Economic Impacts of Legalized Gambling

Economic Impacts of Legalized Gambling

Class # & Title

By

Charles Conner

Baltimore, Maryland

December 6, 2005

Professor: Dr. Ira Sohn

The Economic Impacts of Legalized Gambling

Introduction

The effect of gambling on the standard of living will be pronounced if the gambling activity is regressive, meaning that the rate of participation (as a percentage of income) declines as people earn higher incomes. In other words, if most gamblers are poor, then gambling is more likely to affect the standard of living among the poor. One study showed many forms of gambling to be regressive.

Impact on Surrounding Communities

Much of the economic research investigating the ancillary economic benefits of casinos has focused on riverboat casinos. Riverboat casinos are a uniquely American establishment. They began operating in Iowa in 1991 and quickly expanded throughout the Midwest. By 1998, over 40 riverboat casinos were in operation in Illinois, Indiana, Missouri, and Iowa. 2 Nearly 50 riverboat and dockside casinos were in Louisiana and Mississippi (NGISC, 1999).

There does not appear to be empirical evidence of economic growth as a result of the expansion of riverboat casinos. In terms of generating local tourism, riverboats seem to have been most successful in places such as Galena, Illinois, where the tourism industry was already established. Case studies suggest that the bulk of patrons of riverboat casinos are day-trippers who spend virtually no time at local non-gambling establishments (NGISC, 1999). There, thus, appear to be few, if any, positive economic spillovers to the local hotel or restaurant industry. In support of the "cannibalization" hypothesis, Siegel and Anders (1999) provide empirical evidence that riverboat gambling in Missouri led to a displacement of revenue from industries that constitute substitutes for gaming activity, such as entertainment and recreation services. 3

Evans and Topoleski (2002) conduct a rigorous examination of the economic and monetary impacts of Indian casinos for both Indian tribes themselves and surrounding communities.

Impact on Native American Tribes

An explicit goal of the IGRA was to promote "tribal economic development, self-sufficiency, and strong tribal governments." Tribes frequently refer to casinos as the "new buffalo," meaning the new source of economic sustenance for their communities. The tribes point to repaired infrastructure; diversifying economies; rising employment; augmented health, housing, education, and monetary budgets; greater indigenous language retention; and generally renewed community vitality (Taylor, Krepps, and Wang, 2000).

Evans and Topoleski (2002) find that four years after tribes open casinos, tribal population is up by 12 percent and tribal employment has increased by 26 percent, resulting in an increase in tribal employment-to-population ratios of five percentage points (12 percent). Because the current program seems to be generating jobs does not necessarily mean that granting reservations a monopoly in a particular industry is a desirable policy." 9

Impact on Public Revenue

Casino businesses are subject to taxation and, therefore, have a direct impact on public revenue. Maximum tax rates on gross gaming revenues in American casinos range from 6.25 percent in Nevada to 35 percent in Illinois. Taxes on casinos are not an important source of public sector revenues for most states in the United States; only Nevada is heavily dependent on tax revenue from casino gaming. Non-Indian casinos paid over two billion dollars in taxes to states on gaming revenues in 1997, compared to state lottery revenues of approximately ten billion dollars in the same year (Eadington, 1999, p. 187).

By law, states cannot tax the profits of tribal businesses. But in some states (e.g., Connecticut, Michigan, Wisconsin, California, and New Mexico), tribes have agreed to make annual payments to state governments. These fees are typically payments for the monopoly rights the state have granted the tribe to provide certain forms of gambling. In 2003, tribes contributed over $759 million to state and local governments via various forms of revenue-sharing (Meister, 2004, p. 1). Table 2 lists tribal contributions to state and local governments by state. As shown, there is tremendous variability across states. The two tribes that operate Mohegan Sun and Foxwoods in Connecticut alone account for over half of these payments. 10

Casinos might indirectly affect public revenue as well. Insofar as casinos generate additional business income, they might indirectly increase other forms of tax revenue. Insofar as they cannibalize sales from other businesses, they might decrease net tax revenue. Anders, Siegel, and Yacoub (1998) find that as a result of the introduction of two Indian casinos into Maricopa County, Arizona in 1993, employment and retail sales in the restaurant and bar sectors declined. Popp and Stehwien (2002) estimate a similar model to examine the effect of New Mexico's 11 Indian casinos on gross state tax receipts using quarterly data from 1990 to 1997. They also find a negative effect of Indian casinos on state sales tax revenues--the introduction of a single Indian casino is found to be associated with a one percent decrease in county tax revenues, but the introduction of a second Indian casino in the county if found to reduce sales tax revenue by more than six percent. While suggestive, these analyses are limited in scope and their results do not necessarily generalize to the experiences of other states. Additional research on the link between casino gambling and state sales tax revenue is warranted.

Casinos could also cannibalize sales from state lottery operations. Three studies offer evidence suggesting that they do. Siegel and Anders (2001) investigate the relationship between Indian casinos and state lottery revenue in Arizona. The authors' empirical analysis finds that a ten percent increase in the number of slot machines is associated with a 2.8 percent decline in lottery sales. Elliott and Navin (2002) examine the impact that the introduction of riverboat casinos between 1989 to 1995