THE EFFECT OF LEGALIZED GAMBLING ON STATE GOVERNMENT REVENUE

1. INTRODUCTION Legalized gambling has become an accepted form of entertainment in the United States, with every state except Hawaii and Utah offering some form of gambling. Each gambling industry is either run by or regulated by state governments. Nominally, the primary reason for legalizing gambling--especially recently in the cases of lotteries and casinos--is to provide alternative revenue sources to those which states typically employ. Arguably, the intended effect of these new revenue sources is to increase state revenues and reduce fiscal pressure. Oddly, few researchers have attempted to analyze whether this intended effect has, in fact, been realized. This neglect raises the important empirical question: What is the relationship actually observed between legalized gambling and state government revenues? This is a critical question, especially as many states struggle to deal with increasingly serious fiscal shortfalls. The issue also has significant international importance, as casinos spread worldwide. The proponents of legalized gambling point to total taxes paid by gambling industries as an indication of the benefits of gambling to the states. Table 1 lists government revenue by state from commercial casino taxes, lotteries, and pari-mutuel taxes for 2004. Although the tax revenue from legalized gambling is sizable in many states, this does not necessarily mean that legalized gambling has contributed to a net increase in overall state revenues. As people spend more of their income on gambling activities, their spending on other goods and services is likely to decline. Thus, the net effect of legalized gambling on state receipts depends on complicated relationships among spending on gambling industries, spending on non-gambling industries, and the tax rates imposed on the various forms of spending. Furthermore, politicians could substitute revenues from these new gambling sources for those from existing sources, leading to an ambiguous net effect on total state revenue. Clearly, the introduction of a new good does not necessarily imply increases in government revenue will follow. In this paper, we perform a relatively comprehensive analysis of the relationship between legalized gambling and state government revenues. We perform a panel data analysis on all 50 states for the 1985-2000 period, using annual data. We utilize data on gambling volume at casinos, Indian casinos, greyhound racing, horse racing, and lotteries; and total state government revenues net of transfers from the federal government. Our findings indicate mixed results. Lotteries and horse racing appear to have a positive impact on total state government receipts, but casinos and greyhound racing appear to have a negative effect on state revenues. Therefore, we argue that there is not a unique monotonic relationship between generic legalized gambling activity and overall state revenues. Of course, the effect of legalized gambling in a particular state or states may differ from the general effects we find. TABLE 1 Gambling-Related State Government Revenue, 2004 (millions $) (a) (1) (2) Net (3) (4) Total (5) Net Commercial Lottery Pari-mutuel Gambling State Casino Receipts Taxes Tax Revenue Revenue Taxes (b) (=1 + 2 + (c) 3) Alabama - - 3.2 3.2 15290.8 Alaska - - - 0.0 6659.0 Arizona - 108.0 0.6 108.6 17171.2 Arkansas - - 4.6 4.6 10206.4 California - 1045.8 42.1 1087.9 183736.7 Colorado 99.5 113.7 4.5 217.7 18550.8 Connecticut - 283.9 10. …