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The gambling tsunami

Let's start with some stats from Fox Butterfield's article in today's NY Times:

In Rhode Island, South Dakota, Louisiana, Oregon and, most of all, Nevada, taxes from casinos, slot machines at racetracks and lotteries make up more than 10 percent of overall [state government] revenues, according to a new report. In Delaware, West Virginia, Indiana, Iowa and Mississippi, gambling revenues are fast approaching 10 percent....

Gambling accounts for 13.2 percent of South Dakota's revenue, according to state figures.

Those are some pretty impressive figures to me. Granted, these are mostly small states, but regardless, that kind of money is hard to pass up.

What's causing states to tolerate and tax gambling now, when they ignored the option forty years ago? There are several factors, but here is my single-cause explanation. The current gambling wave stems from the growth of government - increasingly high demand for government services is the driver - and the higher taxes which are the unavoidable consequence of government spending. As these taxes increase, the option of replacing high taxes on income or property with sin taxes looks more and more favorable. Furthermore, once your neighbor gets in the act, the gains from taxing gambling in your state increase as well. Here's a snip from the article that depicts these forces in action:

Not only has gambling revenue surpassed the corporate income tax in Rhode Island and enabled the state to avoid raising its income tax, gambling also helps teach children, pay for medical care for the poor and repair roads.

But Rhode Island, too, faces competition. There is concern that Massachusetts, the source of many customers at Rhode Island's racinos, will legalize slot machines at its own racetracks, and within an hour's drive of Providence, the large Indian-owned casinos in Connecticut are expanding.

"We're in a Catch-22 situation, with our third-largest revenue source being surrounded by these other gambling facilities," said Senator Montalbano, a Democrat.

So Senator Montalbano proposed legislation last week that would allow the new owner of Lincoln Park, Rhode Island's largest racetrack, to increase its 2,543 video slot machines by 1,750 in exchange for a $125 million investment to upgrade the aging track.

In the near term, if my hypothesis is correct, we can expect more of the same. The economic fundamentals won't reverse unless the demand for more government is somehow checked, and I just don't see that happening.

I've written and lectured a bit on the political economy of this phenomenon. You can view some slides (ppt) here and a paper (pdf) here, a final version of which appeared in Managerial and Decision Economics.