Voters and politicians in Ohio used to slap down attempts to expand gambling in their state

Voters and politicians in Ohio used to slap down attempts to expand gambling in their state. But last week, many cheered as demolition crews razed an old Auto parts plant in Columbus to make way for a new casino.

Facing high unemployment and the aftermath of a $3.2 billion state-budget shortfall, Ohioans voted to allow casinos in November. Gov. Ted Strickland dropped his longtime opposition to video lottery machines, proposing to add them to racetracks to generate new tax revenue. If I had not been confronted with these difficult circumstances, I would have obviously opposed expanding gambling in Ohio," says Mr. Strickland.

Nationwide, the public-funding crisis has led many state and local leaders to similarly reverse course. Hampered by withering funds for law enforcement, health care and other public services, a growing number of officials are condoning activities and businesses they'd be apt to restrict in better economic times.

For fiscal 2011, 38 states project combined budget shortfalls of $89 billion, according to the National Conference of State Legislatures, a bipartisan policy research group. Thirty-one states expect budget gaps totaling $73.5 billion in 2012. As a result, says Todd Haggerty, an analyst at the group, lawmakers are "trying anything and everything in order to bring their budgets into balance."

Oakland, Calif., began taxing sales of medical marijuana last year. Now at least a half- dozen states are weighing measures to allow some legal pot sales. Others have loosened decades-long restrictions on Sunday alcohol sales. And about a dozen, like Ohio, have discussed or passed plans to ease restrictions on gambling.

California legislators are debating whether to allow and tax Internet poker, even though such gambling is prohibited by federal law. "It is generally easier to pass something like this in a recession," says Lloyd Levine, a political consultant working for the pro-poker effort. As a state assemblyman in 2008, before the economic crisis, Mr. Levine introduced a similar initiative that failed.

Americans have a time-honored tradition of banking on vice in tough economic times, says David Laband, an Auburn University economics professor who studies the alcohol industry. "Blue laws" restricting Sunday alcohol sales, he says, are a common casualty of recessions.

"Every time there's an economic contraction, sure enough, you start seeing local repeal efforts," says Mr. Laband.

Since early 2008, five states have expanded Sunday alcohol sales, and counties and cities in Alabama and Texas have also scrapped longstanding restrictions on booze sales, says the Distilled Spirits Council of the United States, a liquor-industry group. In February, the mayors of Connecticut's three largest cities asked the legislature to lift a statewide ban on Sunday alcohol sales in stores—one of only three in the country. Such a move, they argued, could help mitigate the state's budget crisis by raising about $8 million a year in tax revenue. The following month, a bill that would have allowed stores to sell alcohol on Sundays died under fierce opposition from liquor-store lobbyists.

Peter Heise is a securities analyst with the stock-research firm RedChip who has followed publicly-traded vice-industry companies like alcohol marketers and strip-club chains. He says strapped local governments are smart to turn to such businesses for revenue since "vices are a consistent source." Earlier this year, Mr. Heise boosted his rating on Rick's Cabaret International Inc., a publicly owned chain of strip clubs.

In Ohio, the move to open up gambling has taken several turns. Four times when the state economy was healthier, in the 1990s and 2000s, voters rejected initiatives to build new casinos.

Since then, Ohioans have fallen on unusually tough times. The state's unemployment rate in March stood at 11%, the tenth-highest in the nation. Faced with a $3.2 billion budget shortfall last June, Mr. Strickland proposed installing lottery machines at racetracks to avoid crippling cuts to public services like education and Medicaid.

It was a stark turnaround for the governor. Mr. Strickland, a nonpracticing Methodist minister, opposed broader gaming rules in the state, and had once described gambling as a "regressive tax" that harms the poor.

But Mr. Strickland faced a quandary last spring, as state officials scrambled to fill the budget deficit by June 30. At the time, the governor had already reduced state spending by $2 billion. He had cut more than 2,500 government jobs, closed two psychiatric hospitals and two juvenile-detention facilities, and slashed the budgets of most state agencies by 10% to 20%. "It still wasn't enough," he recalls.

Further trims required "gut-wrenching" decisions, the governor says. To close the budget gap in the absence of new revenue, he would have had to slash most state agency budgets by 30% from 2008-2009 levels, according to Pari Sabety, Mr. Strickland's budget directo