Casino taxation in the United States.

INTRODUCTION

Casino gambling is a fast-growing industry around the world, leading many governments to believe that casinos are important potential sources of public revenue. The American Gaming Association (2004) reports that 443 commercial casinos in 11 states generated more than $27 billion in gross gaming revenue in 2003. State and local governments derived $4.32 billion in direct gaming taxes from this economic activity, or about 16 percent of gross gaming revenue. Although tax revenue from direct gaming currently amounts to just one-third of one percent of total own-source revenues collected by state and local governments in the U.S., gambling represents a growing source of revenue nationwide. Over the period from 1993 to 2003, consumer spending at casinos rose from $11.2 billion to $27.02 billion in nominal terms. The American Gaming Association (2004) reports that Americans spend more on casino activities than on DVD/VHS rentals and sales, amusement and theme parks, and movie box office sales.

This fast-growing sector has captured the attention of state and local governments that see the potential for added revenues from taxes and fees applied to casinos as they are legalized and that view casinos as engines for local economic growth. Madhusudhan (1996) was the first to document this emergent trend in state and local public finance in the United States. For a good overview of the economics of casino gambling, see Suits (1979b) and Eadington (1999). Similar increased attention to casinos has also been paid in the European Union as national governments there realize the revenue potential that exists as casino operations expand. For a brief review of world gambling and its expansion, see Thompson (1998), and for European context on casino gambling and lotteries, see the European Commission (2003) and European Lotteries (2004). Smith (2000) provides a good overview of gambling taxation issues with applications from Australia.

The purpose of this article is to chronicle the forms of taxation and fees that are being applied to casinos by state and local governments and to analyze those taxes and fees from a policy perspective. The second section of this paper contains an overview of the forms of taxes and fees applied to casinos in the United States. The third section contains economic analysis of several aspects of casino taxes. Finally, the fourth section includes a summary of our current knowledge of casino taxes and presents suggestions for needed research related to casino revenues.

TAXES AND FEES APPLIED TO CASINOS IN THE UNITED STATES

This section contains an overview of the various forms of taxes and fees applied to casinos in the United States. Distinctions are drawn among forms of gambling permitted by the states (land-based and riverboat casinos, and limited-stakes casinos) and types of taxes and fees applied.

Types of Casinos and Casino Gambling

Casino gambling has been legal in Nevada since 1931 and in New Jersey since 1976. In recent years, however, states and casinos have creatively crafted and applied laws that permit riverboat casinos and other types of gambling facilities. According to the recent National Council of State Legislatures (2004) analysis, the phenomenon of casino taxation is proliferating across the U.S. and "casino gaming has become one of the fastest growing businesses in the recreation and entertainment sector." A flurry of casino gambling legalization over the period between 1989 and 1996 added nine more states to the list: Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi, Missouri, and South Dakota. Interest in legalization and expansion of casino gambling continues to be hot. Last year (2004), casino gambling ballot and other initiatives were raised in the states of Alabama, Alaska, Arkansas, Delaware, Minnesota, Nebraska, Ohio, Pennsylvania, Rhode Island, and Washington. According to the American Gaming Association (2004), in the year 2003 commercial casinos operated in 11 states, Native American casinos operated in 28 states, and racetrack casinos operated in six states.

Hoffman, Gerstein, Huang, Brittingham, Larison, and Toce (1999) conducted a survey of gamblers and casinos as part of the National Gambling Impact Study Commission's work and found that the average amount of total revenue for a top-25 non-tribal casino was $395 million in 1998, while the average amount of total revenue for smaller non-tribal casinos was $91 million. They also tracked players at casinos and found that those who played at top-25 non-tribal casinos bet an average of nearly $8,000 per year, although the distribution of the amount gambled was highly skewed with nearly 73 percent of the players gambling $500 or less and just 3.2 percent gambling more than $10,000. At smaller non-tribal casinos the average amount bet was about $2,800 per year with 68 percent gambling $500 or less and 3.6 percent gambling more than $10,000.

In considering the taxation of casinos, it is important to distinguish between commercial casinos and other types of casinos. Commercial casinos include land-based, riverboat, docked, and racetrack casinos operated for commercial purposes. State regulations often make distinctions between land-based, riverboat, and limited-stakes gambling. In an effort to contain gambling activity within discrete locations and reduce potential negative externalities, some states began to permit riverboats to host casino operations in the 1990s (Illinois, Indiana, Iowa, Louisiana, Mississippi, and Missouri). In some cases, the riverboats actually had to push away from the port and travel along the river while the casino was in operation. More recently, however, most riverboat casinos are only nominally boats and are permanently affixed to the dock. Some states put a limit on the amount a gambler can place on any bet on a slot machine or at a blackjack or poker table, providing so-called limited stakes gambling. For example, Colorado has a five dollar bet limit, while South Dakota imposes bet limits that vary with the game and the casino.

Not all casinos have the same revenue potential for state and local governments, however. An important Supreme Court ruling in 1987 established the principle that states could not regulate or tax gaming on Native American reservations. As a result, the number of gaming facilities, including casinos, proliferated on reservations and other property owned by tribes. For an overview of the Indian Gaming Regulatory Act, see National Indian Gaming Commission (2004). Evans and Topoleski (2002) provide an excellent overview of the rise in Native American gaming operations. At this point, there are 28 states in the U.S. with Native American casinos. There are over 310 gaming operations run by more than 200 tribes in the U.S., according to Evans and Topoleski (2002), of which about 220 are Las-Vegas-style casinos.

While states cannot formally tax tribal casinos, informal revenue sharing arrangements have become common as part of the negotiation process between states and tribes that culminates with a compact between the state and a tribe. Among those states with Native American casinos, seven have revenue sharing arrangements: Arizona, California, Connecticut, Michigan, New Mexico, New York, and Wisconsin. These revenue sharing arrangements provide from eight to 25 percent of slot machine revenues to state and local governments. One of the most publicized compacts is that of Connecticut, where in 1992 the Mashantucket Pequot Tribe, which owns the Foxwoods Casino Resort, agreed to share 25 percent of its slot machine net income with the State of Connecticut and the City of Hartford. California compacts with tribes similarly provide for a state share of gaming revenues--up to 25 percent in some cases. At the low end, New Mexico tribal casinos have agreed to pay eight percent of their slot machine net income to the state. The fiscal aspects of these compacts appear to be completely ad hoc with no evidence of fundamental public finance principles being applied in their design by states and tribes, much less consideration being given to the design of optimal fiscal compacts in any sense. While state lotteries have benefited from the economic analysis of the optimal design of the prize structure (e.g., see Quiggin (1991)), there is as yet no economic analysis of optimal compacts for tribes to share the revenues with state and local governments. One area in need of additional research, consequently, is the question of designing appropriate state-tribal compacts. In this regard, the literature on revenue-sharing can be brought to bear.

The Indian Gaming Regulatory Act (IGA) of 1988 established the formal jurisdictional framework that governs Indian gaming in the United States. That act established regulations for three classes of gaming. Class I games are social games for prizes of minimal value and traditional Indian games that are conducted during tribal ceremonies or celebrations. Tribal governments are vested with the right to exclusively regulate such games. Class II games include bingo, pull tabs, punch boards, tip jars, and other games similar to bingo. This class of games also includes non-banked card games (played against other players, not against the house or another player acting as a bank). Tribes have the jurisdictional authority to regulate all such games as long as the state in which they operate permits such gaming for any purpose. Class III games include a broad range of games such as slot machines, black jack, craps, roulette, and other table games. The IGA specifies conditions and restrictions by which tribes have authority to conduct Class III gaming activity.

Commercial Casinos and Taxation