Does Indian Casino Gambling Reduce State Revenues? Evidence from Arizona

I. INTRODUCTION Congress passed the Indian Gaming Regulatory Act (IGRA) in 1988 after a landmark Supreme Court decision affirming California Cabazon Indians' legal right to engage in gaming. IGRA requires that federally recognized Indian tribes codify specific gaming agreements, called compacts, with their respective state governments (Sokolow, 1990). Gaming compacts specify the type of gambling activities, the allocation of machines, and the distribution of profits. IGRA divides gaming into three classes, as shown in table 1. Depending upon the existence of other forms of gambling in the state where a tribe is located, IGRA allows tribes to offer high stakes bingo, non-banking table games, and slot machines (Class III) casino style gaming on their reservations. According to International Gaming & Wagering Business Magazine, Indian gaming is one of America's fastest growing and most profitable industries. Annual revenues from the 120 Indian casinos operating in 24 states are conservatively estimated at $5 billion. According to Goodman (1995), casinos may divert funds from taxable to non-taxable activities. This paper assesses the validity of his concern. Specifically, does the introduction of Indian casinos cause a structural change in state tax collections? II. ARIZONA REVENUE SOURCES State revenue sources in Arizona range from various taxes to traffic violation fees. The most significant source of revenue is the Transaction Privilege, Use, and Severance Tax (TPT). Arizona does not have a traditional sales tax, which is imposed on the buyer. Instead, TPT is levied on the seller for the privilege of engaging in business (State of Arizona, Joint Legislative Budget Committee, 1995). TPT accounts for more than 52% of total state tax revenue. The Income Tax, the second largest revenue source, accounts for more than 42%. Severance taxes are imposed, in lieu of a TPT, on mining (2.5%) and timber (1.5%). TPT rates range from 0.46875% to 5.5%, depending on the type of business, with most rates at 5%. An additional tax usually considered to be part of TPT is the rental occupancy tax levied at the rate of 3% on real property on a long-term lease. Table 2 presents data on Arizona tax collections for FY 1994 and FY1995. The approximately 133,000 TPT accounts generated more than $2.53 billion in gross revenues in the FY1995. As table 2 shows, retail, contracting, utilities, and restaurants and bars constitute approximately 79% of consolidated tax collections. TABLE 1 IGRA Types of Gambling Permits Class Description Class I Social Games for prizes of minimal value and traditional forms of Indian gaming engaged in as part of tribal ceremonies or celebrations. Class II Bingo and games similar to it, pull tabs, tip jars and certain nonbanking card games. Class III All other forms of gaming including banking card games, slot machines, craps, pari-mutuel horse racing, dog racing and lotteries. Reductions in tax collections largely indicate changes in the law that modified or eliminated previous taxes. For example, in table 2, the 21.1% reduction in commercial lease taxes is due to a reduction in the tax rate from 4% to 3%, and various exemptions that are part of an overall effort to phase out of commercial lease taxes (State of Arizona Tax Handbook, 1995). For the last 10 years, TPT has been an increasingly important revenue source for local and state government. Recent changes in the law reducing both corporate and state income taxes will significantly increase the proportion of state revenue derived from the TPT. The total of transaction privilege, rental occupancy, and severance tax base (TPTB) is divided into two parts, distribution base and nonshared. The distribution base is the portion of the tax shared with counties and municipalities. This amount is divided among municipalities (25%), counties (40. …