The economic winners and losers of legalized gambling.

INTRODUCTION

In the past three decades, legalized gambling in the United States has grown from a limited activity to one that is extremely commonplace. Gambling in some form is now legal in every state except Hawaii and Utah. Gallup data from 2004 show that two in three Americans report participating in some form of gambling activity in the last 12 months, with state lotteries being the most common. As legalized gambling continues to grow in popularity and prevalence, and new forms of gaming are introduced and expanded, there is much public debate about the costs and benefits of this sector of the economy.

The gambling sector has always been viewed as different from other sectors of the economy. Unlike other industries in which the market is the principal determinant of supply and demand, government decisions have largely determined the size and form of the legalized gambling sector in the United States. For example, in every state that has legalized lottery gambling, the state has declared itself the monopolist provider. In other forms of gambling, federal, state, and local governments determine the kinds of gambling permitted and the number, location, and size of establishments allowed.

One explanation for this view and history of gambling is moral opposition to gambling as a legitimate form of entertainment. Another is concern that unregulated gambling would produce a number of negative effects on society. These include both the negative consequences for gamblers themselves--e.g., financial and family distress caused by problem

gambling--and the negative externalities imposed on society, such as increased crime. On the other side of the debate, supporters of legalized gambling recognize the increase in consumer welfare for those who enjoy gambling and participate "responsibly." Casino advocates point to potential economic benefits, including job creation and development. Politicians in favor of expanded gambling operations point to the revenue-generating potential for state and local governments of state lotteries and the taxation of casino revenues.

Gross revenues from legalized gambling reached a record-high $78.6 billion in 2003. More than 80 percent of this total is accounted for by revenues from commercial casinos, Native American casinos, and state lotteries. Figure 1 shows 2003 gross gambling revenues by industry. Commercial casinos brought in $28.7 billion (36.5 percent), state lotteries grossed $19.9 billion (25.4 percent), and Native American tribal casinos grossed $16.8 billion (21 percent). Internet gambling generated $5.7 billion in gross revenues. (1) The remaining $7.4 billion is accounted for by pari-mutuel games, charitable games, charitable bingo, card rooms, and legal bookmaking. (2) Figure 2 shows the reported gambling rates among American adults who participated in the annual Gallup Lifestyle Poll conducted in December of 2003. About half of Americans report having bought a lottery ticket in the past 12 months. A third report visiting a casino in the past 12 months, making it the second most common form of legalized gambling.

Each of the gambling industries has a unique history and regulatory structure. Some policy issues are common to all industries in the sector, while others are unique to the particular form of gambling. This article attempts to identify and discuss from an economics perspective the major "winners" and "losers" associated with the three largest segments of the legalized gambling industry: commercial casinos, Native American tribal casinos, and state lotteries. The article both discusses evidence from recent research and points out relevant issues about which there remains considerable uncertainty. The paper also discusses a relatively new and rapidly growing segment of the industry: Internet gambling. This final discussion raises more questions than it answers, as virtually no economic research currently exists on this new sector of the economy.

CASINOS

Prior to 1978, there were no legal casinos in the United States outside Nevada. In 1978, the jurisdiction of Atlantic City, New Jersey became only the second jurisdiction in the country to offer casino gambling. By 2003, casinos operated legally in 37 states. (3) There were 391 commercial casinos operating in 15 states and an additional 356 Native American casinos, operated by 222 tribes, in 30 states. Table 1 lists the number of commercial casinos and Native American casinos by state.

Gross casino revenue in 2003 totaled $28.7 million, excluding Native American tribal casinos. (4) This represents a more than three-fold increase since 1990, when casino revenue totaled $8.7 billion. Native American, or Indian, casinos are operated by sovereign tribes that are generally exempt from many of the requirements and taxes imposed on traditional business owners. They brought in an additional $16.2 billion in 2003. The rapid growth in this industry has been remarkable, as only a handful of tribes operated gaming facilities 20 years ago. Tribes opened their reservations to different games in the late 1970s and continued to open facilities and/or expand existing operations during the 1980s. These facilities often operated in the midst of considerable legal uncertainty and legal battles with states.

In 1988, Congress passed the Indian Gaming Regulatory Act (IGRA) which upheld the sovereignty of tribes over their own development, but also recognized limited regulatory rights on the part of states. The IGRA defines three classes of gambling. Class I includes traditional Indian games, over which states have no jurisdiction. Class II games include bingo and are legal as long as "such Indian gaming is located within a State that permits such gaming for any purpose by any person, organization or entity" and may be overseen both by tribes and by the National Indian Gaming Commission. Class III gambling includes all other forms of gambling, including table games and slot machines. The IGRA specifies that tribes can only offer Class III games when states allow these games elsewhere in the state. So, for example, any tribe in Nevada is eligible to operate a full-scale casino. (5)

There are active constituent groups on both sides of the casino debate. Proponents cite the obvious "pent up" demand among American adults for casino gambling, noting the spectacular rise in gambling participation that has grown alongside the increased availability of casino facilities. In addition to this increase in consumer utility, proponents note potential economic benefits such as job creation and economic development. The 2004 industry report on Indian Gambling notes that Indian gaming facilities directly supported 240,000 jobs in 2003, paying out $7.9 billion in wages. Supporters of Native American casinos in particular point to the potential improvement in economic well-being among reservation populations.

On the other hand, opponents anticipate "cannabilized" sales from competing business sectors. Opponents also worry about potential social costs, including increased crime and other problem behaviors. (6) To the extent that casinos encourage problem gambling, they might lead to increased rates of bankruptcy, suicide, and family problems. An additional source of opposition, often voiced by state legislatures, is that the opening of casinos in a state would reduce state lottery revenue.

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. 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.

Evans and Topoleski (2002) conduct a rigorous examination of the economic and social impacts of Indian casinos for both Indian tribes themselves and surrounding communities. The authors employ a difference-in-difference empirical approach that compares economic outcomes before and after tribes open casinos to outcomes over the same period for tribes that do not adopt or are prohibited from adopting gaming ventures. Their analysis is based on data for all tribes in the 48 contiguous states for the years 1983, 1989, 1991, 1993, 1995, 1997, and 1999. Based on the circumstances surrounding a particular tribe's gaming operations, the authors define the opening date of an Indian casino as either the date a tribe added Class III games to its casino or the date of the tribal-state compact signing a new casino into existence.