IX. Economic Impacts of Gambling

According to one report, there is little reliable information on the social and economic impacts of gambling.1 A great deal of research does exist, but often it is prepared by groups advocating one position or another and is biased or suffers from such basic flaws as to render it virtually unusable. In short, much of what has been done is not sound.

There is a Debate Over Whether or Not Gambling Can be Good For an Economy. Proponents of the view that gambling is harmful use a quote of Nobel Laureate Paul Samuelson.2

"(Gambling) involves simply sterile transfers of money or goods between individuals, creating no new money or goods. Although it creates no output, gambling does nevertheless absorb time and resources. When pursued beyond the limits of recreation, where the main purpose after all is to kill time, gambling subtracts from the national income."

Other economists have taken exception to Samuelson's characterization of gambling. They point out that his criticism could be applied to movies or Disneyland. These are products that don't add to the ability of the economy to produce more. But they still have value because they provide satisfaction, or utility in the economist's jargon, to consumers. These economists are more concerned about the costs of banning gambling, that is the ensuing enforcement costs and the incentives to lobby and bribe public officials to allow illegal gambling to occur.

Gambling Can be a Powerful Economic Development Tool. Las Vegas is a testament of the powerful ability of gambling to foster economic development. Because of gambling, Las Vegas has shown impressive job growth, developed into a major city with a low tax burden that many state and local governments look at with envy, and has spawned significant private and public sector investment. But can the Las Vegas model be duplicated?

There are other questions:

"But look at Atlantic City. It used to be a slum by the sea, and now, it's a slum by the sea with casinos."4

Research has attempted to answer these questions. Before we look at the research results, this report will lay out how a gambling development project may affect a local area. For those that are uninterested in the theoretical discussion, there are some conclusions that begin on page IX-7 that may be more interesting. This discussion also tends to focus on casinos but it is true for any type of gambling facility operation.

The Basic Criteria For Economic Development Success is For a Project to Increase a Region's Net Exports. Specifically, the amount of goods or services that are exported needs to be increased or the amount that are imported decreased. This is the only way that income can increase. Projects can certainly be an overall economic success in terms of profit without doing either of these, but those profits come at the expense of other businesses.

Various Factors Come to Play in Determining if Gaming Has a Positive or Negative Economic Impact. A full accounting of all costs must be done and it is difficult. The economic impacts of legalized gambling are tangible and quantifiable. The basic economic impacts include the construction of a casino which leads to many jobs for construction employees and suppliers, employees to staff the casino, and the suppliers for an ongoing casino. Multiplier effects then ripple throughout the overall economy. But just because a gambling project creates a lot of jobs and a large facility is built doesn't mean the economic impacts are positive. Non-economic impacts such as social costs are usually intangible, difficult to measure, and on balance negative.

Building a casino creates new jobs, such as a card dealer, in the sense that they did not exist before. But they may not be new jobs for the economy. Money spent on a gambling facility is money that already existed but was spent on other things. That is probably an obvious point, but one that needs to be made. Building and running a gambling facility doesn't create wealth, it merely transfers it. The benefit for a region is if the transfers are from outside of the region. In contrast, there is not a stimulus or net benefit if development of the casino leads to more money being spent outside of the region.

This stimulus or beneficial impact could happen two main ways:

There are also ways that building a casino could result in no increased benefits for the region:

Constructing a casino could hurt a region if either of the following occurred:

Economic Development and Impact on Communities

There is debate about whether or not gambling is an appropriate economic development tool. The argument against using it is that although the number of jobs associated with new gambling facilities is significant it is not a compelling reason to be legalized. For example, one commentator wrote after the Mayor of Chicago proposed a gaming project:5

"Ten thousand construction jobs are supposed to be created by this project. This may very well be true. However, we could create plenty of construction jobs by building brothels and opium dens."

Gambling is Often Legalized to Promote Economic Development of Depressed Areas. That was an important motivation in Las Vegas, Atlantic City, New Jersey, and many of the other locales for casinos.

Gaming in Atlantic City, like Las Vegas, has been a successful economic development tool. It has resulted in the building of many large facilities and over forty thousand jobs have been created. The success of gambling in Atlantic City, however, has done little to revitalize the rest of Atlantic City and its business community. Atlantic City has been described as two cities.6 One is the casinos and the other is a city of boarded-up buildings with a unemployed minority work force.7 Gambling has largely failed in achieving the objectives of job growth for local residents and city-wide economic development.8

Another criticism of gaming in Atlantic City is that it doesn't support complimentary businesses in the community such as restaurants because these facilities are all in the casinos. In Atlantic City, the number of restaurants dropped 40 percent since 1977. Most people associated with the industry note that people don't venture far from the casinos. Because of this concern, Louisiana legalized a casino but it cannot have restaurants and hotel facilities.

In Mississippi, the Legislature legalized gambling, in part to promote development in the Mississippi delta. One county, Tunica, was the poorest county in Mississippi, the poorest state. Tunica was once called "America's Ethiopia." Since gambling was made legal, the welfare rate was cut by a third and the proportion of people receiving food stamps has fallen. Unemployment is down to 4.9 percent, its lowest rate in nearly two decades.9 On the negative side, crime skyrocketed and by some reports most jobs went to workers from Memphis.10

Many of the areas that casinos are being sited in Mississippi are heavily minority, almost solely African-American. Most industry observers note that casinos are making more of an effort to hire minorities than other industries.11

One study showed little change in unemployment rates in counties where Illinois casinos are sited.12 But the study did document substantial numbers of people being employed. The study suggested that the new jobs were just substitutions and/or that out-of-area workers were hired. But another explanation is that people who were unemployed but not looking for work, hence not counted in the labor force became more hopeful and led to increased labor force participation and employment but no change in the unemployment rate.

Localities report that the industry will pressure the communities to rewrite the rules for casinos once they are established.13 The casinos are trying to maximize profits as any business should, but this complaint does raise questions about the claims that are made by proponents prior to legalization. Examples of recent liberalizing moves are the extension of Atlantic City gambling hours on weekends at first and then on weekdays. Also, changes in Iowa regarding riverboat gambling rules are another example.

Local Governments have had Difficulty Controlling the Size and Scope of Gambling.14 Colorado legalized limited stake casinos in October, 1991. These facilities were sited in old mining towns that were in need of funds to preserve their historic structures. Within three years the towns were reaping large sums of money. Residents complained about traffic, crime, and noise and air pollution.15

Attempts were made to control the impact of gaming. Bets were limited and casinos had to be a small portion of the floor space. However, within a short period there were 7,000 gaming devices and 68 casinos. By December 1992, 21 casinos closed their doors, since then more have moved into bankruptcy.

The growth of the casinos and rising property tax rates lead to a decline in non-casino businesses. The town quickly found that it didn't have a grocery store, laundromat, or filling station as a result of increased taxes which had driven out these other businesses. There was also a considerable strain on the small town's infrastructure.

The City Manager of Central City, one of the cities with legal gaming, was quoted as saying:

"I'd tell anyone who was thinking of opening their community to casino gambling to have his head examined."16

South Dakota has a limitation on the number of machines per building. Tax revenues have accomplished the goal of restoring old buildings and repaving downtown. Retail sales growth within the community outpaced the state average.17

California Horse Racing Industry Has Major Impact. In a study prepared for the horse racing industry, the following impacts were noted:18

Wisconsin Study Shows Major Economic Impact of Indian Gaming.19 This study attempted to describe the size of Indian gaming in Wisconsin. The major conclusions were:

This study, along with many other studies supported by the Indian tribes, show the large economic impact of Native American gaming. These studies accurately and exhaustively calculate the direct economic impact of Indian gaming. The Indian casinos pay out wages, social security and Medicare taxes, and federal taxes. Even though the tribes are exempt from state and local taxation, many of their employees pay state and local taxes.

The economic impacts can flow outside of the reservation. A study in Minnesota found an increase in the wages of those in the amusement industry as well as an increase in sales in casino areas.20 Typically, these are smaller rural areas. Little overall impact to the state was noted, however. An interesting spin-off from the construction of Foxwoods at Mashantucket, Connecticut led to a marked increase in the profitability of area savings and loans.21

The problem with these types of studies are that they don't document all of the benefits and costs of gaming. They look at the size of the industry, which in many areas is quite significant. They leave unanswered, however, if costs exceed the benefits and what is the impact on a larger area, such as the state or nation. Another problem of the studies is that they are somewhat suspect because they are paid for by groups that have an obvious interest in continued gaming.

Gaming can have a negative impact on rural areas also, depending on the pattern of sales. One study showed that the California state lottery was in effect a $711 million anti-rural development program.22 This figure was arrived at by totaling the amount of money taken out of rural areas through lottery ticket sales, minus the funds that come back into the schools in those areas.

As noted in the discussion of Colorado, gaming enterprises can impact property values. According to industry material, casino gaming leads to higher property values.23 This is supported anecdotally by stories of non-gaming firms leaving towns. The closing of small businesses may be another symptom, although both could be a product of a substitution effect as well, meaning that expenditures for gambling were substituted for other goods. The data and anecdotes from Colorado suggest that the impact can be disruptive and create a land-rush type atmosphere, at least initially.

Australia is a good laboratory for determining the socio-economic impacts. The country legalized a very limited number of casinos, allowing for a thoughtful look at the impacts of new casinos.24 One notable and unsurprising impact is that the casinos took more of the gambling dollars, relative to other gambling enterprises. For most of the casinos, the bulk of revenues came from locals. Some casinos have been good at targeting international visitors and most have appeared to help tourism. But some casinos were placed in locations that were not big destination spots before, hence they did not have a significant impact. There was a boom to local restaurants, but a significant harmful impact on other trade. There were harmful effects like congestion, noise, and traffic. Also, the change in the aesthetics was noted. For the small towns it did appear to slow out-migration. It was difficult to ascertain the impacts to the compulsive gambler. The conclusion was that there was not a casino-led regional tourism boom.

Important Conclusions from this Economic Development Discussion Are:

Public Finance

Politicians and the public are naturally attracted to an industry that is willing to pay 20 to 30 percent of its gross revenues as taxes. Also, gambling is seen as a source of money that is easier to obtain because it is not a tax on individuals.25 Gambling has become a very accepted way for governments to raise funds.

Nevada Stands as an Enviable Example of what Gambling can do for Public Finances. Casino industry revenues make up close to half of the state's tax revenue. But that is not a goal that states can realistically shoot for. Economists doubt that any other state can match that.26 Casino operators agree. The following quote is from a Harrah's publication:

"Despite casino gambling's promise as a source of economic development and tax revenue, gaming should not be viewed as a panacea for the fiscal woes of a state or local jurisdiction. Casino gaming is more appropriately viewed as an amenity that in smaller metropolitan areas can be a cornerstone in the local tourism/entertainment market, and in larger metropolitan areas as simply another component of a regional tourism/entertainment package.27

Outside of Nevada, Gambling Taxes are a Small Share of State Revenues. The next largest gambling presence is in New Jersey, but there the proportion of state revenues provided by gambling is only about 2.5 percent of total tax revenues because the state is so large. The next largest gambling contributions to state revenues, in absolute numbers, are in Louisiana and Mississippi. Because they are small states, gambling revenues can make a larger proportion, about 8 percent of both states' budgets.

Estimated State & Local Government Revenue From Casinos

$ Millions

Nevada

$556

New Jersey

$296

Illinois

$286

Louisiana

$204

Mississippi

$609

Missouri

$130

Colorado

$51

Iowa

$46

South Dakota

$4

Source: Harrah's

Lotteries Don't Supply a Large Portion of Revenues. Compared to overall tax revenues, lotteries are small, they constitute only about 2.5 percent of total taxes.28 Despite the sizable volumes being wagered, only about 40 percent of the lottery revenues are available for state programs after prizes and administrative costs are paid.

Even in California with more modest facilities, there can be substantial amounts of money earned by local governments. In 1993, the U.S. Conference of Mayors conducted a survey.29 San Jose reported that $5 million was contributed by cardclubs and charitable gaming. Another 500 jobs were reported in the industry, while Gardena reported 1,000 jobs. Although the City of Los Angeles had reported that bingo declined, in 1992 over 750,000 residents engaged in this activity and the city earned about $2 million.

With some states earning large sums, other state and local governments look at how they can get a share of the gambling revenues. Because of the state money flowing to New Jersey and Colorado, New York Governor George Pataki has gone on record that gaming would be a way to keep the money at home, reduce income taxes, and control projected budget deficits.30

Could Indian Gaming Help California? California might be able to get revenues from Indian casinos if it signed agreements regarding Indian gaming. Connecticut gains around $200 million annually from slot machines in an Indian casino. There are about three times as many slot machines in California as in Connecticut. If individual slot machines in Indian casinos in California are as profitable, then California might be able to gain around $600 million annually. The figure is derived from the profits in Connecticut multiplied by the three-fold greater number of slot machines in California.

This estimate is highly speculative and is based on the following calculations:

  Slots Profit Per Machine Revenues to State
Connecticut 4,000 $120,000 $200 Million
California 112,000
As profitable as Connecticut $120,000 $600 Million
As profitable as Atlantic City $89,000 $445 Million
Lower profitability scenario $60,000 $300 Million

The estimate is also based on the following assumptions:

It needs to be pointed out that the state cannot tax or even ask for money from the tribes. The funds must be offered, then the state can accept.

If Indian gaming grows along the lines of what some researchers claim, California could stand to gain even more.31 Dr. Marilyn Whitney modeled different scenarios for gambling growth in California. Under one scenario, Indian gaming more than doubled in size. The growth of Indian gaming led to a relative decline in cardroom and lottery activity and state and local revenues fell when adjusted for population growth and inflation. Under that scenario, the state could gain approximately $1 billion if they could negotiate an agreement similar to what the state of Connecticut was able to negotiate and slots have the same popularity. The tribes would have to meet all the conditions described in the preceding paragraphs.

Ability of Governments to Gain Funds is Dependent on Industry Profitability. As recent events in Louisiana have shown, not all gambling is profitable. Last year, two new riverboat casinos opened in New Orleans. They both closed within nine weeks. The City of New Orleans was left to fight with other creditors over collecting $3 million in taxes and fees. The City's problems aren't limited to the riverboat casinos. The land-based casino has netted only about one-third of its projected revenue.32 The closing of the land-based casino led to the layoffs of as many as 1,000 city workers and a 5 percent cut in the city budget.33 In Iowa, the town of Fort Madison was left with a $2.5 million bond for dock improvements, but the boat left because of lack of profitability.

Iowa County Became Owner of Gambling Hall

When the local racetrack stumbled into bankruptcy, county supervisors converted the clubhouse into a casino. The result is that the county has pulled in a tremendous amount of money. The value of the casino, if it was to be sold, is estimated at $300 million.34 According to one report, the county has gone from "rags to riches."35

Reliance on gaming revenues can be problematic because of changing consumer preferences. Parimutuel wagering is one of the oldest sources of gambling revenues. In most states it is from betting on horses, but it includes dog racing and jai alai. Parimutuel revenues are declining and for all states is 17 percent less than in 1980.

The Reaction of Neighboring Jurisdictions is also a Risk Factor in Gaining Public Revenues. The domino theory plays a large role in whether or not governments get their funds. Iowa was initially quite successful in earning gambling funds. Then Illinois legalized riverboat casinos without some of the restrictions that Iowa had adopted. Traffic declined and two of the five boats moved out of Iowa. Revenues also dropped off.

Iowa responded by relaxing rules that limited operating hours and dropped a restriction that limited each gambler's loss to $200 a visit. But Iowa's countermove had an impact on Illinois. A nearby casino in Rock Island, Illinois had to lay off 200 people and the city now receives only a fraction of the revenues it received last year. These events suggest that gambling can provide a lot of money if you are the first state in the region to legalize gambling, but revenues may be at risk if neighboring states legalize gambling.

Casinos May Hurt State Lottery Revenues. The competition between gaming interests isn't just between states. Competition also occurs within industries within the state. This competition does have public finance implications. During a battle over casinos in Maryland, the restaurant and horse racing industries united against casinos.36 Studies have shown that wagering on horse races clearly declines when casino-style gaming is made available in the same market.37 A Florida study projected that gaming revenue would be between $300 and $450 million while sales tax would decrease about $85 million and parimutuel and lottery would fall by a small amount.38 In general, for states that rely more on consumption taxes the impact of increased gambling is likely to be greater than for states that rely on income taxes.

There is some debate about the competition between casino gaming and lotteries. Some research suggests that the casino gambler is much different than the lottery gambler.39 That may change as casinos become more widespread. When Illinois opened up riverboat casinos, lottery revenues fell off by about 25 percent.40

Similarly, the research for California that forecasted a possible doubling in the size of Indian gaming also showed a decline in lottery revenues.41 Local government revenues would also fall.

Another issue of competition that is of concern to some observers is the possible competition between legal commercial gaming and charitable gaming. Some hypothesize that charities will have less money as a result.42

Another Element of the Public Finance Discussion is Public Service Costs. University of Illinois commerce professor John Kindt states that for every dollar of taxes, taxpayers spend three on infrastructure, problems gamblers, police, etc.43 This contention is hotly disputed. Additional research has claimed that gambling can pay for services but because of the actual costs to consumers, it is a very expensive way for governments to raise funds.44

For example, according to this research a ten thousand dollar police squad car really costs $120,000 if the funds are received from gambling. That figure is arrived at by adding up how much money must be lost by consumers to earn enough gambling profits to pay $10,000 in gambling taxes. By using that logic, a ten thousand dollar police squad car costs $129,000 in meals in California. That is how many meals must be purchased to buy the car with sales tax. Figures such as these make it seem that the public services came at an exceptionally high price, but they ignore the fact that people like to gamble or eat out. They suggest the tax burden is the entire expenditure for the entertainment, not the small portion that it really is.

Social Costs

Problem and pathological gambling may be an invisible or silent disease but it is not a costless disease. Social costs are the costs borne by society as a whole that result from the behavior of the problem gambler. Social costs includes such items as fraud, theft, bad loans, bad checks, lost work time, unemployment and welfare benefits, insured or publicly supported medical costs, and criminal justice system costs. Those types of social costs are easier to quantify than other types of social costs that result from gambling such as increased rates of suicide, car accidents, and incidence of child abuse.45 Another study says that social costs should include lost productivity of spouses, impaired judgment and efficiency on the job, divorces, added administrative costs for unemployed, and the costs of depression and physical illness related to the stress and lower quality of family life.46

Any Attempt to Quantify Social Costs is Highly Speculative. Most of the studies have asked pathological gamblers who are in treatment or recovery of some kind to make an estimate of what they cost society. The studies look at those social costs that are easier to quantify, such as employment costs, loss of work, bad debts, civil court costs, criminal justice costs, therapy, and welfare. The problem of this research approach is that people in treatment are not representative of the entire population of pathological gamblers.

For example, in the Wisconsin study, 92 of the 95 members of Gamblers Anonymous who responded to the survey were white. This contradicts what is found in prevalence surveys that show a larger incidence proportion among minorities. Another sign of the unrepresentative nature of these surveys is that 52 percent of those responding were married, again that is inconsistent with the prevalence surveys. The second problem with surveying for determining costs is that it requires accurate reporting by the individuals. These are individuals who clearly have some problems or else they would not be diagnosed with this disease. It isn't known how this problem may affect their reporting.

Nevertheless, the results are interesting and, even if not representative, illustrate the high costs of pathological gambling. The lifetime estimates of losses by each gambler ranged from as little as $100 to $20 million. The latter high figure was from gambling on the stock market and it included $8 million of embezzled funds. A study in Wisconsin shows that the social costs were about $8,600 per year per problem gambler, a figure that is on the low end of the range of available research.47 In Grinols and Omorov, a range of $15,000 to $33,500 per problem gambler per year is discussed from a survey of other studies.48 There are other studies showing different figures and some of the cost figures are much higher, up to $100,000 per pathological gambler.

Consumer Sovereignty

The economic studies have tended to ignore a very important economic component. That component is what economists call consumer surplus, that is the benefit to people who want to gamble. Economists can and do use methods that attach a dollar value to that consumer surplus. Consumer surplus may sound like a theoretical tool that is not useful, but a simple example may help the reader see that it does exist.

Assume an individual goes to the movies and is planning to pay the normal entrance fee of $7.00. Upon arriving the individual finds that entrance can be obtained at the matinee price of $4.00. The individual pays $4.00 but clearly the movie was worth more since the person was prepared to pay $7.00. Consumer surplus then is at least $3.00, the difference between the matinee price and the full price. At least, because maybe it was a movie the person really wanted to see and would have been willing to pay even more.

This concept of consumer surplus is especially relevant in valuing publicly-provided projects such as freeways where a toll is not collected. The value of the freeway can be established by estimating what people would be willing to pay.

Studies also have Neglected the Incidence of Costs and Benefits. Those who are paying the costs are the compulsive gamblers and those whose lives are touched by them. The benefits go to those who enjoy gambling. Also, certain groups of taxpayers may not be well compensated. Typically, Indian gaming doesn't results in the tax revenues from the establishments. Local governments may have to provide services for which they are not paid for. The people who gain from this subsidy are the people who enjoy gambling and the Native Americans, not a small issue given their history of poverty and difficulty in fostering economic development on the reservation. Consistently it has been shown that the poor spend a greater portion of their wealth on gambling. It is still, however, a small amount and generally their gambling is not why they are poor.49

Bottom Line--Do Gaming Facilities Pay Their Way?

A Chicago Sun-Times headline said it best:

"Studies of Gambling Deal Few Answers--Conclusions Elusive on Social, Economic Impact of Casinos."50

The article follows with a discussion and a conclusion that ultimately, a decision on how to weigh all the costs and benefits is essentially subjective and moral. How does one weigh a shattered life of a pathological gambler against new jobs for people whose only hope had been welfare?

California-Nevada Gambling Relationship

With the discussion in this section of the economic success of an area being dependent on a place's ability to get out-of-region residents to gamble, it is fitting to discuss California and Nevada. To many observers, it is probably obvious and not worth discussing. The relationship is simple: California sends gamblers and Nevada receives them. A recent newspaper report gives an idea of how most people view the relationship:

"But there is something vaguely parasitical about Nevadans, who try their damnedest to suck money from Californians."51

With California exporting so much money to Nevada, there are obvious questions as to what might happen if California made gambling legal. A report by the Governor's Office of Planning and Research estimated that it would increase net income in California by about $1.5 billion.52 Any estimate would have to be speculative as nobody knows how attached Californians are to going to Tahoe or Las Vegas. Also, if a California casino was developed it would allow more types of games to be offered in Indian casinos. What effect that might have on gambling behavior and where the dollar is spent is uncertain. Nevertheless, it is possible that California would bear added social costs such as those arising from the pathological gambler if casinos are legalized.

An interesting point to ponder is that California may gain from having the gambling center of North America so near its borders. Although Californians drop a large amount of money in the neighboring state, Nevada orders goods and services from California and California workers bring money or send remittances from Nevada. Nevada orders could never cancel out California spending alone, but when one considers the gambling activity of all the other visitors and all of the orders it generates, that could well be a net plus for California.

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