in any other part of the country, and the expansion is causing upheaval in the region. States that adopted gambling earlier than their neighbors, such as Delaware, New Jersey and West Virginia, are watching dollars drain away, and new projects have some wondering how many facilities the area can support.

Twenty-six casinos have opened since 2004, fueling a 39% increase in total annual gambling revenue in the mid-Atlantic and New England, according to a study by the University of Nevada, Las Vegas. Within 100 miles of Philadelphia, there now are 24 casinos, a big shift from the early 1990s, when Atlantic City, N.J., enjoyed an East Coast monopoly. At least a dozen more gambling spots are in the pipeline from Massachusetts to Maryland, raising fears in states such as Rhode Island that their casino tax windfall is at risk.

The casino-building boom is "a declaration of war—indirect war—by the states," said the Rev. Richard McGowan, a casino expert and Boston College adjunct associate professor. "What they're saying is, 'I want the revenue. I want the revenue back.' "

A recent Fitch Ratings report said the Northeastern market "is reaching a saturation point." Analysts say similar market shakeouts are occurring in Indiana and Mississippi on smaller scales.

Even Pennsylvania, which has roared out of nowhere since 2006 to become the state with the second-most gambling revenue, after Nevada, has seen its fortunes wane, in part because of competition from Maryland and Ohio. Slots revenues at Pennsylvania's 12 casinos are down more than 4% in the first 11 months of the fiscal year ending in June, after dropping last year as well, according to the Pennsylvania Gaming Control Board.

Harrah's racetrack casino opened in Chester, Pa., in 2007 and pays the city millions every year, accounting for roughly one of five dollars in the municipal budget. But the arrival of two more area casinos slashed Harrah's slot-machine revenue by nearly 30%, state figures show, reducing the city's share. The introduction of Las Vegas-style table games in 2010 has helped offset the decline, and this year the casino began paying property taxes after a seven-year exemption expired. Still, city officials are concerned.

"Any loss of dollars is seriously missed here," said Mayor John Linder.

Some public services have been affected. Ocean County, N.J., no longer offers low-cost rides for new dialysis patients because of a dip in casino revenues that fund programs for the elderly and disabled.

Delaware officials say declining gambling money—down 29% since fiscal 2011—is one reason the state cut 538 public jobs over the past five years.

Delaware's once-profitable Dover Downs DDE -4.14% Dover Downs Gaming & Entertainment Inc. U.S.: NYSE ^$1.39 -0.06 -4.14% June 19, 2014 3:59 pm Volume (Delayed 15m) : 16,917 P/E Ratio N/A Market Cap $47.49 Million Dividend Yield 5.76% Rev. per Employee $131,188 06/19/14 Casino Boom Pinches Northeaste... More quote details and news » DDE in Your Value Your Change Short position casino netted just $13,000 last year and lost $1 million the first quarter this year, said Chief Executive Denis McGlynn. He blamed competition, coupled with a 17% increase in the tax rate on slots in 2009, for an "unworkable business model."

Delaware's proposed tax relief for casinos, which needs legislative approval, would lower the table-game tax rate, eliminate fees and shift vendor costs to the state.

New Jersey takes 9.25% of casino revenue, less than nearby states. Nevertheless, Atlantic City's 11 casinos collectively have suffered revenue declines since 2006. The recession, superstorm Sandy and competition from Pennsylvania all have contributed. On Thursday, the city's Revel resort and casino filed for Chapter 11 protection, its second trip to bankruptcy court in recent years.

In January, Caesars Entertainment Corp. CZR +1.47% Caesars Entertainment Corp. U.S.: Nasdaq ^$18.61 +0.27 +1.47% June 19, 2014 4:00 pm Volume (Delayed 15m) : 477,609 AFTER HOURS ^$18.61 -0.00 -0.02% June 19, 2014 4:38 pm Volume (Delayed 15m): P/E Ratio N/A Market Cap $2.64 Billion Dividend Yield N/A Rev. per Employee $125,263 06/19/14 Casino Boom Pinches Northeaste... 06/13/14 Amaya Gaming to Buy PokerStars... 06/09/14 The Daily Docket: Energy Futur... More quote details and news » CZR in Your Value Your Change Short position and a rival closed the bankrupt Atlantic Club Casino Hotel after buying it. Among the hundreds laid off was 62-year-old Pat Van Woeart, who had earned $35,000 a year serving food in the casino's coffee shop. "Now I'm losing my home," she said. "My unemployment is going to run out real soon. I've applied for every job in the world."

Hoping to compensate for casino declines, New Jersey and Delaware have allowed their casinos to offer Internet gambling, with limited success. Pennsylvania officials are exploring the same.

In southern New England, states are bracing for a hit when Massachusetts opens its casinos. The first, a Penn National Gaming Inc. PENN 0.00% Penn National Gaming Inc. U.S.: Nasdaq ^$12.18 0.00 0.00% June 19, 2014 4:00 pm Volume (Delayed 15m) : 846,826 AFTER HOURS ^$12.18 0.00 0.00% June 19, 2014 4:26 pm Volume (Delayed 15m): P/E Ratio N/A Market Cap $957.27 Million Dividend Yield N/A Rev. per Employee $158,739 06/19/14 Casino Boom Pinches Northeaste... 06/13/14 MGM Gets Approval to Build Mas... More quote details and news » PENN in Your Value Your Change Short position slots parlor about 12 miles from Rhode Island's biggest casino, is expected to open next year.

A 2011 Massachusetts law also allows three resort-style casinos, and a Native American casino may be in the works. A battle is continuing for a coveted license near Boston, the last big Northeastern city without a nearby casino.

"It kind of was the last frontier of market without commercial gaming" in the region, said Mitchell Etess, chief executive of the Mohegan Tribal Gaming Authority, which is competing for rights to build a $1.3 billion casino near Boston's Logan Airport. Mohegan also has casinos in Connecticut and Pennsylvania and is vying for other regional licenses.

The Mohegan Sun Native American casino opened in Connecticut in 1996, and nearby Foxwoods Resort Casino opened four years earlier. They had little outside competition for years. But since the recession, the state's 25% cut of slot-machine revenue has been under pressure, said Thomas Fiore, fiscal and program policy director at Connecticut's Office of Policy and Management.

Partly because of competition from racetrack casinos on the outskirts of New York City—and soon from Massachusetts—Connecticut has forecast a 5% decline in state revenue from casinos in fiscal 2016 and a 20% drop the following year, Mr. Fiore said.

"There is dramatic oversupply in the industry right now," said Foxwoods Chief Executive Scott Butera.

In neighboring Rhode Island, casino dollars accounted for 9.5% of state revenue last fiscal year, one of the highest levels in the country, and are the third-largest source of state revenue.

The state has two casinos: a small one in Newport that developers hope to remake as a Monte Carlo-styled boutique casino if voters approve table games in a November referendum, and the far larger Twin River Casino outside Providence, which last year added voter-approved table games including blackjack.

Since the state approved video-gambling machines in 1992, its reliance on casino dollars has grown. Now Rhode Island is projecting it will lose about $422 million in casino revenue over the next five years, contributing to budget struggles.

"We did kind of continue to pursue that easy money," said Thomas Mullaney, Rhode Island's budget officer.

In Chester, Pa., city officials have plans to renovate downtown buildings and open a pasta factory in a long-abandoned plant. Still, with nearly 1,700 casino jobs on the line, the wager on gambling continues.

"We are hoping that something changes so they can continue to make money—and we can continue to make money," the mayor said.

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